2017 (3) TMI 31 - AT - Income Tax

Addition with respect to written off of bad and doubtful debts reserve - Held that - The ledger accounts of each individual account holder/company whose outstanding loan amount have been written off during the relevant period were filed before the Assessing Officer during the remand proceedings. The Assessing Officer in remand report instead of verifying the same has reiterated his objection that the Board Resolutions have not granted absolute mandate to write off the bad debts to the assessee, and has laid a condition that the bank has right to recover the amount in future, if possible. The Revenue has not brought on record any material to show that the assessee has in fact recovered any of the amounts written off in subsequent assessment years or the accounts declared as bad debts were actual live or being capable of being realized. As in the case of TRF Ltd. Vs. Commissioner of Income Tax (2010 (2) TMI 211 - SUPREME COURT ) has held that after amendment of section 36(1)(vii) w.e.f. April 1, 1989 for claiming deduction in relation to bad debts, it is not necessary for the assessee to establish that debt in fact has become irrecoverable. The deduction is allowable if bad debts are written off as irrecoverable in the account of the assessee. One of the objection raised by the revenue against writing off of bad debts reserve is that the income of the assessee was exempt up to assessment year 2006-07 on account of deduction u/s. 80P of the Act. As is evident from the impugned order the assessee had suo-moto created a provision for bad and doubtful debts since 1985-86 on regular basis. While computing the income the assessee claimed entire amount as exempt u/s. 80P up to assessment year 2006-07. Merely because the assessee had claimed the benefit of deduction u/s. 80P it cannot be inferred that the benefit of section 36(1)(vii) is not available to the assessee in the subsequent years when the assessee is not eligible to claim deduction u/s. 80P of the Act. The Revenue has not placed on record any material to show that the provision created by the assessee on account of bad and doubtful debts during the period when the assessee was eligible to claim deduction u/s. 80P was in any manner appropriated. Thus the Commissioner of Income Tax (Appeals) by giving a well reasoned and detailed findings has rightly deleted the addition with respect to written off of bad and doubtful debts reserve. - Decided in favour of assessee

Summary

Issues Involved:

1. Disallowance of depreciation on investment in Government Securities held under HTM category.
2. Allowability of bad debts written back to profit and loss accounts under Section 36(1)(vii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Investment in Government Securities Held Under HTM Category:

The assessee, a Co-operative Bank, claimed depreciation of ?2,90,38,695/- on investments made in Government Securities held under the Held to Maturity (HTM) category. The Assessing Officer disallowed this claim, which was upheld by the Commissioner of Income Tax (Appeals). The assessee contended that similar issues had been adjudicated in its favor in previous assessment years (2005-06, 2007-08, and 2009-10) by the Tribunal. The Tribunal had remitted the issue back to the Assessing Officer for verification and deduction in line with the directions given in the case of Addl. Commissioner of Income Tax Vs. Bank of Maharashtra.

The Tribunal noted that the issue was identical to the one raised in earlier appeals and followed the precedent set in the case of Commissioner of Income Tax Vs. HDFC Bank Ltd., where the Hon’ble Bombay High Court allowed amortization of premium on securities held under HTM category. Consequently, the Tribunal remitted the issue back to the Assessing Officer for fresh adjudication in line with the earlier judgments and provided the assessee an opportunity to present necessary workings for re-computation of income.

2. Allowability of Bad Debts Written Back to Profit and Loss Accounts Under Section 36(1)(vii):

The Department contested the Commissioner of Income Tax (Appeals)'s decision to allow the assessee’s claim of ?76,76,97,831/- as bad debts written back to profit and loss accounts under Section 36(1)(vii). The Department argued that the assessee did not provide evidence that the debts had been taken into account in computing income of any previous years, a prerequisite under Section 36(2)(i).

The assessee argued that it had been creating provisions for bad and doubtful debts since 1985-86 and had complied with all conditions laid down under Section 36(1)(vii) read with Section 36(2). The Commissioner of Income Tax (Appeals) found that the assessee had indeed created specific provisions for bad and doubtful debts over the years, and the opening balance as of 31-03-2007 was ?1,86,76,16,006/-. The Commissioner observed that the Assessing Officer failed to examine the documents on record and had overlooked significant details provided by the assessee.

The Tribunal upheld the Commissioner of Income Tax (Appeals)’s findings, noting that the assessee had furnished necessary documents to show compliance with Board Resolutions and that the conditions for writing off bad debts were met. The Tribunal referred to the Supreme Court decision in TRF Ltd. Vs. Commissioner of Income Tax, which held that post-amendment of Section 36(1)(vii) w.e.f. April 1, 1989, it is not necessary for the assessee to establish that the debt has become irrecoverable; writing off the debt in the accounts suffices.

The Tribunal also dismissed the Department’s argument that the assessee’s earlier claims under Section 80P nullified the provision for bad debts, stating that the benefit of Section 36(1)(vii) is available even if the assessee was previously exempt under Section 80P.

Conclusion:

The Tribunal allowed the assessee’s appeal for statistical purposes regarding the depreciation on Government Securities and dismissed the Revenue’s appeal concerning the bad debts written back. The matter of depreciation was remitted back to the Assessing Officer for fresh adjudication, while the decision on bad debts was upheld in favor of the assessee.