Hi Tia Jain,
The AO does not seem to be following the law when he denies you the
deduction u/s 36(1)(viia)(
ground that your NBFC hasn't identified the accounts which are
likely to turn bad. From the language deployed in clause (viia)(c)
and especially when you contrast it within the provision of clause
(vii) alone, it is clear that in case of an assessee not carrying on
the business of money-lending, the government will not allow the
deduction unless the amount is actually written off. But in case of
banks and other FIs, the government is ready to cut some slack and
lets them claim the deduction on the basis of a mere provision for
doubtful debts.
When you are into lending business, it is inevitable that some debts
will turn bad. When you make a provision for doubtful debts, I don't
think you have to identify which accounts will eventually turn bad.
As far as I understand, the purpose of Section 36(1)(viia) is to
give a sort of tax cushion to the money-lending institutions; they
don't have to wait till the account actually turns into an NPA. If
the intention of the law had been to allow this expense in respect
of individual debts only, we wouldn't have had separate provision in
respect of banks, NBFCs, etc and these assessees too would have been
allowed the bad debts claim only upon actually writing off the
balance in the account.
Actually, it's just a matter of timing. When the accounts actually
turn bad, you'd be debiting it to the Provision account and won't be
able to claim a deduction again. So if the AO doesn't allow the ad
hoc provision now, he'd have to allow it then on actual basis.
But I understand the AO's stand too. Clause (viia) opens with the
words "…any provision for bad and doubtful debts made by". So first
you have to make the provision, and then compare it with the figure
that constitutes 5% of your total income. Whichever is less will be
the amount allowed. You can't just pick up a calculator, find out 5
per cent of your TI, make out a voucher and claim the deduction! But
this is what you seem to have done. So I can understand the AO's
discomfiture in letting that amount be knocked off your income!
I presume there are some sticky, delinquent advances in your
company's advance portfolio. You can list them out and roughly
determine the amount you think you may never get back, and produce
it before the AO.
Thanks,
CA Sanjeev Bedi
--- In ICAI_CIRC_MEERUT_
<catiajain@.
>
> Hello friends,
>
> I m working with a NBFC. The co. is claiming deduction u/s 36(1)
(viia)(c) @ 5% of total income which is disallowed by the AO on the
ground that to claim deduction under the said section it is
necessary to identify doubtful debts and that deduction under the
said section is not a statutory deduction. Is the contention of AO
correct?
>
>
> ------------
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