Deduction u/s 36(1)(viia) Allowed Even if Provision Entry Passed After Year-End Based on Audit Memo

By | November 29, 2025
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Deduction u/s 36(1)(viia) Allowed Even if Provision Entry Passed After Year-End Based on Audit Memo

Issue

Whether a co-operative bank is entitled to claim a deduction under Section 36(1)(viia) for the provision for bad and doubtful debts for a specific assessment year (AY 2007-08), when the actual accounting entry creating the provision in the ledger was passed on a later date (13-07-2007) in the subsequent financial year, but the effect was given in the audited financial statements as of the year-end (31-03-2007) based on the Statutory Auditor’s instructions.

Facts

  • Assessee: A co-operative bank.

  • Assessment Year: 2007-08.

  • The Claim: The bank claimed a deduction under Section 36(1)(viia) for the provision made for bad and doubtful debts.

  • The Disallowance: The Assessing Officer (AO) disallowed the claim. The AO observed that the journal entry creating the provision was passed in the ledger only on 13-07-2007, which falls in the subsequent financial year (FY 2007-08 / AY 2008-09). Therefore, the AO held that no provision existed in the books of account as of 31-03-2007.

  • Assessee’s Defense:

    • The bank explained that the entry on 13-07-2007 was passed to give effect to the “Memorandum of Changes” issued by the Statutory Auditors during the audit process.

    • Although the manual entry date was later, the provision was incorporated into the final audited Balance Sheet and Profit & Loss Account as of 31-03-2007.

    • The claim was for the first time under this section, and the necessary debit to the P&L appropriation/reserve was made to satisfy the statutory requirement.

Decision

  • The ITAT Mumbai Bench ruled in favour of the assessee and allowed the deduction.

  • Effective Date of Provision: The Tribunal held that the date of the manual ledger entry (13-07-2007) is not the sole determinant. What matters is whether the provision effectively impacts the financial statements of the relevant year.

  • Auditor’s Memorandum: Since the entry was passed pursuant to the Statutory Auditor’s direction (Memorandum of Changes) to finalize the accounts for the year ended 31-03-2007, and the audited financials reflected this provision as of that date, the condition of “making a provision” under Section 36(1)(viia) was satisfied.

  • Substance Over Form: The Tribunal emphasized that denying the deduction merely based on the date of the adjusting entry, when the accounts for the year undoubtedly carried the provision, would be hyper-technical and incorrect.

Key Takeaways

  • Audit Adjustments are Valid: Accounting entries passed after the year-end to incorporate audit adjustments (via Memorandum of Changes) relate back to the financial year being audited. They are valid for claiming deductions that require “provision in the books.”

  • Condition of Provision: For Section 36(1)(viia), creating a provision in the books of account is a mandatory condition. However, if the final audited accounts show the provision, the timing of the backend ledger entry is secondary.

  • Co-operative Banks: This ruling protects co-operative banks from disallowances caused by the timing lag between the end of the financial year and the finalization of statutory audits.

