2017 (2) TMI 401 - AT - Income Tax

Disallowance of claim of bad debt - Held that - The assessee is an urban co-operative bank eligible for deduction for bad debts on account of provision for bad and doubtful debts under section 36(1)(viia). It was informed that since the assessee was not having any rural advances, it was not eligible for the benefit of deduction under section 36(1)(viia). Under these circumstances, the assessee made claim on account of bad debts under section 36(1)(vii) as normal assessee, i.e. an assessee other than a bank. But, the Assessing Officer denied the benefit of deduction, firstly for the reason that the assessee cannot claim double deduction. However, this objection was rightly removed by the learned Commissioner of Income-tax (Appeals) by observing that in case the assessee has not made claim under section 36(1)(viia), then the assessee was entitled to claim deduction under section 36(1)(vii). The bad debt has been written off in the account in the year before us as is evident from the fact that when the amount was credited in the respective debtors account, the debtors were reduced to that extent. Further, the profit and loss account has already been debited with the corresponding amount as per the accounting procedure followed by the assessee as narrated above. Thus, both the conditions stand fulfilled. The second condition was fulfilled in the year before us. Thus, in our view, the assessee became eligible to claim deduction on account of bad debts in the year before us. Under these circumstances, we find that the assessee is principally eligible to claim bad debts in the year before us.

Summary

Issues Involved:
1. Disallowance of the claim of bad debts amounting to ?5,50,44,192.

Issue-wise Analysis:

1. Disallowance of the Claim of Bad Debts:

Background:
The assessee filed an appeal against the order of the Commissioner of Income-tax (Appeals)-3, Mumbai, which confirmed the disallowance of the claim of bad debts amounting to ?5,50,44,192 for the assessment year 2011-12. The Assessing Officer disallowed the claim on the grounds that the bad debts were not written off to the profit and loss account as required by section 36(1)(vii) and that the "bad debts provision account" had a credit balance of ?8.62 crores, which was more than the bad debts written off.

Submissions by the Assessee:
The assessee argued that:
- Bad debts were claimed under section 36(1)(vii) and not under section 36(1)(viia).
- The provision for bad debts was created by debiting the profit and loss account, which was added back in the computation of income.
- Similar issues in previous assessment years were decided in favor of the assessee by the Commissioner of Income-tax (Appeals).
- Bad debts were written off in the books by debiting the bad and doubtful debts reserve account and crediting the debtor's accounts.

Commissioner of Income-tax (Appeals) Decision:
The CIT(A) agreed with the assessee that if the claim was not made under section 36(1)(viia), the assessee was entitled to a deduction under section 36(1)(vii). However, the CIT(A) rejected the claim on the ground that the bad debts were not debited to the profit and loss account but to the reserve account, which does not constitute a write-off as per section 36(1)(vii).

Tribunal's Analysis:
The Tribunal considered the arguments and submissions made by both parties. The Tribunal noted that the Supreme Court judgments in Catholic Syrian Bank Ltd. v. CIT and Deputy CIT (Assessment) v. Karnataka Bank Ltd. clarified that sections 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction. The Tribunal also noted that the assessee did not have any rural advances and thus was not eligible for the deduction under section 36(1)(viia), making the claim under section 36(1)(vii) valid.

Accounting Procedure:
The Tribunal analyzed the accounting procedure followed by the assessee:
- In the year when the provision for bad debts is made, the profit and loss account is debited, and the provision for bad and doubtful debts reserve is credited.
- In the year when bad debts are written off, the provision for bad and doubtful debts reserve is debited, and the debtor's account is credited.
- This procedure indicates that the profit and loss account is debited when the provision is made, and the debtor's accounts are credited when the bad debts are written off.

Decision:
The Tribunal concluded that the assessee fulfilled both conditions of section 36(1)(vii) since the bad debts were written off in the debtor's accounts in the year under consideration. However, the Tribunal noted a discrepancy in the reconciliation of the written-off amount and directed the Assessing Officer to allow the claim of bad debts to the extent of ?5,37,41,411, excluding the excess provision of ?1,30,23,780.

Conclusion:
The Tribunal partly allowed the appeal, granting the deduction for bad debts to the extent of ?5,37,41,411. The order was pronounced in the open court at the conclusion of the hearing.