query regarding deduction u/s 36(1)(viia)(c)

Hi Tia Jain,

The AO does not seem to be following the law when he denies you thededuction u/s 36(1)(viia)(c) @ 5 per cent of total income on theground that your NBFC hasn't identified the accounts which arelikely 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 onthe business of money-lending, the government will not allow thededuction unless the amount is actually written off. But in case ofbanks and other FIs, the government is ready to cut some slack andlets them claim the deduction on the basis of a mere provision fordoubtful debts.When you are into lending business, it is inevitable that some debtswill turn bad. When you make a provision for doubtful debts, I don'tthink you have to identify which accounts will eventually turn bad.As far as I understand, the purpose of Section 36(1)(viia) is togive a sort of tax cushion to the money-lending institutions; theydon't have to wait till the account actually turns into an NPA. Ifthe intention of the law had been to allow this expense in respectof individual debts only, we wouldn't have had separate provision inrespect of banks, NBFCs, etc and these assessees too would have beenallowed the bad debts claim only upon actually writing off thebalance in the account.Actually, it's just a matter of timing. When the accounts actuallyturn bad, you'd be debiting it to the Provision account and won't beable to claim a deduction again. So if the AO doesn't allow the adhoc provision now, he'd have to allow it then on actual basis.But I understand the AO's stand too. Clause (viia) opens with thewords "…any provision for bad and doubtful debts made by". So firstyou have to make the provision, and then compare it with the figurethat constitutes 5% of your total income. Whichever is less will bethe amount allowed. You can't just pick up a calculator, find out 5per cent of your TI, make out a voucher and claim the deduction! Butthis is what you seem to have done. So I can understand the AO'sdiscomfiture in letting that amount be knocked off your income!I presume there are some sticky, delinquent advances in yourcompany's advance portfolio. You can list them out and roughlydetermine the amount you think you may never get back, and produceit before the AO.

Thanks,

CA Sanjeev Bedi

--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=U8Fr9syS796oPzSQDeZ_4nFd9saZXotyi9X1yZaqX0Lv8JR7dZYxne92oSCPxrsNzHU94aowf7t55JYcyx62K4wmGMY6v0qLvw, First NameTia Jain wrote:>> 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 theground that to claim deduction under the said section it isnecessary to identify doubtful debts and that deduction under thesaid section is not a statutory deduction. Is the contention of AOcorrect?>