Removing incongruities relating to bad debts written off by banks
Akhter Zamil FCA | Wednesday, 4 June 2008
THE objective of write-up is to help remove some misunderstanding and misinterpretation of the tax law and accounting treatment that have crept into the minds of the bank officials, tax officials, auditors of the offices of the Auditor General, Bangladesh (AGB) and other related agencies. The allowability of claims of bad-debt writ-off and the provision for doubtful debts do not mean losing revenue in the form of tax. There is no scope for revenue loss by the government. Rather, it will help the concerned personnel to know the exact financial position of an organisation and to stop erosion of capital of the company by not allowing largesse to the owners in the forms of dividend to directors and other benefits and to create impression in the minds of the public about robust financial health of any bank.
The existing law relating to bad-debt written off is reasonably enacted when the claim is made by an assessee other than banking companies as it is confined to only few parties. But when any such claim is made by the banking companies, it involves innumerable customers spread over to the remotest corner of the country through so many branches of the concerned bank at different locations all around. Hence it is really a tough job for the assessing authority to assess the actual position of bad debts' claim unless he has enough experience/ expertise in interpreting the relevant laws in view of the prevailing facts. It may be noted that relevant papers and source documents are maintained locally by different branches of the bank throughout the country. The proposal for bad-debt write-offs are being sent from each branch to the respective regional offices of the bank for their verification and recommendation of the same to the head office of the bank. Before recommendation thereof is made, it remains the responsibility of the regional offices to be fairly satisfied as to whether all possible measures including legal steps have been taken for recovery of the debt in question to conclude it as finally irrecoverable.
The board of directors of the bank on perusal of the pros and cons of each individual case, in terms of the legal steps taken by the branches, judgments delivered by both the lower & appellate courts and adequacy of other applicable procedures taken by the branches of the banks and, thus, only on being fully satisfied, approves the proposal for writing off the bad-debt through books of accounts of the assessee bank. Accordingly, the banking companies claims' for bad-debt written-off in the computation of tax liability for the income year under consideration. But the tax officials, instead of honouring such established facts, unequivocally insist on documents like court proceedings and so many other things knowingly that these are available only at the root-level branches. Finally, they disallow the bad debt claims on the simple pretext that the assessee banks have failed to establish the fact of the irrecoverability of the claimed bad debts.
It has now-a-days been a common experience that the assessing authority without going through the bank's laid-down procedural aspects for claiming bad-debts, rejects outright such claims solely to increase the assessee's tax liability having no relation with the assessee's circumstances. The bank claims bad-debt under section (u/s) 29(l) (xv) (xvi) (xvii) of the Income Tax (IT) Ordinance 1984 for deduction of the amount from income. But the concerned Deputy Commissioners of Taxes ((DCT) ask the assessee to prove and establish the fact of irrecoverability of the claimed bad debts by documentary evidences of legal process like pleader's notice to customers, proof of filing suits against customers and also documents relating to referral to the High Court and the like.
The current law on this issue is old and dates back to 1922. But now a days, the scenario has changed on many grounds/ reasons. The guardian of the scheduled banks is the central bank e. i. the Bangladesh Bank, of the country. The scheduled banks are under the direct control and supervision of the Bangladesh Bank. It has issued so many circulars as to how the classification of bad debts are to be made. To avoid lengthy legal proceedings and to avoid huge expenditures relating to defending the legal proceedings causing further losses, it is, rather, preferable to collect the bad amount on 'compromise' with the customer on the basis of allowing waiver/ exemption of interest and penal interest charges, depending on the merit of the case as advised by the Bangladesh Bank. Banks in government and private sectors are sustaining losses for loans also. It may be recalled that full waiver on agricultural loans was declared successively by the past two governments of the country and the Ministry of Finance also endorsed the same with advice to banks and the National Board of Revenue (NBR) to consider the loss while computing tax liability on the income of the banks. But it is a great surprise and regret that the tax authority does not pay any heed to the said advice and banks are compelled to take recourse to legal proceeding. This will definitely take a long time to settle the suits, followed with huge expenditure to defend the case by the bank.
