In a significant ruling, the Delhi High Court has allowed the income tax deduction of irrecoverable bad debts to Standard Chartered Grindlays Bank. The court emphasized that Section 36(1)(vii) and Section 36(1)(viia) are distinct and independent provisions.
The case revolved around the assessment year 2003-04 when the Assessee filed a return of income of Rs.205 Cr and claimed a deduction of Rs.10.78 Cr on account of bad debts under Section 36(1)(vii). However, the Revenue disallowed the deduction, which was upheld by both the CIT(A) and ITAT.
The Assessee relied on previous Supreme Court rulings in Khyati Realtors, Catholic Syrian Bank, and Southern Technologies. It argued that since no provision for bad debts was made during the relevant assessment year, it should be entitled to claim the entire amount of irrecoverable bad debts under Section 36(1)(vii).
The Delhi High Court noted that there was no dispute regarding the absence of a provision for bad debts and cited the Supreme Court’s decision in Catholic Syrian Bank, stating that the Assessee can claim deduction towards irrecoverable bad debts under Section 36(1)(vii) when the conditions specified in Section 36(2) are fulfilled.
The court further opined that any Assessee, including a scheduled bank, can claim a deduction for bad debts or a portion thereof that has been written off as irrecoverable in the relevant assessment year. It clarified that the first proviso to Section 36(1)(vii) applies when the deduction of bad debts is limited to the amount exceeding the credit balance of the provision made in the books of account under clause (viia), which wasn’t applicable in the present case.
Based on these considerations, the Delhi High Court decided the substantial question of law in favor of the Assessee, allowing the income tax deduction of irrecoverable bad debts.
This landmark ruling provides clarity on the tax treatment of bad debts and sets an important precedent for similar cases in the future.
Case Title: Standard Chartered Grindlays Bank Ltd. V/s ACIT
Citation: ITA 536/2022