I-T wants bad debt certified for claiming deductions

The Income Tax department has suggested an amendment for taxation of bad debt to the Central Board of Direct Taxes (CBDT) after an anomaly arose due to a decision by the Appellate Authority in Mumbai in the case of the Oman International Bank.

The authority said the decision of a bank or company executives declaring a debt as bad was enough. After the debt is declared bad and written off from the books of accounts, the income tax authority will have to grant it as a deduction.

Tax officials have recommended that Section 36(1)(vii) of the Income Tax Act, 1961, should mention that the income tax authority has to certify the debt as bad before it is allowed as deduction. A debt turns "bad" when there is no chance of its recovery.

However, the companies are using this to evade tax. Healthy business groups park their surplus funds with their financially weak companies as loans. Since these weak companies do not pay interest on these loans, the loan gets written off and the principal and interest are claimed as deduction.

Banks, on their part, will have to make full provisioning for bad debt (set aside funds equivalent of the full amount of the loan) according to a guideline of the Reserve Bank of India.

However, there are tax benefits for provisioning. Since write-offs are allowed for deduction from tax claims, most banks are writing off bad debt rather than making provisions. Banking sources say the recovery is hampered once the loan is written off.

There is also a move to tighten norms for taxing the companies paying minimum alternate tax (MAT). The department has suggested that "deferred tax" should be added for calculating the book profit under MAT.

This is because even if it is not to be paid this year, several hundred crores of rupees are deducted from the book profit for the assessment year and not adjusted back by the companies even if the tax payable for the said year is much less.

Similarly, inclusion of deferred tax liability under book profit for computing MAT has been suggested.

Several major companies, including Larsen and Toubro, Mahindra and Mahindra and Reliance Industries, pay MAT.

MAT is paid by the companies that do not have taxable income but can show book profits either by depreciating their assets under the straight-line method or by not debiting capital expenditure on scientific research and development to its profit and loss account.

Deferred taxation at present does not come under the scope of the adjustment of book profit and refers to provision for tax.

Extending this a bit, the department has sought harmonisation of profit shown in annual accounts approved in annual general meeting and total income for tax calculation.