The claim of bad-debt written off may be considered in the light of the backgrounds stated above. It is mentionable that, when banks allow the advance to a customer, it charges interest from the date of the disbursement of the loan. On completion of a financial year, accrued interests are considered as income and is credited to profit & loss (P/L) account and, thus, taxes are paid thereon to the tax authority. As and when the amount of advance becomes bad as per the guidelines of the Bangladesh Bank, no interest on such bad debt is credited to the P/L account. Rather, the interests charged thereon are transferred to suspense account.
Again when an advance becomes bad, the bank authority makes provision on the said advance under the head -- Provision for Loans and Advance -- as per classification suggested by the Bangladesh Bank. But tax authority does not allow the loss and tax is charged on the amount. Similarly, when the bad-debt written off is claimed by the bank in computation of tax liability as deduction from income, the tax authority again disallows the claim and imposes tax on the said claim of bad-debt written off. In this way, an amount of bad-debt is charged tax thrice. Evidently, disallowance of the bad-debt written off by the tax department means triple taxation on the same amount in the hands of the assessee bank which is unjust and illegal from the viewpoint of natural justice. The claim of bad-debt written off does not mean that the amount will not be recovered at all but it may be recovered later on and if so, it will be taken into income account of the bank. The amount of bad-debt claimed by a bank is kept under a memorandum accounts until it is recovered. The right of recovery over the amount of bad-debt always remains in the hands of the banks. As such, an amendment to the concerned law is warranted on all considerations.
The tax authority sometimes argues that the claim of bad-debt written off has not been reflected in the profit and loss account of the banks, which is merely due to failure of such authority to understand the techniques of accounting applied by banks according to the Banking Companies Ordinance. Moreover, movements and adjustments of the amounts written off from year to year pass through books of accounts and are reflected in the balance sheet under head -- notes to accounts -- verified by the statutory auditors of the banks.
Very often, the tax officials do not know what types of documents are needed to verify the claims of the amount of bad-debt. The tax officials with a predetermined and suspicious mind simply record in the assessment proceedings/orders that the assessee has failed to submit the relevant documents in respect of claim and as such the claim is, therefore, disallowed. Sometimes, the tax officials also mention that provision for bad-debt is allowed as deduction from income according to section 29 (1) (xxiiiaa) of the Income Tax (IT) Ordinance 1984 and as such claim of bad-debt written off cannot be allowed. This is misconception of law by the tax officials.
Actually, the claim is made under section (u/s) 29 (1) (xv) (xvi) (xvii) of IT Ordinance 1984. The tax officials have mixed up the two sections, due to misconception of law. The section 29(l) (xviiiaa) was introduced from the assessment year 1990-91 and the facilities were withdrawn from assessment year 2007-2008. The banking companies like Sonali Bank Ltd., Janata Bank Ltd., Agrani Bank Ltd., Rupali Bank Ltd., and Uttara Bank Ltd., are carrying their banking business since the pre-liberation period of the country and provision on bad and doubtful debts was treated as non-allowable expenses at that time by tax authority on the ground that provision was not actual loss and taxes are imposed on the amount of provision for doubtful debts.
This section again came under the purview of tax from the assessment year 2007-2008 and the banks are now again paying tax on the provisioned-for amount. The amount of provision is adjusted by a bank against the amount of bad-debt, written-off claims by it and so the amount of bad-debt written off does not appear in the P/L account. It is failure of the tax officials to understand the recording technique of the bad debt transaction that they raise misleading points unnecessarily and without any lawful basis. The auditors of Auditor General (AG) office are also raising silly questions about banks' evading taxes by not crediting the income account on realisation of the bad-debt loan on its recovery. Besides, they insist on disallowing of all other provisions -- like provision on other assets, other provisions which are provided in the accounts in line with the orders of the Bangladesh Bank -- to make the bank accounts transparent as required by the International Monetary Fund (IMF), the World Bank and other users.
It is interesting to note that the allegations of the auditors of AGB regarding evasion of tax by the banks are grossly being challenged and the banks are compelled to prefer appeals in different forums of appeals, leading to appeals in the High Court on the disallowance of the claims by the tax officials/ auditors of AGB.
To remove this misunderstanding and confusion by the different offices, it is expected that the tax authority may make necessary change in the tax law for the benefit of the business community and for gearing up efforts for revenue collection for the government.
