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Provision for npa and 36(1)(vii)

SURESHAN K (Auditor) (189 Points)

10 May 2014

Whether the provision for NPA created under guideline of RBI is eligible for deduction u/s 36(1)(vii) as bad debt in view of Vijaya Bank vs CIT (323 ITR 166) as the banks discloses Debtors/Advances in Balance Sheet net of provision?

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2 Replies

Income Tax Wala: (Fin. Expert) (Chartered Accountants) (2010 Points)
Replied 19 May 2014

IN MY VIEW YES

SURESHAN K (Auditor) (189 Points)
Replied 20 May 2014

But I disagree on following ground:

Firstly bad debt written off is ‘Nominal a/c’ which is closed at the end of each accounting year by charging to profit/loss a/c where as provision for NPA ‘Real a/c’ which is created by charging to profit/loss a/c and is balanced and carried forward at the end of accounting year.

The banks to follow with the disclosure norms of RBI, discloses receivables/advances in balance sheet net of provision for NPA it does not mean the receivables/advances a/c wiped off to the extent of the provision and the balance in provision for NPA a/c is obliterated.

If we go through the schedules to balance sheet, it can be understood that each year provision required to be created is determined on the basis of opening provision for NPA available and amount of actual write-off/write-back of excess provision and quality of Assets at the end of year. (Please refer Annual Reports available in web-site of any commercial bank.)

Actually in Vijaya Banks case the Assessing Officer wrongly dis-allowed the actual write-off. The figure Rs. 7,10,47,161/- stated in the decision is actual write-off not provision for NPA created during the previous year relevant to AY1994-95. The AO dis-allowed the amount on the ground that there is no debit in the P/L a/c and corresponding credit in Debtor’s a/c.

As per accounting principles when provision for bad debt is created and subsequent year certain amount is written-off journal entries would be as follows:

Bad Debt a/c Dr. xx

To Debtors a/c Cr. xx

(bad debt written off)

Provision for Bad Debt a/c Dr. xx

To Bad Debt a/c Cr. Xx

(bad debt a/c closed by transferring to Prov a/c)

Thus the Debtors as well as Provision a/c stands reduced to the extent of bad debt written-off.

Similarly, the figure Rs. 7,10,47,161/- in Vijaya Bank’s case is actual write-off @ . Though it was not debited in P/L a/c it was removed not only from Debtors but also from Provision a/c. hence the amount become allowable. The fact is clear from the wordings of final fact finding authority viz. ITAT which is extracted below (from the Apex Court’s decision):

“….. Firstly, according to the Tribunal, the assessee had rightly made a provision for bad and doubtful debt by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year. Secondly, the provision account so created was debited and simultaneously the amount of loans and advances or debtors stood reduced and, consequently, the provision account stood obliterated.”…..

I have gone through several Annual Reports of Banks available in their web-site. None of the case provision for NPA a/c stood obliterated to the extent of provision created during the year instead closing balance is inclusive of the provision created during the year. Hence the decision is not squarely applicable.

Conclusion:

What allowable as deduction u/s 36(1)(vii) in case of banks is not the entire provision for NPA created by debiting to P/L a/c but the amount written-off and removed from both Debtors and Provision for NPA a/c (ie. it is not necessary to debit bad debt in P/L a/c). In case of rural bad debt, it is allowable to the extent exceeds the opening balance in the provision for bad debt a/c u/s 36(1)(viia) – not provision for NPA a/c