Section 36(1)(viia) of the Income Tax Act
Income-tax Act, 2025: ss.29, 30, 31, 32
Section 36(1)(viia) falls under section 36 of the Income-tax Act, 1961, which corresponds to section 29 (Deductions related to employee welfare), section 30 (Deduction on certain premium), section 31 (Deduction for bad debt and provision for bad and doubtful debt) and section 32 (Other deductions) of the Income-tax Act, 2025.
Read section 29 of the 2025 ActRead section 30 of the 2025 ActRead section 31 of the 2025 ActRead section 32 of the 2025 Act
Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.
The decision most relied on for Section 36(1)(viia) is Maxopp Investment Ltd. v. CIT (347 ITR 272), cited in 516 of the 877 judgments on BharatTax that turn on this section.
Leading authorities on Section 36(1)(viia)
Disallowance under Section 14A cannot exceed the exempt income earned. The Assessing Officer must record satisfaction regarding the assessee's accounts before making any disallowance.
The mixed fund theory is affirmed, holding that no disallowance of interest expenditure under Section 14A can be made if the assessee possesses sufficient non-interest bearing funds, such as capital and reserves, to cover investments made in tax-free securities.
A provision for bad and doubtful debts debited to the profit and loss account and reduced from advances on the balance sheet constitutes a write-off for deduction purposes. This is true even if individual debtor accounts are not closed.
The case concerns the allowability of deductions for provisions made under Section 36 of the Income Tax Act, 1961, especially those related to bad and doubtful debts. It distinguishes such deductions from the recognition of interest income on non-performing assets (NPAs).
When following the mercantile system of accounting, provisions for liabilities made on a scientific and rational basis are allowable as deductions, even if their actual quantification and discharge are deferred to a future date.
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.
Liabilities accrued on a notional basis are allowable as deductions under the mercantile system of accounting even if their exact quantification or discharge is deferred to a future date or if the demand itself is disputed.
Amendments to tax law that impose new obligations or change existing legal positions apply prospectively, even if stated to be "for the removal of doubts." The judgment also clarifies that deductions under Section 43B are allowed only on actual payment, overriding the mercantile system of accounting.
A cardinal principle of tax law is that the law in force for the relevant assessment year applies unless expressly or necessarily provided otherwise. A retrospective tax provision stated to be 'for the removal of doubts' is not presumed retrospective if it alters or changes the law as it earlier stood.
Income from shares and securities held by banks as stock-in-trade constitutes business income, hence Section 14A disallowance is not attracted. Further, any disallowance under Section 14A cannot exceed the actual amount of exempt income earned by the assessee during the year.