Because of the disallowances of the claim by tax officials, the revenue collections are adversely affected due to pending court cases preferred both by the assessee and the tax departments up to the final verdict of the Honourable High Court which generally takes at least 10 to 15 years for their final settlement.
Under the circumstances as mentioned above, the tax authority may make a change in the relevant sections 29 (1) (xv) (xvi) (xvii) of the I. T. Ordinance 1984 in a manner suitable to the tax authority by incorporating the following "provision" in the Tax Ordinance, 1984.
Proposed provision: "Provided that the amount of bad-debt written off, claimed by a banking company be allowed as deduction from income while computing total income of the bank if the amount of bad-debt amount is verified and certified by the statutory auditors of the company and also, followed by approval of the Board of Directors of the assessee bank".
"Provided further that if the amount of bad-debt written off so allowed is ultimately recovered later on, the same shall be deemed to be profit of the year in which it is recovered. But in no case the tax will be applicable on the assessee bank if tax is paid on the claims earlier".
Provision for bad & doubtful debts: Now this writer would like to discuss the issue in respect of disallowance of the provision for bad and doubtful debts by the tax officials and consequent upon which the taxes are being imposed on the said amount by the tax authority. Provision for doubtful debts is a loss in the hands of the banking companies and imposition of tax on the said amount by the tax department on the plea that it is not the actual expenditure, is totally unjustified without any logic behind.
It is true that "provision" is necessary against bad loans and reflection of the said provision in the accounts is to be made as a matter of prudence in order to reflect true profits in the accounts of the company. Unless the provision is accommodated in the accounts, the balance sheet of the banks will not be transparent and will not also reflect the correct position of the profit and loan portfolio of the banks. The users of the balance sheet will also be deprived of assessing the financial position of the banks. But will it be justified if the banks are required to pay tax on the amount of provision of bad and doubtful debts as expected by the tax authority? The reality of making provision of bad & doubtful debts is a usual loss to the banks and payment of tax on the said amount as expected by tax officials is nothing but injustice.
To give relief to the assessee banks and as per recommendation of the World Bank, the tax authority previously introduced a new section 29 (1) (xviiaa) in the IT Ordinance 1984 through Finance Act, 1990 under which an assessee bank had been allowed to deduct provision for doubtful debts from income while computing the total income for the assessment year from 1990-91 to 2006-2007.
But some restriction was also made in the above section that the claim of deduction of the bad-debt allowance against income shall not exceed the rates from 5.0% to 1.0% (changed from year to year) of the total outstanding loan including penal interest charges, standing in the books of accounts of banks on the date of closing of the accounts or the amount of actual provision for such bad and doubtful debts, whichever is less.
But in the first stage of application of law/section, the tax officials and auditors of the AGB office raised objections and misinterpreted the law. As a result of this, many tax cases were lying pending and collection of tax was deferred. Although, the NBR, under the circumstances and in the interest of tax collection, issued a clarification accepting the rate of allowance applicable on the total outstanding loan (both "good loan" and "bad loan") as it stands in the books of the assessee on the date of closing of the account. But unfortunately auditors of the AGB office differ with above clarification with the allegation that tax authorities are allowing excessive relief/ allowances to the assessee banks. According to them, the rate of allowance should be applicable in respect of classified amount of bad debts only and not the total outstanding loans including interest thereon.
In this respect, this writer would like to refer to a judgement recently delivered by the Honourable Judges of the High Court in the matter of Sonali Bank Ltd., Vs CT, LTU, Dhaka under reference Application No. 55 of 2003, explaining the meaning of total outstanding on which the rate of allowance would be applicable in favour of the assessee and also supported the clarification made by the NBR which was rightfully given.
In the backdrop of the case as mentioned above, this writer holds the view that provision for bad and doubtful debts should be allowed as deduction from the income while computing the total income of the banking companies. Banks may be allowed to build up a reserve to face any unforeseen losses in future, similar to the spirit referred to in the clauses 6 of the 401 Schedule of IT Ordinance 1984. But in no case, the said reserve should be used for distribution of dividend to the shareholders of the company. The claim of bad-debts, written off can be adjusted from the above reserve. In case of subsequent recovery of bad debt, it may be treated as income through P/L account of the banking companies by paying due amounts of taxes.
