2019 (5) TMI 1884 - AT - Income Tax

Addition of provision for bad and doubtful debts u/s 36(1)(iii) - HELD THAT - We do not hesitate to conclude that the assessee is entitled to be allowed the provision for bad and doubtful debts on the identical facts and circumstances of the case since it has debited the provision to the Profit and Loss account in respect of doubtful debts and also reduced the same amount in the balance sheet from sundry debtors trade receivable. Such reduction from sundry debtors amounts to actual write off and hence we are of the considered opinion to delete the addition made by the authorities below. Assessee s appeal is allowed.

Issues Involved:
1. Addition of ?2,21,627/- under Section 36(1)(va) read with Section 2(24)(x).
2. Addition of provision for bad and doubtful debts of ?5,23,625/- under Section 36(1)(vii).

Detailed Analysis:

Issue 1: Addition of ?2,21,627/- under Section 36(1)(va) read with Section 2(24)(x)

At the time of the hearing, the counsel for the assessee chose not to proceed with this ground of appeal. Consequently, this issue was dismissed as not pressed.

Issue 2: Addition of provision for bad and doubtful debts of ?5,23,625/- under Section 36(1)(vii)

The assessee, engaged in the business of manufacturing and trading of ceramic tiles chemicals and trading of ceramic machine spares, filed its return of income on 29.11.2013 declaring total income at ?19,68,48,120/-. During the assessment proceedings, it was noted that the assessee had claimed ?5,23,625/- as provision for bad and doubtful debts in the Profit and Loss account. The assessee argued that this provision was allowable based on the Supreme Court decision in CIT vs. Vijaya Bank (323 ITR 166 SC), which allows such provisions when debited to the Profit and Loss account and deducted from the balance of trade receivables.

However, the Assessing Officer (AO) rejected this claim, and the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision. The assessee then appealed to the ITAT.

During the ITAT hearing, the assessee's counsel argued that the case was covered by the Supreme Court judgment in Vijaya Bank and the Gujarat High Court judgment in CIT vs. Vodafone Essar Gujarat Ltd. (397 ITR 55). The counsel emphasized that the provision was debited to the Profit and Loss account and reduced from sundry debtors/trade receivables in the balance sheet, which should be considered an actual write-off.

The ITAT examined the records and found that the provision of ?5,23,625/- was indeed debited to the Profit and Loss account and reduced from sundry debtors/trade receivables. The authorities below had distinguished the Vijaya Bank case on the grounds that it related to actual write-off rather than provision for bad debts. However, the ITAT noted that the Supreme Court had clarified that mere debit to the Profit and Loss account is not sufficient; the provision must also be obliterated from accounts by reducing loans and advances or debtors on the asset side of the balance sheet. This reduction amounts to an actual write-off.

The ITAT also referred to the Gujarat High Court's interpretation of the Vijaya Bank judgment, which reiterated that after the amendment on 1.4.1989, a mere provision for bad debt does not qualify for deduction under Section 36(1)(vii). The High Court emphasized that the write-off must involve both a debit to the Profit and Loss account and a reduction from loans and advances or debtors on the balance sheet.

Based on these judgments, the ITAT concluded that the assessee was entitled to the deduction for the provision for bad and doubtful debts. The reduction from sundry debtors amounted to an actual write-off, and thus, the addition made by the authorities below was deleted.

Conclusion:
The ITAT allowed the assessee's appeal, concluding that the provision for bad and doubtful debts was rightly claimed as a deduction, and the addition made by the authorities was deleted. The order was pronounced in open court on 17/05/2019.

← Previous Next →