PROVISION FOR BAD AND DOUBTFULL DEBT

PROVISION FOR BAD AND DOUBTFULL DEBT WHICH WAS NOT ALLOWED EARLIER IN FULL IN THE ASSESSMENT YEAR CANNOT BE TAXED AS INCOME IN THE YEAR OF WRITE BACK

Each and every business entity working in India is guided by Income Tax Act, 1961. The income which a business entity earns is taxed following the relevant provisions of the Income Tax Act, 1961. There are a lot of section following which tax authority has to decide whether an income is taxable or not. One such section relates to the provisions for bad and doubtful debt. It is covered under section 36(viia)(b) of the Income Tax Act, 1961.

Section 36(viia)(b) is an important section as it allows a bank which though not incorporated India but being a bank under a law of any country outside India is allowed a deduction of five percent of the total income(computed before making such provision and Chapter VI) on account of provision for bad an doubtful debt.

In the banking sector the scope of default by customer is large so there is large provisions created for such default but under the Income Tax Act, 1961 there is a ceiling limit of five percent of the total income beyond which it can create any provision. So there remains some provision which remain unutilized. But in case if it recover some portion of the provision and write backs the amount in the books, whether such income chargeable tax or not is a question.

This can be best understood by a case involving Bank of Tokyo Mitsubishi UFJ Ltd(BTM) and the income tax department.

BTM is bank under the laws of Japan. The bank carries out its operation in India through its branches established in India. The profits earned by its permanent establishment were taxed by the income tax authorities.

Since being a foreign bank it was allowed a deduction under section 36(viia)(b) of the Income Tax Act, 1961 of an amount being not more than five percent of the total income. But since it being a foreign bank maintains its own provision for bad and doubtful debt and therefore because of the ceiling limit, the provisions created over years was not allowed as deduction.

Now during a year BTM made a gross provision and after writing back an amount which was recovered. The resultant figure was then added back to the total income to compute the Net Income.

When the Assessing Officer was assessing the return of income he allowed the deduction under 36(viia)(b) but he also charged the amount recovered on the grounds that no sufficient information was provided regarding the amount recovered and even it was from write back the amount was chargeable to tax assuming it was from a amount already provided as deduction earlier.

BTM was not happy with this assessment and appealed before the Commissioner of Income Tax (Appeal).

BTM won the case. But the income tax authority not happy with decision appealed in the Tribunal.

The Tribunal was of the view that since the department cannot produce any proof that the write off amount taxed was allowed as deduction in any of the earlier previous years. The deduction allowed under section 36(viia)(b) being five percent of the total if recovered can only be taxed as income in the year of recovery. So the decision again went in favor of BTM and the Assessing Officer was ordered to satisfy himself if the amount recovered was from provisions made earlier.

The ultimate conclusion is that an amount which is recovered and written back by a bank can only be subject to tax as an income only if it was allowed as deduction any of the earlier previous years. Until and unless this happens the amount is not subject to tax.