IN THE ITAT MUMBAI BENCH ‘G’
GS Mahanagar Co-operative Bank Ltd.
v.
Deputy Commissioner of Income-tax *
SAKTIJIT DEY, Vice President
and PADMAVATHY S, Accountant Member
IT Appeal No. 1867 (Mum) of 2025
[Assessment year 2007-08]
NOVEMBER  4, 2025
Dinesh Kukreja and Ms. Priyanshi Chokshi, Advs. for the Appellant. Swapnil Choudhary, Sr. AR for the Respondent.
ORDER
Padmavathy S, Accountant Member.- This appeal by the assessee is against the order of the Commissioner of Income Tax Appeals/National Faceless Appeal Centre (NFAC), Delhi passed u/s. 250 of the Income Tax Act, 1961 (the ‘Act’) dated 27.08.2024 for AY 2007-08. The assessee raised the following grounds-
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the Ld. AO in denying deduction of Rs. 39,24,481 under Section 36(1)(viia) of the Income Tax Act, 1961 (Act’) towards the provision for bad and doubtful debts.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO erred in holding that the Appellant had not made any provision towards bad and doubtful debts in the books of account, ignoring the documents and information submitted by the Appellant.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO erred in holding that the Appellant was required to debit the amount of provision for bad and doubtful debts to the profit and loss account for the year under consideration for the purpose of claiming deduction under Section 36(1)(viia) of the Act.
4. The Appellant craves leave to, add to or alter, by deletion, substitution, or otherwise, any or all of the foregoing grounds of appeal at or before the hearing, and to submit such statements, documents, and papers as may be considered necessary either at or before the appeal hearing.”
2. The assessee filed the return of income for AY 2007-08 on 29.09.2007 declaring a total income of Rs. 4,84,01,934/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The AO completed the assessment u/s. 143(3) 27.11.2009 after making disallowance towards software expenses to the tune of Rs. 28,25,216/- and deduction claimed u/s. 36(1)(viia) of the Act amounting to Rs. 39,24,481/-. Aggrieved the assessee filed an appeal before the ld. CIT(A) contending the disallowance made u/s. 36(1)(viia) and the ld. CIT(A) confirmed the said disallowance. The assessee preferred further appeal before the Tribunal and the Tribunal vide order dated 02.11.2018 restore the matter back to the file of the AO for re-appreciation of factual matrix and re-adjudicate the same as per law after providing reasonable opportunity of being heard to the assessee. During the scrutiny proceedings u/s. 143(3) r.w.s. 254 the assessee submitted the following supporting documents to substantiate the claim for deduction u/s. 36(1)(viia)
a. Audited Financials & Annual Report of the assessee Bank for A.Y. 2007-08.
b. Audited Financials & Annual Report of the assessee Bank for A.Y. 2006-07
c. Ledger copies of Provision for Bad and Doubtful Debts for A.Y. 2007-08
d. Ledger copies of Provision for Interest Accrued on Standard Assets for A.Y. 2007-08.
e. Copy of “Statement of Memorandum of Changes” issued by Statutory Auditor for A.Y. 2007-08 in pursuance of which Provision for Bad and Doubtful Debts of Rs.45 lacs is created by the assessee.
f. Explanation for creation of Provisions for Interest Accrued on Standard Assets out of appropriation of net profit for F.Y. 2005-06 (i.e. A.Y. 2006-07).
3. The assessee submitted that the claim of deduction u/s.36(1)(viia) is against the transfer from provision for standard assets to provision for bad and doubtful debts as per the advise of the statutory auditors. The assessee further submitted that the above listed documents substantiate the entries passed based on which the deduction is claimed for AY 2007-08. The AO however did not accept the submissions of the assessee and made the disallowance stating that-
5.7 On perusal of above ledger accounts of ‘Provision for Interest on Standard Assets’ from 01.04.2006 to 31.03.2007 & 01.04.2007 to 31.03.2008, it can be seen that the closing balance as on 31.03.2007 is Rs. 1,18,39,100/-, whereas, in the Balance Sheet, the closing balance of ‘Provision for Interest on Standard Assets’ as on 31.03.2007 is Rs. 73,39,100/-. It is also seen that the closing balance of “Provision for Interest on Standard Assets’ as on 31.03.2008 is Rs. 73,39,100/-,
5.8 Further, in its submission, the assessee also relied upon the judicial pronouncements of (i) Rural Electrification Corporation Ltd  (AAR New Delhi) and (ii) Power Finance Corporation Ltd V. JCIT [2006] 10 SOT 190 (Delhi Trib). However, on perusal of the above judgments, it is seen that the fact of the above cases are distinguishable with the facts of the case of the assessee.
5.9 In view of above discussion and discrepancies found in the submission by the assessee and the fact that the assessee has not made any provision of bad & doubtful debts in the P&L A/c in A.Y 2007-08 and moreover has transferred the amount of Rs. 45,00,000/- from ‘Provision for Interest on Standard Assets’ to ‘Bad Debts Reserve’ on 13/07/2007 in A.Y 2008-09, the claim of the assessee of Rs. 39,24,481/- u/s. 36(1)(viia) of the Act is not allowable in A.Y 2007-08.
6. The total income of the assessee is remains unchanged at Rs. 5,51,51,630/-(As per order u/s. 143(3) of the Act dated 27.11.2009).”
