ITAT Special Bench Upholds Section 36(1)(viia) Deduction for RBI-Mandated Bad Debt Provisions

The Special Bench of the Income Tax Appellate Tribunal (ITAT), Chandigarh, on 5 May 2026, held that provisions created by banks for bad and doubtful debts in compliance with RBI prudential norms qualify for deduction under Section 36(1)(viia) of the Income Tax Act, 1961, subject to the statutory ceiling prescribed under the provision. The Special Bench comprising Justice (Retd.) C.V. Bhadang (President), Rajpal Yadav (Vice President), and Manoj Kumar Aggarwal (Accountant Member) answered the reference in favour of the assessee, M/s Malwa Gramin Bank.

“Whatever provision is made in the books of accounts pursuant to RBI guidelines qualifies as provision for bad and doubtful debts.”

The dispute arose after the Revenue restricted the deduction claimed by the assessee-bank under Section 36(1)(viia), contending that the provision reflected in the books was either not specifically classified as “Provision for Bad and Doubtful Debts” or did not strictly correspond with the deduction mechanism under the Income Tax Act. The matter was referred to a Special Bench to settle conflicting judicial views on whether the deduction is governed by the actual provision recorded in the books or by the ceiling prescribed under the statute.

Before the Tribunal, the assessee submitted that banks are statutorily required to create provisions for Non-Performing Assets (NPAs) in accordance with RBI Prudential Norms, and such provisions are fundamentally meant to cover doubtful and irrecoverable debts. It was argued that the deduction under Section 36(1)(viia) is intended as a beneficial provision for the banking sector and should not be denied merely because of the nomenclature used in the accounts.

The Tribunal accepted the contention and observed that Section 36(1)(viia) prescribes only the maximum permissible deduction linked to total income and aggregate average rural advances. It held that once a provision for doubtful or impaired assets exists in the books in compliance with RBI requirements, the deduction cannot be denied solely on technical classification issues. The Tribunal held that :

“The nature and substance of the provision are more relevant than the exact nomenclature adopted in the books of accounts.”

The Special Bench further noted that RBI-mandated provisioning norms are aimed at recognising potential loan losses and maintaining financial discipline in the banking sector. Such provisions, therefore, squarely fall within the ambit of “bad and doubtful debts” contemplated under Section 36(1)(viia).

While answering the reference in the affirmative, the Tribunal relied upon the Karnataka High Court decision in Bellad Bagewadi Urban Souhard Sahakari Bank Niyamit v. CIT, which had similarly recognised the allowability of provisions created under regulatory banking norms.

Thus, the Special Bench directed that the appeals be placed before the regular Division Bench for disposal in accordance with the legal position settled through the present ruling.

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