Case Note & Summary
The Revenue appealed against the order of the Income Tax Appellate Tribunal which allowed a deduction of Rs.3,57,34,509 under Section 36(1)(viia) of the Income Tax Act, 1961, in excess of 5% of the gross total income. The assessee, a banking company incorporated in USA, had claimed deduction for bad debts under Section 36(1)(vii) and provision for bad and doubtful debts under Section 36(1)(viia) for assessment year 2000-01. The assessing officer computed the deduction under Section 36(1)(viia) at 5% of the assessed total income, which was higher than the amount claimed by the assessee. On appeal, the Commissioner of Income Tax (A) and the Tribunal allowed a higher deduction. The High Court held that the deduction under Section 36(1)(viia) is to be limited to 5% of the gross total income as computed before making any deduction under that clause, and not 5% of the total income after other deductions. The court allowed the Revenue's appeal and restored the order of the assessing officer.
Headnote
A) Income Tax - Deduction for Provision for Bad and Doubtful Debts - Section 36(1)(viia) - Interpretation - The issue was whether the deduction under Section 36(1)(viia) should be computed at 5% of the gross total income or 5% of the total income after other deductions - The court held that the deduction is to be limited to 5% of the gross total income as computed before making any deduction under that clause, and the Tribunal erred in granting relief in excess of that limit (Paras 1-6).
Issue of Consideration
Whether the deduction under Section 36(1)(viia) of the Income Tax Act, 1961 is to be limited to 5% of the gross total income or 5% of the total income assessed after appeal effect.
Final Decision
Appeal allowed. The order of the Income Tax Appellate Tribunal is set aside and the order of the assessing officer is restored.
Law Points
- Deduction under Section 36(1)(viia) is limited to 5% of gross total income as computed before making any deduction under that clause
- not 5% of total income after other deductions.
Case Details
2011 LawText (BOM) (12) 68
INCOME TAX APPEAL NO.5758 OF 2010
J.P. Devadhar, A.R. Joshi
Mr. Suresh Kumar for the appellant, Mr. P.J. Pardiwala, Senior Advocate with Mr. B.D. Damodar i/by Kanga & Co. for the respondent
The Director of Income Tax (International Taxation)
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Nature of Litigation
Appeal by Revenue against order of Income Tax Appellate Tribunal allowing deduction under Section 36(1)(viia) in excess of 5% of gross total income.
Remedy Sought
Revenue sought to set aside the Tribunal's order and restore the assessing officer's computation limiting deduction to 5% of gross total income.
Filing Reason
The Tribunal allowed deduction under Section 36(1)(viia) at Rs.3,57,34,509 which was in excess of 5% of the gross total income.
Previous Decisions
Assessing officer computed deduction at 5% of assessed total income; CIT(A) and Tribunal allowed higher deduction.
Issues
Whether deduction under Section 36(1)(viia) is limited to 5% of gross total income or 5% of total income after other deductions.
Submissions/Arguments
Revenue argued that deduction under Section 36(1)(viia) is to be limited to 5% of gross total income as computed before making any deduction under that clause.
Assessee contended that deduction should be computed on total income after other deductions.
Ratio Decidendi
The deduction under Section 36(1)(viia) of the Income Tax Act, 1961 is to be limited to 5% of the gross total income as computed before making any deduction under that clause, and not 5% of the total income after other deductions.
Judgment Excerpts
The question of law raised by the Revenue in this appeal reads thus: 'Whether, on the facts and circumstances of the case and in law, the Income Tax Appellate Tribunal was right in providing the relief of Rs.3,57,34,509 under Section 36(1)(viia) of the Act which is far in excess 5% of the total income assessed after appeal effect at Rs.5,20,86,28,184 without appreciating the fact that the deduction as per Section 36(1)(viia) of the Act is to be limited to 5% of the gross total income ?'
Procedural History
Assessing officer passed assessment order on 20th March 2002. Assessee appealed to CIT(A) who allowed relief on 26th July 2005. Revenue appealed to ITAT which confirmed CIT(A) order on 30th April 2010. Revenue then filed appeal to High Court.
Acts & Sections
- Income Tax Act, 1961: 36(1)(vii), 36(1)(viia)
