2017 (6) TMI 1386 - AT - Income Tax

Reopening of assessment u/s 147 - deduction u/s.36(1)(viia) - HELD THAT - As rightly relied upon by the Ld.DR on the Hon ble Supreme Court judgment in the case of 1997 (10) TMI 5 - SUPREME COURT re-opening of the case on the basis of factual error pointed out by the Audit Party is permissible under law. What is brought to the notice of the AO by the Audit Party was the factual error and it is a fact that the assessee had claimed the deduction against the provisions made by under NPA and there was prima facie case for under assessment - Therefore we do not find any error in the re-opening of assessment and uphold the issue of notice u/s.148 - CIT(A) also relied on the decision in the case of CIT v. Raman Co 1967 (7) TMI 2 - SUPREME COURT and we uphold the order of the Ld.CIT(A) and dismiss the ground of the appeal of the assessee on this issue. Addition made u/s.36(1)(viia) - assessee has created NPA provisions and claimed the deduction in respect of the provisions for bad and doubtful debts - AR argued that the assessee has already made the provision in the earlier years which was unadjusted and brought forward in the books - HELD THAT - In Income Tax each year is an independent and the income has to be computed as per the system of accounting regularly followed by the assessee. Therefore the deduction can be made by the assessee only on the basis of the expenditure debited to the Profit Loss A/c from the previous year relevant to the AY under consideration. No expenditure which is not debited to the Profit Loss A/c in the year under consideration is permissible for deduction. In the instant case the assessee has not debited the expenditure relating to the provisions for bad and doubtful debts. Therefore the deduction u/s.36(1)(viia) is permissible to the extent of the amount debited to the Profit Loss A/c or as per the permissible limits specified u/s.36(1)(viia) whichever is less. The contention of the assessee that the reserves already created in the earlier years is available in the books of accounts which remained unadjusted is not an acceptable proposition and not as per the Income Tax Act - the deduction is permissible only to the extent of provisions actually created in the books of accounts for the relevant Assessment Year. Decided against assessee.

Issues:
1. Re-opening of Assessment u/s.147 of IT Act
2. Claim of deduction u/s.36(i)(vii)(a)
3. Legality of re-opening assessment based on audit objection
4. Interpretation of law by audit party
5. Allowability of deduction u/s.36(1)(viia) based on provisions made
6. Claiming deduction from existing NPA provisions
7. Independence of income tax proceedings each year
8. Computation of income based on accounting system
9. Restriction on deduction for provision for bad and doubtful debts
10. Interpretation of Circular No.17/2008 by CBDT

Analysis:

1. Re-opening of Assessment u/s.147 of IT Act:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the re-opening of assessment u/s.147 of the IT Act for the Assessment Year 2008-09. The re-opening was based on discrepancies in the claim of deduction u/s.36(i)(vii)(a) made by the assessee.

2. Claim of deduction u/s.36(i)(vii)(a):
The issue revolved around the claim of deduction u/s.36(i)(vii)(a) by the assessee, which was found to be in excess of the provisions made for bad debts. The AO re-opened the assessment based on the audit objection pointing out the factual error in the deduction claimed by the assessee.

3. Legality of re-opening assessment based on audit objection:
The legality of re-opening the assessment based on the audit objection was challenged by the assessee, arguing that the AO had already considered the deduction in the original assessment. However, the Tribunal upheld the re-opening, citing the permissibility under law to re-assess based on factual errors identified by the audit party.

4. Interpretation of law by audit party:
The issue of interpretation of law by the audit party was raised, with the assessee contending that the audit objection should not lead to re-opening of assessment. The Tribunal, however, referred to a Supreme Court judgment to justify the re-opening based on factual errors highlighted by the audit.

5. Allowability of deduction u/s.36(1)(viia) based on provisions made:
The Tribunal examined the claim of deduction u/s.36(1)(viia) in relation to the provisions made for bad and doubtful debts by the assessee. It was found that the deduction claimed was in excess of the actual provisions made, leading to the disallowance of the excess claim.

6. Claiming deduction from existing NPA provisions:
The assessee argued that the deduction was claimed from existing NPA provisions brought forward from earlier years. However, the Tribunal held that deductions can only be claimed based on provisions made in the relevant assessment year, as per the Income Tax Act.

7. Independence of income tax proceedings each year:
The Tribunal emphasized that each year's income tax proceedings are independent, and deductions can only be claimed based on expenses debited to the Profit & Loss A/c for the specific year under consideration.

8. Computation of income based on accounting system:
The Tribunal clarified that income must be computed according to the accounting system followed by the assessee for each year independently, and deductions are limited to expenses debited in the relevant assessment year.

9. Restriction on deduction for provision for bad and doubtful debts:
The Circular No.17/2008 issued by CBDT clarified that deductions for provisions for bad and doubtful debts are restricted to the amount actually created in the books for the relevant assessment year, as per the provisions of section 36(1)(viia).

10. Interpretation of Circular No.17/2008 by CBDT:
The Tribunal upheld the interpretation of Circular No.17/2008 by the CBDT, which restricts deductions for bad and doubtful debts provisions to the amounts actually created in the books for the relevant assessment year. This interpretation was supported by the decision of the Hon'ble Punjab & Haryana High Court.

In conclusion, the Tribunal dismissed the appeal of the assessee, upholding the re-opening of assessment and disallowance of excess deduction claimed under section 36(1)(viia) based on the provisions made for bad and doubtful debts in the relevant assessment year.

← Previous Next →