To remove the confusion and conflict from the minds of tax officials, auditors of AGB office and also bank officials, the government should come forward to enact a law in this regard.
But to implement the above decision, as per para-4, the banks and tax officials should maintain a record in the form of a memorandum account/assessment order in respect of the amount of provision for bad & doubtful debts so far created year-wise and adjustments made there against, by the assessee in respect of any loss, bad debts and other losses etc., so far. This writer believes neither the banks nor the tax officials have such records on the amount of provision for bad & doubtful debts and taxes paid thereon by the bank to claim adjustment in respect bad -debt, written-off, other provision, provision for other assets etc.
It is true that if the provision for bad debt is allowed without imposing tax, the government may lose revenue but it will be replenished from the transfer of amount from the said reserve to income account every year. It will help to clear the doubts from the minds of tax officials and auditors of AGB. At the same time, it will help the banks to carry on their business smoothly by contributing tax to the national exchequer.
At the end, this writer would propose to enact a law by the Govt., in a manner suitable to the assessee, tax department and other concerned agencies etc. The existing law under section 29 (i) (xviiiaa) of the Income Tax Ordinance 1984 should be modified and amended.
The existing section 29 (1) (xviiiaa) should be replaced and a new modified and amended section 29 (1) (xviiiaa), be inserted as under:
"29 (1) (xviiiaa) in respect of provision for bad and doubtful debts and interest thereon, other provision, provision for other assets made by a commercial banks or scheduled banks including the Bangladesh Krishi Bank, Karmo-Shongsthan Bank, and the Rajshahi Krishi Unnayan Bank be allowed as deduction from the income while computing the total income under tax law till such time until the classified amount is fully covered by the said year-to-year provision.
"Provided that the provision of this clause shall apply in respect of such loan as the statutory auditors of the company verify and certify from time to time, on the basis of the classification defined by the Bangladesh Bank, but it will not exceed the total classified amount as standing in the books of the assessee on the date of closing the accounts of the bank.
"Provided further that if any of the amount so allowed is subsequently recovered, the same shall be deemed to be profit of the year in which it is recovered and tax to be paid unless it was paid earlier.
"Provided further that amount of provision so allowed as deduction from income and reserve so built-up there against, the claim of bad-debts written off, provision on other assets, loss, etc., can be adjusted by debiting the said reserve account and crediting the income account through P/L accounts on payment of due tax on the income accordingly."
The writer is Senior Partner, Howlader, Yunus & Company. He may be reached at e-mail: [email protected]
The existing law relating to bad-debt written off is reasonably enacted when the claim is made by an assessee other than banking companies as it is confined to only few parties. But when any such claim is made by the banking companies, it involves innumerable customers spread over to the remotest corner of the country through so many branches of the concerned bank at different locations all around. Hence it is really a tough job for the assessing authority to assess the actual position of bad debts' claim unless he has enough experience/ expertise in interpreting the relevant laws in view of the prevailing facts. It may be noted that relevant papers and source documents are maintained locally by different branches of the bank throughout the country. The proposal for bad-debt write-offs are being sent from each branch to the respective regional offices of the bank for their verification and recommendation of the same to the head office of the bank. Before recommendation thereof is made, it remains the responsibility of the regional offices to be fairly satisfied as to whether all possible measures including legal steps have been taken for recovery of the debt in question to conclude it as finally irrecoverable.
The board of directors of the bank on perusal of the pros and cons of each individual case, in terms of the legal steps taken by the branches, judgments delivered by both the lower & appellate courts and adequacy of other applicable procedures taken by the branches of the banks and, thus, only on being fully satisfied, approves the proposal for writing off the bad-debt through books of accounts of the assessee bank. Accordingly, the banking companies claims' for bad-debt written-off in the computation of tax liability for the income year under consideration. But the tax officials, instead of honouring such established facts, unequivocally insist on documents like court proceedings and so many other things knowingly that these are available only at the root-level branches. Finally, they disallow the bad debt claims on the simple pretext that the assessee banks have failed to establish the fact of the irrecoverability of the claimed bad debts.
