2017 (1) TMI 319 - HC - Income Tax

Allowability of claim for bad debts - maintenance of two sets of book - Held that - The books maintained for the purposes of the Companies Act duly approved by the Board of Directors and placed before the shareholders at the Annual General Body Meeting of the Company being contain inter alia the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II-III of Schedule VI to the Companies Act 1956 will form the basis of an assessment in terms of Chapter XII-B, Special Provisions relating to certain companies, that provide for an assessment of Minimum Alternate Tax (MAT). The Income Tax Act requires for the assessee to follow a parellelly consistent method of accounting in accordance with section 145 thereof. The books maintained for the purposes of the Income Tax Act shall comply with the provisions of section 145 and shall form the basis for an assessment thereunder. The error in the order of assessment is the juxtaposition of the two books by the assessing officer. The creation of a provision for bad debts in the corporate accounts thus does not, in any way, impact the claim of bad debt u/s 36(1)(vii) of the Act in the regular computation of income. This submission of the department stands rejected. The claim of bad debts relates to debts actually written off and not a provision made in this regard. The Supreme Court in the case of Vijaya Bank (2010 (4) TMI 46 - SUPREME COURT ) explaining the methodology for proper write-off set out in accordance with the Judgment of the Supreme Court in Southern Technologies (2010 (1) TMI 5 - SUPREME COURT OF INDIA) states as if an assessee debits an amount of doubtful debt to the P&L Account and credits the asset account like sundry debtors Account, it would constitute a write off of an actual debt. However, if an assesse debits provision for doubtful debt to the P&L Account and makes a corresponding credit to the Current liabilities and provisionson the Liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, assesse would not be entitled to deduction after 1-4-1989. In view of the above, the Assessee has, in accordance with the provisions of Section 36 (1)(vii), written off the bad debt and the claim is allowable. Substantial Question is answered in favour of the assessee

Summary

Issues Involved:
1. Allowability of bad debts as a deduction under section 36(1)(vii) of the Income Tax Act.
2. Allowability of loss on sale of investments as a deduction in computing business income.

Issue-wise Detailed Analysis:

1. Allowability of Bad Debts as a Deduction:

The primary issue is whether the Tribunal was correct in allowing the claim for bad debts amounting to ?13,57,58,000/- as a deduction in computing the income of the Assessee under section 36(1)(vii) of the Income Tax Act. The Assessee, a Domestic Company and Non-Banking Financial Institution (NBFC), maintained two sets of books: one for the Companies Act and another for the Income Tax Act. The bad debts were written off in the Profit and Loss Account and claimed as a deduction. The Assessing Officer disallowed this claim, but it was allowed by the Commissioner of Income Tax (Appeals) and the Tribunal.

The Department's main contention was the maintenance of two sets of books, arguing it caused an anomaly and distortion of relevant facts. They also claimed that the method of write-off was not in accordance with Supreme Court judgments in Southern Technologies vs. The Joint Commissioner of Income Tax and Vijaya Bank vs. Commissioner of Income Tax. However, the Assessee argued that maintaining two sets of books is permissible and that the bad debts were written off in accordance with accepted principles.

The Court held that maintaining two sets of books is permissible, and the creation of a provision for bad debts in corporate accounts does not impact the claim of bad debt under section 36(1)(vii) in the regular computation of income. The Court also found that the methodology adopted by the Assessee for writing off bad debts was correct and in accordance with the Supreme Court's guidelines. The substantial question of law was answered in favor of the Assessee.

2. Allowability of Loss on Sale of Investments:

The second issue was whether the loss on the sale of investments is allowable as a deduction in computing the business income of the Assessee. This issue had been considered in previous Tax Case Appeals (Nos. 1420 and 1421 of 2010), and the Court followed the view taken in those appeals, answering the question against the Department and in favor of the Assessee.

Conclusion:

The Court dismissed the Department's appeal, upholding the Tribunal's decision to allow the claims for bad debts and loss on the sale of investments as deductions in computing the Assessee's income. The Court emphasized that the Department had accepted the Assessee's methodology for over a decade, and there were no convincing reasons to disturb the settled position.