2014 (11) TMI 1192 - HC - Income Tax

Entitlement to claim a deduction under Section 36(1)(vii) in respect of bad debts written off - Held that - Assessing Authority has not disputed the fact that the assessee s claim for bad debt under Section 36(1)(vii) does not represent those debt in which deduction has been claimed under Section 36(1)(vii) out of the provision for bad and doubtful debts. The law laid down by the Apex Court in the case of the assessee itself (2014 (11) TMI 179 - KARNATAKA HIGH COURT) is attracted and the first substantial question of law is to be answered in favour of the assessee and against the revenue as rightly held by the Tribunal. - Decided in favour of the assessee and against the revenue.

Summary

Issues:
1. Allowability of deduction for bad debts written off under Section 36(1)(vii) of the Income Tax Act.
2. Taxability of interest on government securities under the mercantile system of accounting.

Analysis:

Issue 1: Allowability of deduction for bad debts written off under Section 36(1)(vii) of the Income Tax Act:
The assessee, a bank, filed a return claiming a deduction of &8377; 25,95,60,772/- as bad debts written off for the assessment year 2004-05. The Assessing Authority disallowed this claim stating it did not meet the requirements of Section 36(1)(vii) of the Act. The First Appellate Authority allowed the appeal based on a previous Tribunal judgment in the assessee's favor. The Tribunal upheld this decision, leading the revenue to appeal. The High Court noted that the Apex Court's ruling in a similar case favored the assessee, as the bad debts claimed were not those for which deduction had already been claimed under Section 36(1)(vii). Consequently, the court upheld the Tribunal's decision, ruling in favor of the assessee.

Issue 2: Taxability of interest on government securities under the mercantile system of accounting:
The second substantial question of law related to whether interest on government securities of &8377; 23,88,75,850/- could be added to the assessee's income when following the mercantile system of accounting. The Assessing Authority disallowed this claim as well, arguing that the interest accrued only on maturity, not on a day-to-day basis. However, the High Court pointed out that the same judgment favoring the assessee in the bad debts issue also covered this question. As a result, the court found no merit in the revenue's appeal and dismissed it accordingly.

In conclusion, the High Court upheld the Tribunal's decision in favor of the assessee, ruling that the deduction for bad debts written off and the taxability of interest on government securities under the mercantile system of accounting were both in line with the provisions of the Income Tax Act.