2011 (3) TMI 454 - HC - Income Tax

Deduction u/s 36(1)(vii)- Provision for bad and doubtful debt - Provision for bad and doubtful debt is not to be included in any bad debt or part thereof written off as irrecoverable in the accounts of the assessee - It is only actual debt whose recovery has become bad which is written off is admissible and no provision for bad and doubtful debt is admissible as expenditure under Section 36 (1)(vii) of the Act - The Tribunal had thus erred in reversing the order of CIT(A) and allowing the provision for bad and doubtful debt as expense under Section 36(1)(vii) of the Act - answered in favour of the revenue.

Summary

Issues:
Interpretation of Section 36(1)(vii) of the Income Tax Act, 1961 regarding the allowance of provision for bad and doubtful debts as an expense.

Analysis:
The appeal before the High Court involved a dispute regarding the addition of Rs.36,76,974 made on account of the disallowance of bad debts under Section 36(1)(vii) of the Income Tax Act, 1961. The assessee had initially filed a return declaring a loss, which was assessed at nil income by the Assessing Officer. Among other disallowances, a provision for bad and doubtful debts was disallowed, leading to an appeal before the Commissioner of Income-Tax (Appeals) and subsequently before the Tribunal. The Tribunal accepted the claim of the assessee related to the provision for bad and doubtful debts, prompting the Revenue to approach the High Court.

The main contention raised by the Revenue was that the Tribunal erred in allowing the provision for bad and doubtful debts as claimed by the assessee. The Revenue argued that the Explanation to Section 36(1)(vii) inserted by the Finance Act, 2001, retrospectively from 1.4.1989, clarified that only debts that had become bad and doubtful and were written off could be claimed as a deduction. The provision for bad and doubtful debts, according to the Revenue, was inadmissible as an expense unless the specific debt was written off in the accounts of the assessee.

Upon examining the Explanation to Section 36(1)(vii) inserted by the Finance Act, 2001, the High Court concluded that the provision for bad and doubtful debts should not be included in any bad debt or part thereof written off as irrecoverable in the accounts of the assessee. The court emphasized that only actual debts whose recovery had become bad and were specifically written off could be considered admissible under Section 36(1)(vii) of the Act. Therefore, the Tribunal's decision to allow the provision for bad and doubtful debts as an expense was deemed erroneous by the High Court.

Consequently, the High Court allowed the appeal by the Revenue, answering the substantial question of law in favor of the Revenue. The judgment clarified the interpretation of Section 36(1)(vii) concerning the treatment of provision for bad and doubtful debts, emphasizing the necessity for actual bad debts to be written off for them to be considered as admissible deductions under the Act.