Calcutta High Court: In an appeal concerning with the disallowance of a deduction under the first proviso to Section 36(1)(vii-a)(a), Income-tax Act, 1961, the Division Bench of Rajarshi Bharadwaj* and Sudip Deb, JJ., allowed Indian Bank’s appeal against disallowance of ₹96.65 crores claimed towards provisions for doubtful and loss assets classified by Reserve Bank of India (RBI). The Court held that the deduction under the first proviso could not be rejected merely because a deduction under the main provision had already been allowed.
Background
The issue arose from the rejection of additional deduction claim of ₹96,65,00,000 made by the appellant-assessee in respect of provisions made for assets classified by RBI as doubtful assets or loss assets. The appellant Bank merged with Indian Bank, was engaged in the banking business and had claimed a deduction under Section 36(1)(vii-a)(a), Income-tax Act, for Assessment Year 2004—2005. This provision allowed specified banks to claim deductions in respect of provisions created for bad and doubtful debts, subject to the applicable statutory limits. The appellant challenged the order of the Income Tax Appellate Tribunal, Kolkata Bench, concerning the relevant assessment year.
In addition to the deduction claimed under the main provision, the bank sought a deduction of ₹96,65,00,000 for provisions relating to assets classified by RBI as doubtful assets or loss assets in accordance with its guidelines. The bank relied on the first proviso to Section 36(1)(vii-a)(a), read with the succeeding proviso applicable to the relevant assessment year. It contended that the statutory scheme provided a special deduction for the specified categories of assets and that the expression “at its option” vested the choice of claiming the benefit in the assessee.
The assessing officer rejected the additional deduction. The principal reason was that the bank had already been allowed a deduction under the main provision and could not separately invoke the first proviso. The assessing officer also relied on the position that the additional claim was not allowable in the circumstances of the assessment, particularly in view of the absence of taxable income as considered in the assessment proceedings.
The Commissioner of Income Tax (appeals) upheld the disallowance. The Income Tax Appellate Tribunal also affirmed the departmental position, interpreting the first proviso as providing an alternative mode of deduction rather than an independent or additional benefit. According to this interpretation, once the deduction under the principal clause had been allowed, the bank could not claim a further deduction under the proviso for the specified assets.
The appellant argued that the proviso addressed a distinct category of assets identified under RBI Guidelines and operated within its own statutory field. It maintained that the proviso could not be treated as merely an alternative to the principal provision when the statutory language expressly conferred an option upon the assessee. The Revenue, on the other hand, contended that the provision permitted only 1 deduction within the prescribed statutory limits and that the proviso did not create a cumulative deduction over and above the deduction available under the main clause.
Issue
Whether the Tribunal had correctly interpreted the statutory scheme by treating the deduction under the first proviso as alternative to the deduction under the principal clause.
Decision and Analysis
The Court examined the statutory language, the purpose of Section 36(1)(vii-a)(a) and the significance of the expression “at its option”. The principal clause allows a deduction for provisions made by specified banks for bad and doubtful debts, subject to the statutory ceiling. The first proviso addresses provisions relating to assets classified by RBI as doubtful assets or loss assets in accordance with its guidelines. The applicable succeeding proviso modifies the percentage or quantum relevant to the assessment years concerned.
The Court observed that a proviso ordinarily qualifies the principal enactment or creates an exception to its general operation. However, the effect of a proviso must be determined by considering its actual language, context and legislative purpose. A proviso cannot automatically be interpreted as restricting the principal provision if its wording and purpose indicate a distinct statutory benefit.
The Court held that the expression “at its option” could not be treated as surplusage or deprived of their ordinary meaning. They indicated that the statutory choice belonged to the assessee satisfying the prescribed conditions, rather than to the assessing officer. If the Revenue’s interpretation were accepted, the statutory option would have little practical significance because the tax authorities would effectively determine which route the assessee could follow.
The Court noted that the provision was intended to recognise the peculiar nature of banking operations and the provisioning requirements prescribed by RBI. The special treatment of specified doubtful and loss assets was intended to give meaningful effect to the statutory benefit enacted by Parliament. Accordingly, the provision had to be interpreted in a manner that respected the legislative choice while remaining within the monetary, percentage and other conditions expressly prescribed by the statute. In support of this interpretation, the Court relied on CIT v. T.N. Industrial Investment Corpn. Ltd., 1994 SCC OnLine Mad 749 which considered the expression “at its option” in a cognate proviso to Section 36(1)(vii-a) and held that the proviso carved out an exception whose language could not be rendered meaningless.
The Court reiterated that consistency in tax assessments was desirable, but an erroneous interpretation could not be perpetuated merely because it had been followed in earlier years. Similarly, administrative circulars and explanatory materials could assist in understanding the legislative background but could not override the plain language of the statute.
The Court concluded that the deduction under the first proviso was not automatically exhausted by the allowance of a deduction under the main provision. However, the Court did not dispense with the statutory requirements governing the claim. The benefit remained subject to fulfilment of the conditions prescribed under Section 36(1)(vii-a)(a), the relevant RBI classification requirements and the applicable percentage ceiling.
Accordingly, the appeal was allowed, and the Tribunal’s order was set aside insofar as it rejected the deduction claim of ₹96,65,00,000 on the ground that the first proviso deduction was alternative to the main-clause deduction. The assessing officer was directed to give effect to the judgment after verifying the relevant statutory conditions and limits, without reopening the legal issue decided by the Court.
[Indian Bank v. CIT, ITA 8 of 2018, decided on 13-10-2026]
*Judgment authored by: Justice Rajarshi Bharadwaj
Advocates who appeared in this case:
For the Appellant: C. Bhaskaran, Swapna Das, Advocates
For the Respondent: Prithu Dudhoria, Sukanya Dutta, Advocates
