CIT Vs Madurai District Central Co-operative Bank Limited (Madras High Court)
The Madras High Court considered departmental appeals relating to Assessment Year 2010–11 concerning the computation of deduction for provision for bad and doubtful debts under Section 36(1)(viia) of the Income-tax Act, 1961, read with Rule 6ABA of the Income-tax Rules, 1962. Two substantial questions of law were admitted: whether “aggregate average advances” of rural branches should be computed based on the amounts outstanding at the end of the last day of each month of the previous year, and whether such computation should be on cumulative monthly outstanding balances rather than incremental advances made during each month.
At the hearing, both sides agreed that the issues were squarely covered by binding precedent. The Court noted that the Supreme Court’s decision in Catholic Syrian Bank v. Commissioner of Income-Tax and its own earlier ruling in Commissioner of Income-Tax v. City Union Bank governed the controversy. In City Union Bank, this Court had relied on the Kerala High Court’s decision in South Indian Bank v. CIT, which had also been referred to by the Supreme Court.
The Kerala High Court decision, as extracted and relied upon, explained the legislative scheme behind clauses (vii) and (viia) of Section 36(1) and clause (v) of Section 36(2). It held that the proviso to Section 36(1)(vii) and Section 36(2)(v) were introduced simultaneously to prevent double deduction for the same bad debt in the case of scheduled banks. The scheme permits a bank to claim deduction for bad debts written off relating to urban branches, while also allowing a specific deduction for provisions created in respect of rural branch advances under Section 36(1)(viia). Where a bad debt written off relates to advances for which a provision has been made under Section 36(1)(viia), the proviso limits the deduction to the difference between the amount written off and the credit balance in the provision account. If the bad debt written off does not relate to advances covered by such provision, the main clause applies and the deduction is allowable.
