2010 (10) TMI 99 - HC - Income Tax

Assessee not added provision for doubtful debts and advances/bad debts to the income - SCN issued - assessee did not respond to the said notice - AO had added an amount on the ground that doubtful debts and advances were not allowable under Section 36(1)(vii) of the Act - Held that - deduction under Section 36(1)(vii) it was enough if the bad debt is written off by the assessee as irrecoverable in its accounts - decision on a debatable point of law cannot be treated as a mistake apparent from the record - appeal being devoid of merit is dismissed

Summary

Issues:
Challenge to order under Section 260A of Income Tax Act, 1961 for Assessment Year 2004-2005.
Validity of adding provision for doubtful debts and advances/bad debts to income under Section 154 of the Act.
Interpretation of Section 36(1)(vii) for deduction of bad debts.
Rectifiability of mistakes under Section 154 of the Act based on debatable points of law.

Analysis:
The appeal filed under Section 260A of the Income Tax Act, 1961 contested the order passed by the Income Tax Appellate Tribunal for the Assessment Year 2004-2005. The respondent-assessee initially declared an income of Rs. 71.43 crores, which was later computed at Rs. 83.06 crores under Section 143(3)/153A of the Act. Subsequently, the Assessing Officer reduced the income to Rs. 79.81 crores under Section 154 of the Act. A fresh notice was issued by the AO as he believed that the respondent-assessee did not include a sum of Rs. 39.28 lacs for doubtful debts and advances/bad debts in the income. Despite the respondent's submission that a portion was bad debts and the rest was a provision, the AO added the entire amount to the income.

The issue revolved around the interpretation of Section 36(1)(vii) concerning the deduction of bad debts. The AO's decision to disallow the amount under this section was based on the belief that doubtful debts and advances were not allowable. However, a recent Supreme Court judgment clarified that post-April 1, 1989, it was not necessary for the assessee to prove irrecoverability under Section 36(1)(vii). Deduction could be claimed if the bad debt was written off as irrecoverable in the accounts. This made the deduction under Section 36(1)(vii) a debatable issue, as highlighted by the Tribunal.

The Tribunal, in agreement with the Supreme Court's stance in MEPCO Industries Ltd. Vs. Commissioner of Income Tax, held that rectification under Section 154 cannot correct a debatable point of law or a failure to apply the correct law to a set of facts. It emphasized that a rectifiable mistake should be obvious and not subject to a lengthy process of reasoning or differing opinions. Therefore, the Tribunal rightly concluded that a decision on a debatable legal point could not be considered a mistake apparent from the record. Consequently, the appeal was dismissed for lacking merit.