“Section 36(2)(viia)”
The decision most relied on for Section 36(2)(viia) is Catholic Syrian Bank Ltd. v. CIT (343 ITR 270), cited in 326 judgments on BharatTax.
Leading authorities on Section 36(2)(viia)
For a bad debt deduction under Section 36(1)(vii), the debt must be actually written off as irrecoverable in the assessee's accounts, distinct from merely making a provision for bad and doubtful debts. The assessee bears the onus to satisfy the conditions under both Section 36(1)(vii) and Section 36(2) of the Income-tax Act.
Expenditure incurred by an assessee in relation to income not forming part of the total income is not deductible under Section 14A(1). The disallowance must be restricted to direct and indirect expenses having an approximate connection with the earning of such exempt income, and Rule 8D applies from Assessment Year 2008-09.
When an assessee possesses sufficient interest-free funds, it is presumed that any interest-free advances or investments made are from these funds, preventing disallowance of interest under Section 36(1)(iii). This principle applies if own capital and interest-free loans exceed the interest-free advances given.
The assessee must consistently follow one method of accounting and cannot arbitrarily change it, particularly in contravention of Section 145 of the Income Tax Act. This principle prohibits changes in accounting methods that are not in conformity with the law.
Disallowance under Section 14A read with Rule 8D(2)(iii) does not apply to long-term investments, including those in subsidiary/group concerns or strategic investments, and such investments should be excluded from the calculation.
The test of enduring benefit for classifying expenditure as capital or revenue is not absolute; expenditure incurred for an enduring advantage may nonetheless be on revenue account, as the test can break down depending on the facts.
The valuation of shares is not relevant for determining the genuineness of a transaction under Section 68 of the Income Tax Act. Interest income earned on the deposit of surplus funds is taxable as business income.
For banking companies, the machinery provisions of Section 115JB(2) of the Income Tax Act are unworkable due to a legal dichotomy created by the first proviso.
