2016 (10) TMI 1094 - AT - Income Tax

Disallowing claim of Bad Debts - accounting treatment to debt - Held that - In the present case the debt has been written off in the sense that account of the debtor is squared up by crediting the debtor and debiting the bad debt reserve account. This accounting treatment in our considered view does amount to actual writ off of the debit. However since this entry does not touch upon the profit and loss account at this stage directly the authorities below have declined to treat it as a write off of the debts. What is overlooked in the process is that provision which is partially squared up in this year to the credit of the debtor was created in earlier years to the debit of profit and loss account but added back as provision is not tax deductible. As regards the learned CIT(A) s reference to proviso to section 36(1)(vii) which in turns refers to section 36(1)(viia) to provisions made under section 36(1)(viia) which admittedly is not the case here. In view of these discussions as also bearing in mind entirety of the case the grievance of the assessee must be upheld. Accordingly disallowance of deduction for bad debts is deleted. - Decided in favour of assessee. Excess provision of interest payable written back - provision was never claimed as deduction - Held that - CIT(A) has justified the same by observing that considering these facts reversal of interest expense is income under section 41(1) of Income Tax Act but then section 41(1) comes into play only when an allowance or deduction has been made in the assessment for any year in respect of loss expenditure or trading liability incurred by the assessee. In the case before us the provision was never claimed as deduction as it was added back in the computation of income. Clearly section 41(1) has no application in the matter. When provision was never claimed as deduction there cannot be any occasion to bring to tax reversal of such a provision. The entire exercise of creating this provision and reversing the same partly or fully is completely tax neutral. The fact that income was eligible for deduction under section 80P even if that be so is wholly irrelevant in this context. In view of these discussions we uphold the grievance of the assessee. Additions deleted - - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of claim of Bad Debts
2. Addition of excess provision of interest payable written back

Analysis:
1. Disallowance of claim of Bad Debts:
The appellant challenged the disallowance of the claim of Bad Debts amounting to ?11,72,22,554. The Assessing Officer did not allow the claim stating that the amount was not written off and not routed through the profit and loss account. The CIT(A) upheld this decision, emphasizing that the bad debts were not written off in the P&L account but adjusted against the provision for bad debts. The CIT(A) referred to the proviso to section 36(1)(vii) and concluded that the bad debts were not allowable as they did not exceed the credit balance in the provision for bad and doubtful debts account. However, the ITAT held that the debt was effectively written off by squaring up the debtor's account and debiting the bad debt reserve account, which amounted to an actual write-off. The ITAT also clarified that the provision created in earlier years was not tax deductible. Consequently, the disallowance of the deduction for bad debts was deleted.

2. Addition of Excess Provision of Interest Payable Written Back:
The Assessing Officer made an addition of ?10 crores on account of excess provision written back, stating that the reduction of income was illogical and not in line with the mercantile system of accounting. The CIT(A) upheld this addition under section 41(1) of the Income Tax Act. However, the ITAT disagreed, pointing out that section 41(1) applies when an allowance or deduction has been made, which was not the case here as the provision was added back in the computation of income. The ITAT deemed the provision reversal as tax-neutral, especially considering the income was eligible for deduction under section 80P. Consequently, the addition of ?10 crores was also deleted.

In conclusion, both grounds of appeal were allowed, and the judgment favored the appellant, overturning the disallowance of the claim of Bad Debts and the addition of excess provision of interest payable written back.