Standard-asset provision qualifies for section 36(1)(viia) deduction

The dispute concerned whether Malwa Gramin Bank could claim deduction under section 36(1)(viia) for a provision made against standard assets. The Revenue’s case was that the allowance was confined to provisions for bad and doubtful debts in a narrower sense, and that the bank’s claim on standard-asset provisioning did not satisfy the provision. The bank maintained that it had made the provision in its books in accordance with RBI norms and within the statutory ceiling.

The decision holds that an eligible assessee under section 36(1)(viia) is entitled to the deduction by making a provision for bad and doubtful debts in its books, subject only to the prescribed overall cap. There is no further statutory requirement to exclude standard assets from the provision. The reasoning proceeds on the basis that RBI guidelines require banks to make a general provision even in respect of standard assets, because such assets carry inherent risk and may subsequently deteriorate. Those norms also prescribe minimum provisioning percentages, while the income-tax deduction remains confined by the statutory ceiling of 8.5% of total income and 10% of the aggregate average advances of rural branches.

On that footing, the view taken by the Commissioner of Income Tax was found unjustifiable. The assessee is bound to follow RBI provisioning norms, and an income-tax authority cannot adopt a contrary approach that would deprive the bank of the deduction otherwise available under section 36(1)(viia). The matter was remanded for fresh consideration, with liberty to the assessee to place the relevant material documents supporting the provision of Rs. 15,00,000 for assessment year 2011-12.

The impugned order was set aside and the matter remitted to the Tribunal.