No Double Deduction: ITAT Allows Separate Claims for Bad Debts – Sections 36(1)(vii) & 36(1)(viia)

DCIT Vs Small Industries Development Bank of India (ITAT Mumbai)

ITAT: No duplication or excessive bad debts deduction claim, allows deduction under both Secs. 36(1)(vii) & 36(1)(viia)

Summary: ITAT Mumbai upheld relief to the assessee, a statutory financial institution, on multiple issues relating to bad debt and special reserve deductions. It ruled that deductions under Sections 36(1)(vii) and 36(1)(viia)(c) operate independently, relying on the Supreme Court’s decision in Catholic Syrian Bank Ltd. v. CIT, and that the proviso to Section 36(1)(vii) prevents only double deduction, which was not the case here. The Tribunal also confirmed that the special reserve deduction under Section 36(1)(viii) should be computed separately and not reduced by the claim under Section 36(1)(viia)(c). On Section 14A disallowance, it held that the AO could not invoke Rule 8D without recording dissatisfaction with the assessee’s computation and restricted disallowance to the amount already offered. The issue of amortized lease premium paid to MMRDA was remanded for consideration in line with the Bombay High Court’s pending decision. Overall, the CIT(A)’s relief was upheld and Revenue’s appeal dismissed.

Facts:

• The assessee, Small Industries Development Bank of India (SIDBI), is a statutory financial institution established under the SIDBI Act, 1989 with the objective of promoting, financing, and developing Micro, Small and Medium Enterprises (MSMEs) in India. It is engaged in providing financial assistance to small industries, refinancing loans extended by banks and financial institutions, and undertaking various developmental and promotional activities for the MSME sector.
• For the relevant assessment years 2014–15 to 2018–19, the assessee filed its income tax returns declaring substantial income from its banking and financial activities. For instance, for Assessment Year 2016–17, the assessee declared a total income of Rs.1,552.64 crores and a book profit of Rs.1,861.94 crores under Section 115JB of the Income-tax Act, 1961.
• The assessee’s cases were selected for scrutiny assessment under the provisions of Section 143(3) of the Act. During the course of assessment proceedings, the Assessing Officer (AO) made various additions and disallowances to the returned income based on his interpretation of different provisions of the Act.
• The major adjustments made by the AO included:
  84. Disallowance of bad debts written off under Section 36(1)(vii) amounting to Rs.84.46 crores.
  85. Disallowance of amortized rent/lease premium of Rs.0.60 crores.

• Disallowance under Section 14A read with Rule 8D for Rs.5.50 crores on account of expenditure allegedly relatable to exempt income.
• Restriction of deduction under Section 36(1)(viii) for Rs.71.75 crores relating to special reserve for development finance institutions.
• The assessee contested the assessment order before the Commissioner of Income Tax (Appeals) [CIT(A)], who partly allowed the appeals by granting significant relief on multiple issues. The CIT(A):

i. Deleted the disallowance of bad debts written off under Section 36(1)(vii).

ii. Allowed the full deduction under Section 36(1)(viii) without reducing the amount claimed under Section 36(1)(viia)(c).