CPT V24P7-Art1 (Content).pmd - Taxmann

Direct Tax Laws
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
5. 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.
Section 36(viia) was introduced by the Finance
Act, 1979 w.e.f. 1-4-1980 and the scope of the
provision was explained by the CBDT vide its
Circular No. 258, dated 14-6-1979 in which it
was explained that the provisions were
introduced to promote rural banking and assist
the scheduled commercial banks in making
adequate provision out of their current profits
in order to provide for risks in respect of rural
advances.
Clause 13.3 of the Circular states that the
deduction on account of provision for doubtful
debts, is distinct and independent of section
36(1)(vii) relating to allowance of deduction
for bad debts. The scheduled commercial banks
would continue to get the benefit of writing
off of irrecoverable debts as per section 36(1)(vii)
in addition to the benefit of deduction of the
provision for bad and doubtful debts under
section 36(1)(viia).
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
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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 nonrural
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 subsection
(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