Kalpesh Classes

The Apex Court in Catholic Syrian Bank Ltd. v. CIT [2012] 18 taxmann.com 282/ 206 Taxman 182 made a path breaking interpretation of the application of section 36(1)(vii) vis-a-vis section 36(1)(viia) of the Act. This decision is not only taxpayer friendly but also gives wider coverage of the statute by looking into the circular issued by the CBDT and the purposive interpretation of the statutory provision.​​ 

The Apex Court had to decide the appeal of the assessee. The following two questions were to be resolved:​​ 

• Whether the Full Bench of the High Court had grossly erred in reversing the Division Bench's decision in order to deny the deduction in respect of bad debts written off in the books with respect to which provision was made under clause (viia) of the Act?​​ 

• Whether the Full Bench was correct in reversing the findings of the earlier Division Bench that if the bad debt written off relates to debt other than for which the provision is made under clause (viia), such debts will squarely fall within the main part of clause (vii) which is entitled to deduction and in respect of part of the debt which relates to provision made under clause (viia ), the proviso will operate to limit the deduction to the extent of the difference between the debt written off and credit balance in the provision for bad and doubtful debts made under clause (viia)?​​ 

The above questions could be simplified as under:​​ 

• Whether the proviso to section 36(1)(vii) limits the deduction in respect of bad debts written off only when it exceeds the provision made under section 36(1)(viia)?

• Whether bad debts relating to non-rural branches, when written off would be governed by section 36(1)(vii), which is independent of the provision maintained in respect of rural advances of the bank governed by section 36(1)(viia)?

• Whether banks have to maintain identity of the bad debts written off in case of rural branches and other branches and adjust the write off relating to rural advances in the provision account maintained as per section 36(1)(viia) and the write offs relating to non-rural branches being eligible for deduction separately under section 36(1)(vii) , read with section 36(2)?

DECISION OF THE COURT

The Apex Court held that sections 36(1)(vii) and 36(1)(viia) are separate items of deduction. They are independent provisions and cannot be intermingled or read into each other. It is a well-settled canon of interpretation of fiscal statutes that they need to be construed strictly and on their plain reading.​​ 

The Court observed that it is inclined to give an interpretation which would serve the legislative object and intent, rather than subverting the same. It held that the language of section 36(1)( vii) is unambiguous and does not provide for dual interpretation. However, this benefit of bad debts write off is subject to satisfaction of conditions contained in section 36(2). The proviso to section 36(1)(vii) does not control the application of the section, since the proviso could apply only when the case of the assessee is covered by section 36(1)(viia ) (applicable for scheduled banking companies).

The Apex Court held that in respect of non-rural advances, section 36(1)( viia) relating to maintenance of provision will not apply. So, any debt written off as irrecoverable is deductible under section 36(1)(vii) and such claim is not controlled by section 36(1)(viia).​​ 

With regard to rural advances, the assessees', i.e., banks are obliged to maintain a provision. Bad debts written off in respect of rural advances have to be adjusted against the provision maintained by the assessee. Only where​​ the bad debts written off exceed the provision maintained, such excess is deductible and is covered by the proviso to section 36(1)(vii ). The proviso to section 36(1)(vii) protects the interests of the Revenue. For rural advances, which are covered by clause (viia) there would be no double deduction. The proviso limits the deduction towards bad debt write off by allowing the claim only when the write off relating to rural advances exceeds the provision maintained.​​ 

The Apex Court also observed that the Full Bench of the Kerala High Court ignored a significant expression appearing in both the proviso to section 36(1)(vii) and section 36(2)(v), i.e., 'assessee to which clause (viia) of sub-section (1) applies'. Thus, where the claim does not fall under section 36(1)(viia) ( i.e., provision for bad and doubtful debts), section 36(1)( vii) will not apply.​​ 

Chief Justice of the Apex Court in his separate concurrent view held that where the bad debt write off in respect of rural advances exceeds the provision, such excess alone is deductible and this situation is taken care of by the proviso to clause (vii). He observed that the proviso indicates that it is limited in its application to bad debts arising out of rural advances of a bank. It follows that if the amount of bad debt actually written off relates to urban advances, such claim is not affected, controlled or limited in any way by the proviso to clause (vii).​​ 

CONCLUSION​​ 

• The decision of the Apex Court provides finality and would be binding in nature. In simple terms, bad debts written off relating to urban advances are eligible for deduction as per section 36(1)(vii), read with section 36(2). It is not controlled by section 36(1)(viia).​​ 

• In respect of rural advances for which the banks are expected to maintain a provision towards bad and doubtful debts, any bad debt written off will be adjusted only in the provision account. Only when the bad debt write off claim exceeds the provision maintained by the assessee such an excess is deductible and it is mandatory as per the proviso to section 36(1)(vii).​​ 

• The decision provides a conceptual clarity and would set at rest the controversy surrounding these two sub-sections. The proviso contained in section 36(1)(vii) if it was incorporated in section 36(1)(viia) the confusion or controversy might have been avoided. Similarly, the Explanation to section 36(1)(viia) saying that the deduction is in addition to section 36(1)(vii) would have eliminated any controversy whatsoever on this issue.

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