It has now-a-days been a common experience that the assessing authority without going through the bank's laid-down procedural aspects for claiming bad-debts, rejects outright such claims solely to increase the assessee's tax liability having no relation with the assessee's circumstances. The bank claims bad-debt under section (u/s) 29(l) (xv) (xvi) (xvii) of the Income Tax (IT) Ordinance 1984 for deduction of the amount from income. But the concerned Deputy Commissioners of Taxes ((DCT) ask the assessee to prove and establish the fact of irrecoverability of the claimed bad debts by documentary evidences of legal process like pleader's notice to customers, proof of filing suits against customers and also documents relating to referral to the High Court and the like.
The current law on this issue is old and dates back to 1922. But now a days, the scenario has changed on many grounds/ reasons. The guardian of the scheduled banks is the central bank e. i. the Bangladesh Bank, of the country. The scheduled banks are under the direct control and supervision of the Bangladesh Bank. It has issued so many circulars as to how the classification of bad debts are to be made. To avoid lengthy legal proceedings and to avoid huge expenditures relating to defending the legal proceedings causing further losses, it is, rather, preferable to collect the bad amount on 'compromise' with the customer on the basis of allowing waiver/ exemption of interest and penal interest charges, depending on the merit of the case as advised by the Bangladesh Bank. Banks in government and private sectors are sustaining losses for loans also. It may be recalled that full waiver on agricultural loans was declared successively by the past two governments of the country and the Ministry of Finance also endorsed the same with advice to banks and the National Board of Revenue (NBR) to consider the loss while computing tax liability on the income of the banks. But it is a great surprise and regret that the tax authority does not pay any heed to the said advice and banks are compelled to take recourse to legal proceeding. This will definitely take a long time to settle the suits, followed with huge expenditure to defend the case by the bank.
The claim of bad-debt written off may be considered in the light of the backgrounds stated above. It is mentionable that, when banks allow the advance to a customer, it charges interest from the date of the disbursement of the loan. On completion of a financial year, accrued interests are considered as income and is credited to profit & loss (P/L) account and, thus, taxes are paid thereon to the tax authority. As and when the amount of advance becomes bad as per the guidelines of the Bangladesh Bank, no interest on such bad debt is credited to the P/L account. Rather, the interests charged thereon are transferred to suspense account.
Again when an advance becomes bad, the bank authority makes provision on the said advance under the head -- Provision for Loans and Advance -- as per classification suggested by the Bangladesh Bank. But tax authority does not allow the loss and tax is charged on the amount. Similarly, when the bad-debt written off is claimed by the bank in computation of tax liability as deduction from income, the tax authority again disallows the claim and imposes tax on the said claim of bad-debt written off. In this way, an amount of bad-debt is charged tax thrice. Evidently, disallowance of the bad-debt written off by the tax department means triple taxation on the same amount in the hands of the assessee bank which is unjust and illegal from the viewpoint of natural justice. The claim of bad-debt written off does not mean that the amount will not be recovered at all but it may be recovered later on and if so, it will be taken into income account of the bank. The amount of bad-debt claimed by a bank is kept under a memorandum accounts until it is recovered. The right of recovery over the amount of bad-debt always remains in the hands of the banks. As such, an amendment to the concerned law is warranted on all considerations.
The tax authority sometimes argues that the claim of bad-debt written off has not been reflected in the profit and loss account of the banks, which is merely due to failure of such authority to understand the techniques of accounting applied by banks according to the Banking Companies Ordinance. Moreover, movements and adjustments of the amounts written off from year to year pass through books of accounts and are reflected in the balance sheet under head -- notes to accounts -- verified by the statutory auditors of the banks.
Very often, the tax officials do not know what types of documents are needed to verify the claims of the amount of bad-debt. The tax officials with a predetermined and suspicious mind simply record in the assessment proceedings/orders that the assessee has failed to submit the relevant documents in respect of claim and as such the claim is, therefore, disallowed. Sometimes, the tax officials also mention that provision for bad-debt is allowed as deduction from income according to section 29 (1) (xxiiiaa) of the Income Tax (IT) Ordinance 1984 and as such claim of bad-debt written off cannot be allowed. This is misconception of law by the tax officials.
