N P A

(Guest)

Good question Kaya..........The banks have to make provision for NPA as per Banking Regulation act. However there is no such provision in Income Tax, I suppose. Please correct me if I m wrong......

Max Payne (employed) (2574 Points)
Replied 02 October 2009

Yes u can see section 36(1)(viia)

⁶⁶36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

^XXXX

⁹⁶[(viia) ⁹⁷[⁹⁸ in respect of any provision for bad and doubtful debts made by—

(a) a scheduled bank [not being ⁹⁹[* * *] a bank incorporated by or under the laws of a country outside India] or a non- scheduled bank ¹[or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount ²[not exceeding seven and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ³[ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner :

⁴[Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:]

⁵[Provided further that for the relevant assessment years com-mencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words “five per cent”, the words “ten per cent” had been substituted :]

⁶[Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:

Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head “Profits and gains of business or profession.” ]

⁷[Explanation.—For the purposes of this sub-clause, “relevant assessment years” means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;]

(b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA);]

⁸[(c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) :]

⁹[Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.]

Explanation.—For the purposes of this clause,—

¹⁰[(i) “non-scheduled bank” means a ¹¹banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank;]

¹²[(ia)] “rural branch” means a branch of a scheduled bank ¹³[or a non-scheduled bank] situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;

¹⁴[(ii) “scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) ¹⁵[***];]

¹⁶[(iii) “public financial institution” shall have the meaning assigned to it in section 4A¹⁷ of the Companies Act, 1956 (1 of 1956);

(iv) “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);

(v) “State industrial investment corporation” means a Government company¹⁸ within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and ¹⁹[eligible for deduction under clause (viii) of this sub-section];]

²⁰[(vi) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;]

²¹[(viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head “Profits and gains of business or profession” (before making any deduction under this clause) carried to such reserve account:

Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.

Explanation.—In this clause,—

(a) “specified entity” means,—

(i) a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956)²²;

(ii) a financial corporation which is a public sector company;

(iii) a banking company;

(iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;

(v) a housing finance company; and

(vi) any other financial corporation including a public company;

(b) “eligible business” means,—

(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or construction or purchase of houses in India for residential purposes;

The following sub-clause (i) shall be substituted for the existing sub-clause (i) of clause (b) of the Explanation to clause (viii) of sub-section (1) of section 36 by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2010 :

(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for—

(A) industrial or agricultural development;

(B) development of infrastructure facility in India; or

(C) development of housing in India;

(ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and

(iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India;

(c) “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;

(d) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;

(e) “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes;

(f) ²³“public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);

(g) “infrastructure facility” means—

(i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified²⁴ by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed²⁵;

(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and

(iii) an undertaking referred to in sub-section (10) of section 80-IB;

(h) “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;]

1 Like

praveen (Chartered Accountant) (6971 Points)
Replied 02 October 2009

Does it apply for NBFC as well.

Saurabh Badjatya (Internal Auditor) (22 Points)
Replied 02 October 2009

not at all allowed deduction as per IT ACT

CA.kaya (Chartered accountant) (3990 Points)
Replied 02 October 2009

now i am confused.. some one telling its allowed some one not..

Rahul Gupta (CA Final Student) (1780 Points)
Replied 02 October 2009

Hello friends,

Kaya u have asked a really nice question. Well as per my knowledge..Provision for NPA debited to P & L A/c is not eligible for deduction under IT act.

Under the Income-tax Act, as per Section 36(1 )(vii) only the bad debt or part thereof which is written off as irrecoverable in the accounts is allowable as deduction. Explanation to Section 36(1)(vii) provides that any bad debt or part thereof written off as irrecoverable shall not include any provision for bad and doubtful debts & provision for NPA is not wriiten off as irrecoverable.

The provisions for NPA under the RBI directions is not only in respect of loss assets but also doubtful assets and sub standard assets. Depending upon the period for which the asset has been considered as doubtful, various percentage of the amount is to be provided.

Thus, so long as the amounts written off is in respect of provision for bad and doubtful debts or provision for NPA or so long as amount provided is not in respect of a bad debt, the same is not allowable as deduction u/s 36(1)(vii).

Provision for NPA is neither an expenditure nor an allowance which are permitted as deductions u/s 28 to 43B of the Act and, therefore, "DISALLOWED".

"Correct me if i am wrong"

Regards

Rahul Gupta.

Max Payne (employed) (2574 Points)
Replied 02 October 2009

Hi Kaya, The first proviso to section 36(1)(viia) allows the same as deduction - but it should be as per the RBI Guidelines.

Regarding Praveen's query, Financial corporation can only create a apecial reserve U/s 36(1)(viii). Not an admissible provision for bad debts though.

²¹[(viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head “Profits and gains of business or profession” (before making any deduction under this clause) carried to such reserve account:

Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.

Explanation.—In this clause,—

(a) “specified entity” means,—

(i) a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956)²²;

(ii) a financial corporation which is a public sector company;

(iii) a banking company;

(iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;

(v) a housing finance company; and

(vi) any other financial corporation including a public company;

(b) “eligible business” means,—

(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or construction or purchase of houses in India for residential purposes;

The following sub-clause (i) shall be substituted for the existing sub-clause (i) of clause (b) of the Explanation to clause (viii) of sub-section (1) of section 36 by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2010 :

(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for—

(A) industrial or agricultural development;

(B) development of infrastructure facility in India; or

(C) development of housing in India;

(ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and

(iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India;

(c) “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;

(d) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;

(e) “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes;

(f) ²³“public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);

(g) “infrastructure facility” means—

(i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified²⁴ by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed²⁵;

(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and

(iii) an undertaking referred to in sub-section (10) of section 80-IB;

(h) “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;]

Max Payne (employed) (2574 Points)
Replied 02 October 2009

Hi Praveen

Find a circular attached for section 36(1)(viii)

Attached File : 58 circular notified fis section 36 viii .doc downloaded: 433 times

rajesh (I Am CA a final student & CS final) (100 Points)
Replied 20 November 2009

classification of NPA

VINAY (ca final) (21 Points)
Replied 09 December 2010

in my opinion provision for NPA for loss assets is allowed as deduction but u have to prove before the Income tax authority that these are genuine provisions based on the fact that such amount is likely to be not recoverable from debtor..ie in due corse of time will become bad debts ..