Banks may deduct bad debts on urban advances without set-off against provisions for rural advances.

The Department appealed under Section 260A of the Income-tax Act, 1961, against the Income Tax Appellate Tribunal’s order for assessment year 2006–07.

The admitted questions concerned the treatment of Government securities held by the bank as stock-in-trade, the deductibility of a revaluation loss of ₹27,76,08,025, and the allowance of bad debts relating to non-rural advances in light of Sections 36(1)(vii) and 36(1)(viia).

The parties accepted that the issues were covered by Supreme Court and High Court precedents.

1. Whether Government securities held to maturity by the bank could be treated as stock-in-trade.

2. Whether the loss arising from revaluation of the securities, amounting to ₹27,76,08,025, was deductible.

3. Whether the bank was entitled to deduct bad debts relating to non-rural advances.

4. Whether the write-off under Section 36(1)(vii) had to be set off against the provision balance under Section 36(1)(viia), without distinguishing between urban and rural advances.

5. Whether the Tribunal’s decision was contrary to the scope of the bad-debt provisions as clarified by Explanation (2) to Section 36(1)(vii).

Section 36(1)(vii) permits deduction of bad debts actually written off, while Section 36(1)(viia) provides a separate deduction for eligible provisions for bad and doubtful debts.

In Catholic Syrian Bank Ltd. v. Commissioner of Income-tax, 343 ITR 270, the Supreme Court held that the proviso to Section 36(1)(vii) limits the deduction for actual write-offs only in relation to rural advances covered by Section 36(1)(viia); write-offs of urban advances are not limited by that proviso.

The Court also relied on Commissioner of Income Tax v. Karur Vysya Bank, 273 ITR 510, for the rule that Government securities held by a bank constitute stock-in-trade, and that such securities are valued at cost or market value, whichever is lower.

It further applied Commissioner of Income Tax I v. Karur Vysya Bank Ltd., T.C.(A) Nos. 290 to 295 and 663 of 2010, dated 20 February 2026, which applied Catholic Syrian Bank to the bad-debt issues.

Applying Karur Vysya Bank, the Court held that the securities were properly treated as stock-in-trade; consequently, the loss determined on revaluation using the lower of cost or market value was allowable.

On the bad-debt questions, the Court followed Catholic Syrian Bank and the later Karur Vysya Bank decision, which established that the restriction in the proviso to Section 36(1)(vii) does not curtail deductions for actual write-offs of non-rural advances.

As the parties agreed that the admitted questions were governed by those authorities, the Court applied them to the appeal.

The Tribunal’s order, including the allowance of the revaluation loss and bad debts relating to non-rural advances, was therefore left undisturbed.