Actually, the claim is made under section (u/s) 29 (1) (xv) (xvi) (xvii) of IT Ordinance 1984. The tax officials have mixed up the two sections, due to misconception of law. The section 29(l) (xviiiaa) was introduced from the assessment year 1990-91 and the facilities were withdrawn from assessment year 2007-2008. The banking companies like Sonali Bank Ltd., Janata Bank Ltd., Agrani Bank Ltd., Rupali Bank Ltd., and Uttara Bank Ltd., are carrying their banking business since the pre-liberation period of the country and provision on bad and doubtful debts was treated as non-allowable expenses at that time by tax authority on the ground that provision was not actual loss and taxes are imposed on the amount of provision for doubtful debts.
This section again came under the purview of tax from the assessment year 2007-2008 and the banks are now again paying tax on the provisioned-for amount. The amount of provision is adjusted by a bank against the amount of bad-debt, written-off claims by it and so the amount of bad-debt written off does not appear in the P/L account. It is failure of the tax officials to understand the recording technique of the bad debt transaction that they raise misleading points unnecessarily and without any lawful basis. The auditors of Auditor General (AG) office are also raising silly questions about banks' evading taxes by not crediting the income account on realisation of the bad-debt loan on its recovery. Besides, they insist on disallowing of all other provisions -- like provision on other assets, other provisions which are provided in the accounts in line with the orders of the Bangladesh Bank -- to make the bank accounts transparent as required by the International Monetary Fund (IMF), the World Bank and other users.
It is interesting to note that the allegations of the auditors of AGB regarding evasion of tax by the banks are grossly being challenged and the banks are compelled to prefer appeals in different forums of appeals, leading to appeals in the High Court on the disallowance of the claims by the tax officials/ auditors of AGB.
To remove this misunderstanding and confusion by the different offices, it is expected that the tax authority may make necessary change in the tax law for the benefit of the business community and for gearing up efforts for revenue collection for the government.
Because of the disallowances of the claim by tax officials, the revenue collections are adversely affected due to pending court cases preferred both by the assessee and the tax departments up to the final verdict of the Honourable High Court which generally takes at least 10 to 15 years for their final settlement.
Under the circumstances as mentioned above, the tax authority may make a change in the relevant sections 29 (1) (xv) (xvi) (xvii) of the I. T. Ordinance 1984 in a manner suitable to the tax authority by incorporating the following "provision" in the Tax Ordinance, 1984.
Proposed provision: "Provided that the amount of bad-debt written off, claimed by a banking company be allowed as deduction from income while computing total income of the bank if the amount of bad-debt amount is verified and certified by the statutory auditors of the company and also, followed by approval of the Board of Directors of the assessee bank".
"Provided further that if the amount of bad-debt written off so allowed is ultimately recovered later on, the same shall be deemed to be profit of the year in which it is recovered. But in no case the tax will be applicable on the assessee bank if tax is paid on the claims earlier".
Provision for bad & doubtful debts: Now this writer would like to discuss the issue in respect of disallowance of the provision for bad and doubtful debts by the tax officials and consequent upon which the taxes are being imposed on the said amount by the tax authority. Provision for doubtful debts is a loss in the hands of the banking companies and imposition of tax on the said amount by the tax department on the plea that it is not the actual expenditure, is totally unjustified without any logic behind.
It is true that "provision" is necessary against bad loans and reflection of the said provision in the accounts is to be made as a matter of prudence in order to reflect true profits in the accounts of the company. Unless the provision is accommodated in the accounts, the balance sheet of the banks will not be transparent and will not also reflect the correct position of the profit and loan portfolio of the banks. The users of the balance sheet will also be deprived of assessing the financial position of the banks. But will it be justified if the banks are required to pay tax on the amount of provision of bad and doubtful debts as expected by the tax authority? The reality of making provision of bad & doubtful debts is a usual loss to the banks and payment of tax on the said amount as expected by tax officials is nothing but injustice.
To give relief to the assessee banks and as per recommendation of the World Bank, the tax authority previously introduced a new section 29 (1) (xviiaa) in the IT Ordinance 1984 through Finance Act, 1990 under which an assessee bank had been allowed to deduct provision for doubtful debts from income while computing the total income for the assessment year from 1990-91 to 2006-2007.
But some restriction was also made in the above section that the claim of deduction of the bad-debt allowance against income shall not exceed the rates from 5.0% to 1.0% (changed from year to year) of the total outstanding loan including penal interest charges, standing in the books of accounts of banks on the date of closing of the accounts or the amount of actual provision for such bad and doubtful debts, whichever is less.