4. On further appeal, the ld. CIT(A) confirmed the disallowance stating that in order to become eligible for deduction u/s. 36(1)(viia) the assessee is required to make the provision by debiting the P&L a/c. which the assessee had failed to do so in the present case. Aggrieved by the order of the ld. CIT(A) the assessee is in appeal before the Tribunal for the second time.
5. There is a delay of 147 days in filing the appeal before the Tribunal and the assessee has filed the petition for condonation of delay. Having heard both the parties and perused the material on record, we are of the view that there is a reasonable and sufficient cause for the delay in filing the appeal before the Tribunal. Therefore following the Hon’ble Supreme Court decision in the case of Collector, Land Acquisition v. MST. Katiji (1987) 167 ITR 471 we condone the delay of 147 days in filing the appeal and admit the appeal for adjudication.
6. The ld. AR submitted that the reason for the AO to deny the deduction u/s. 36(1)(viia) is that the assessee has transferred the amount of Rs. 45,00,000 from provision for interest on standard asset to provision for bad and doubtful debts on 13.07.2007 which pertains to subsequent AY 2008-09. The ld. AR further submitted that the entry for transferring the provision was given effect while finalising the accounts for the year ended 31.03.2007 based audit recommendations. The ld. AR in this regard, drew our attention to the memorandum of changes with the auditors remark dated 13.07.2007 where the auditors have advised various entries to be passed in the financial statements as on 31.03.2007 (page 171 &172 of paper book). The ld. AR also drew our attention to the audited financial statements for the year ended 31.03.2007 in support of the claim that the entry pertaining to the transfer of provision was passed in the financial statements for the year ended 31.03.2007 (page 106 of paper book) where the provision for bad and doubtful debts as increase from Rs. 31,10,00,000/- to Rs. 31,55,00,000/-. The ld. AR submitted that the assessee during the year under consideration based on audit recommendation towards transfer of provision from standard asset to provision for bad and doubtful debts and has claimed deduction u/s. 36(1)(viia) against the same. The AR accordingly submitted that the AO has not appreciated the said fact and made the disallowance stating that the entry pertains to subsequent AY. With regard to the provision being not routed through P&L account the ld. AR submitted that the assessee’s income was not taxable u/s. 80P till AY 2006-07 and from AY 2007-08 due to amendment to the said section, the assessee’s income is brought within tax net. The ld AR further submitted that corresponding amendment was brought in section 36(1)(viia) whereby cooperative banks were allowed to claim deduction towards provision of bad and doubtful debts and therefore the amount transferred by the assessee is eligible for deduction even if not routed through P&L account since this is the first year of claim.
7. The ld. DR on the other hand, relied on the orders of the lower authority.
8. We heard the parties and perused the material on record. The assessee during the year under consideration and claimed deduction as per the provisions of Section 36(1)(viia) to the tune of Rs. 39,24,481/-. The AO denied the said claim based on the verification of the ledger accounts stating that the entries against which the assessee has made the claim are passed in the subsequent AY and therefore the assessee cannot be allowed the deduction during the year under consideration. However, from the perusal of various records as explained by the ld. AR during the course of hearing, we notice that though the ledger accounts reflect the entry on 13.07.2007, in the audited financial statements the effect for the entries are reflected as on 31.03.2007. We further notice that since the transfer entry was based on the memorandum of changes recommended by the auditors dated 13.07.2007, in the books of accounts the entries were passed on the said dates though the audited financial statements were adjusted as on 31.03.2007. Accordingly, the ground on which the AO denied the deduction u/s. 36(1)(viia) cannot be sustained. Further we notice that the ld. CIT(A) has confirmed the disallowance stating that the deduction u/s. 36(1)(viia) can be allowed only when the provision is routed through the P&L a/c. Finance Act 2007, amended the provisions of section 36(1)(viia) whereby cooperative banks became eligible for deduction under the said section from AY 2007-08. The said amendments correspond to the amendment brought in section 80P removing the cooperative banks from the benefit of claiming deduction u/s.80P. Since the assessee has claimed the deduction for the first time u/s.36(1)(viia), there is merit in the submission that the requirement to route the claim through P&L account though not met in the present case, the assessee is entitled to claim deduction u/s.36(1)(viia). In view of these discussions, we hold that the assessee’s claim cannot be denied, and therefore we direct the AO delete the disallowance made u/s.36(1)(viia) of the Act.
9. In the result, appeal of the assessee is allowed.