With a view to reduce avoidable litigations the sections / rules governing the allowance of Bad Debts / Provision for Bad Debts needs to be simplified. The rules / sections pertaining to allowance of Bank’s Claim for Bad Debts / Provision for Bad debts should be standardized on the basis of guidelines of RBI in respect of Income Recognition, Asset classification and Provisioning requirement applicable to Indian Banks.
1. It may be observed that as per the provisions in the Depository’s Act, stamp duty payable in respect of transactions governed by the Act is specifically exempted. Similarly, for transaction under Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002 the Stamp duty may also be exempted.
2. Applicability of Securitisation Act may be extended to the assets of our NPA borrowers parked or held abroad.
3. Under new section 45ZA and 45ZF of the Banking Regulation Act in respect of Nomination facilities, the bank depositors may be allowed to have more than one nomination in each account.
4. Nomination facility for shares issued by nationalized bank may be extended on the lines of shares issued by public limited companies.
5. Housing Sector:
Tax benefits allowed to individuals in respect of housing loans may be continued. Continuation of such benefits will help banks to enhance their housing loan portfolio.
6. Non Applicability of Section 14 A for disallowance of expenditure for earning exempted income :
Section 14A introduced by Finance Act, 2001 with retrospective effect from 1.4.1962 disallows to the assessee expenditure for earning exempted income. This has severely affected the profitability of Public Sector Banks and Financial Institutions that contribute majority of tax free investments of State / Central Government or other Infrastructure projects of Public Sector Undertakings. In fact the lower rate of interest of such investment was partly compensated by the tax benefits available u/s 10 of Income Tax Act. The introduction of this section that too with retrospective effect has withdrawn almost the entire tax benefit available to them and made investments in these securities uneconomical. This has also resulted in increased tax cost to the Banks for the earlier years. With a view to improve the yield on such investments (and thereby the profitability) it is suggested that the applicability of this section should be restricted to assessee other than Public Sector banks and Public Sector Financial Institutions. Alternatively the section 14 A should be applicable to fresh investments made by the Public Sector Banks / Financial Institutions. This would also set right the “unethical” stamp on the statute due to the retrospective application.
7.Full Allowance of Provisions for Bad & Doubtful Debts ( Doubtful & Loss Assets):
The allowance of bad debts and provision for Doubtful Debts has been the point of dispute between Banks and Revenue Department (Income Tax) for long. The ambiguity in drafting of Section 36 (1) (vii) and 36 (1) (viia) of Income Tax act, 1961 resulted in adoption of varied practices by Banks for claiming deduction for Bad Debts written off Section 36 (1) (vii) for Provision for Bad and Doubtful Debts 36 (1) (viia) disallowance of the whole or portion of such Bad Debts / Provision for bad & doubtful debts by the Income Tax authorities has led to litigation (involving large amounts) between the Banks and Income Tax Authorities.
With a view to reduce such avoidable litigations the sections / rules governing the allowance of Bad Debts / Provision for Bad Debts needs to be simplified. The rules / sections pertaining to allowance of Bank’s Claim for Bad Debts / Provision for Bad debts should be standardized on the basis of guidelines of RBI in respect of Income Recognition, Asset classification and Provisioning requirement applicable to Indian Banks.
It is suggested that Banks should be allowed full deduction for Provision for doubtful and loss assets made by them during the Financial Year in accordance with the guidelines of RBI and duly certified by their statutory auditors. In respect of Bad Debts written off the deductions should be allowed to the extent of difference between provision for bad debts made in the books for particular account and the net outstanding in the account. This would minimize litigation and ensure tax cost to the Banks. This would not result in any loss to the revenue as it does not allow such deductions to the assessee which is more than the loss / likely loss.
P. S. Shenoy,
Chairman & Managing Director,
Bank of Baroda