2009 (9) TMI 12 - HC - Income Tax

Bad Debts Banking Company - the bad debts of Rs.19, 04, 000/- had been written off in the books of account even though no corresponding entries to this effect had been made in the individual accounts of the loanees revenue contented that mandatory condition laid down in Section 36(1)(vii) of the Income-tax Act was not satisfied Held that - Admittedly the Financial Corporation is following the cash system and has written off the bad debts in according with the accounting system following by the Company. There is no error in the order of the ITAT. The first question is accordingly decided in favour of the assessee and against the Revenue deduction of bed debts allowed However the limit of 5% fixed by amendment to section 36(1)(viia)(c) was not considered the matter remanded for limited purpose.

Summary

Issues:
1. Interpretation of Section 36(1)(vii) of the Income-tax Act regarding bad debts written off.
2. Consideration of amended provision of Section 36(1)(viia)(c) limiting deduction for bad debts to 5%.

Issue 1: Interpretation of Section 36(1)(vii) of the Income-tax Act regarding bad debts written off

The case involved the question of whether the bad debts of Rs.19,04,000 had been correctly written off by the financial institution in accordance with Section 36(1)(vii) of the Income-tax Act. The Assessing Officer initially disallowed the deduction, stating that the debts had not been written off in the individual accounts of the loanees. However, the CIT (Appeals) and the ITAT ruled in favor of the assessee, M/s. Himachal Pradesh Financial Corporation (HPFC), noting that the HPFC followed the cash system of accounting and had written off the bad debts in accordance with its accounting practices. The High Court upheld the decision of the ITAT, emphasizing that there was no error in the ITAT's order and deciding the first question in favor of the assessee.

Issue 2: Consideration of amended provision of Section 36(1)(viia)(c) limiting deduction for bad debts to 5%

The second issue revolved around the amended provision of Section 36(1)(viia)(c) of the Income-tax Act, which restricted the deduction for bad debts to 5% of the total income. The section was inserted by the Financial Act No.2 of 1991 with effect from 1.4.1992. The High Court noted that this provision was not considered by the authorities during the assessment process. Despite correctly writing off the bad debts, the HPFC could only claim a deduction within the 5% limit specified in the amended section. As a result, the High Court ruled in favor of the Revenue on this issue and remanded the case to the Assessing Officer for reconsideration in light of Section 36(1)(viia)(c).

In conclusion, the High Court's judgment addressed the interpretation of Section 36(1)(vii) regarding bad debts written off by a financial institution and the application of the amended provision of Section 36(1)(viia)(c) limiting the deduction for bad debts to 5% of the total income. The Court upheld the ITAT's decision on the first issue but ruled in favor of the Revenue on the second issue, remanding the case for further assessment in accordance with the relevant provisions of the Income-tax Act.