2012 (9) TMI 610 - AT - Income Tax

Addition made by disallowing the provision for standard assets on ground that u/s 36(1)(viia) only provision for bad and doubtful debts was allowable and nature of standard assets as per RBI guidelines are performing assets and thus they are not bad and hence not covered in 36(1)(viia) - Revenue contesting deletion of addition by CIT(A) on ground that CIT(A) should not have decided the matter without admitting the guidelines of RBI, not provided by assessee before AO, as an additional evidence as per Income Tax Rules, 1962 - Held that - CIT(A) is not justified in accepting the explanation of the assessee which was not made before the A.O. The same should have either been admitted under Rue 46A of the I.T. Rules, 1962 and by having a remand report from the A.O. The same has not been done by the CIT(A). Therefore, the order of CIT(A), at the outset, is against the principles of natural justice and deserves to be reversed. Hence, matter is set aside to the file of the A.O. who will examine the claim of the assessee and find out whether the provisions made is a provision for bad and doubtful debts, first and if so thereafter apply the limit as provided under clause (a) to section 36(a)(viia) - Decided in favor of assessee for statistical purposes.

Summary

Issues:
- Disallowance of provision for standard assets under section 36(1)(viia) of the Income Tax Act, 1961.

Analysis:
1. The Revenue appealed against the CIT(A)'s order deleting the addition of Rs.36,75,000 made by the Assessing Officer by disallowing the provision for standard assets. The Revenue contended that the provision for bad and doubtful debts under section 36(1)(viia) was allowable as a deduction, not the provision for standard assets. The AO disallowed the provision for standard assets as it was considered a contingent liability and not a business expenditure.

2. The assessee argued before the CIT(A) that they followed RBI guidelines regarding standard, sub-standard, and doubtful assets while creating provisions. The CIT(A) accepted this explanation and allowed the claim, leading to the deletion of the addition made by the AO.

3. During the ITAT hearing, the Revenue's representative argued that the CIT(A) should not have accepted the explanation as additional evidence without following proper procedures. It was emphasized that the provision for bad and doubtful debts was limited to Rs.13.25 lakhs, not the total provision of Rs.50 lakhs, which included the amount for standard assets. Therefore, the AO's disallowance of Rs.36.75 lakhs was justified.

4. The assessee's counsel reiterated the arguments made before the CIT(A) and supported the decision to delete the addition.

5. The ITAT held that the CIT(A) erred in accepting new evidence without following proper procedures and remanding the case back to the AO. The matter was set aside for the AO to re-examine whether the provisions made were for bad and doubtful debts and to apply the relevant limits under section 36(1)(viia). The AO was directed to provide a fair hearing to the assessee. Consequently, all grounds of the assessee were allowed for statistical purposes, and the appeal by the Revenue was allowed.

This detailed analysis covers the issues involved in the legal judgment, providing a comprehensive understanding of the arguments presented and the ITAT's decision.