But in the first stage of application of law/section, the tax officials and auditors of the AGB office raised objections and misinterpreted the law. As a result of this, many tax cases were lying pending and collection of tax was deferred. Although, the NBR, under the circumstances and in the interest of tax collection, issued a clarification accepting the rate of allowance applicable on the total outstanding loan (both "good loan" and "bad loan") as it stands in the books of the assessee on the date of closing of the account. But unfortunately auditors of the AGB office differ with above clarification with the allegation that tax authorities are allowing excessive relief/ allowances to the assessee banks. According to them, the rate of allowance should be applicable in respect of classified amount of bad debts only and not the total outstanding loans including interest thereon.
In this respect, this writer would like to refer to a judgement recently delivered by the Honourable Judges of the High Court in the matter of Sonali Bank Ltd., Vs CT, LTU, Dhaka under reference Application No. 55 of 2003, explaining the meaning of total outstanding on which the rate of allowance would be applicable in favour of the assessee and also supported the clarification made by the NBR which was rightfully given.
In the backdrop of the case as mentioned above, this writer holds the view that provision for bad and doubtful debts should be allowed as deduction from the income while computing the total income of the banking companies. Banks may be allowed to build up a reserve to face any unforeseen losses in future, similar to the spirit referred to in the clauses 6 of the 401 Schedule of IT Ordinance 1984. But in no case, the said reserve should be used for distribution of dividend to the shareholders of the company. The claim of bad-debts, written off can be adjusted from the above reserve. In case of subsequent recovery of bad debt, it may be treated as income through P/L account of the banking companies by paying due amounts of taxes.
To remove the confusion and conflict from the minds of tax officials, auditors of AGB office and also bank officials, the government should come forward to enact a law in this regard.
But to implement the above decision, as per para-4, the banks and tax officials should maintain a record in the form of a memorandum account/assessment order in respect of the amount of provision for bad & doubtful debts so far created year-wise and adjustments made there against, by the assessee in respect of any loss, bad debts and other losses etc., so far. This writer believes neither the banks nor the tax officials have such records on the amount of provision for bad & doubtful debts and taxes paid thereon by the bank to claim adjustment in respect bad -debt, written-off, other provision, provision for other assets etc.
It is true that if the provision for bad debt is allowed without imposing tax, the government may lose revenue but it will be replenished from the transfer of amount from the said reserve to income account every year. It will help to clear the doubts from the minds of tax officials and auditors of AGB. At the same time, it will help the banks to carry on their business smoothly by contributing tax to the national exchequer.
At the end, this writer would propose to enact a law by the Govt., in a manner suitable to the assessee, tax department and other concerned agencies etc. The existing law under section 29 (i) (xviiiaa) of the Income Tax Ordinance 1984 should be modified and amended.
The existing section 29 (1) (xviiiaa) should be replaced and a new modified and amended section 29 (1) (xviiiaa), be inserted as under:
"29 (1) (xviiiaa) in respect of provision for bad and doubtful debts and interest thereon, other provision, provision for other assets made by a commercial banks or scheduled banks including the Bangladesh Krishi Bank, Karmo-Shongsthan Bank, and the Rajshahi Krishi Unnayan Bank be allowed as deduction from the income while computing the total income under tax law till such time until the classified amount is fully covered by the said year-to-year provision.
"Provided that the provision of this clause shall apply in respect of such loan as the statutory auditors of the company verify and certify from time to time, on the basis of the classification defined by the Bangladesh Bank, but it will not exceed the total classified amount as standing in the books of the assessee on the date of closing the accounts of the bank.
"Provided further that if any of the amount so allowed is subsequently recovered, the same shall be deemed to be profit of the year in which it is recovered and tax to be paid unless it was paid earlier.
"Provided further that amount of provision so allowed as deduction from income and reserve so built-up there against, the claim of bad-debts written off, provision on other assets, loss, etc., can be adjusted by debiting the said reserve account and crediting the income account through P/L accounts on payment of due tax on the income accordingly."
The writer is Senior Partner, Howlader, Yunus & Company. He may be reached at e-mail: [email protected]