2017 (8) TMI 1073 - HC - Income Tax

Addition of bad debts claim - Held that - The claim of bad or doubtful debt would be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made in clause (viia) in case of an assessee to which such clause applies. The fact that clause (viia) applies to the assessee is not in dispute. However, Mr.Soparkar for the assessee submitted that the assessee had not claimed any part of the provision made for bad or doubtful debts in its account and that therefore the first proviso to clause (vii) in any case had no applicability. He submitted that the Assessing Officer therefore advisedly did not proceed on such basis and that the Commissioner of Income Tax (Appeals) erred in invoking the said provision. He would draw our attention to the observations of the Tribunal in the impugned judgment, in which, in this context, it was stated that proviso to section 36(1) (vii) refers to section 36(1)(viia) and the provisions made under such subclause which admittedly is not the case here. In our opinion if that is the case, reliance of the Commissioner of Income Tax (Appeals) on the proviso to section 36(1)(vii) also would be redundant. However, by way of abundant caution, it is clarified that while granting the deduction on the said sum of ₹ 11.72 crores it may be verified that the assessee is not in any manner, getting table deduction. Disallowance of excess provision returned back - Held that - Section 41(1) of the Act in plain terms provides for adding back of an allowance or deduction which has been made by the assessee in any year in respect of loss expenditure or trading liability and subsequently during any previous year such liability ceases. The primary requirement of applicability of this provision therefore is where an allowance or reduction has been made in the assessment for any year in respect of such loss or expenditure or trading liability. When no such allowance or deduction was made, question of applicability of section 41(1) of the Act would not arise.

Summary

Issues:
1. Whether the Appellate Tribunal was right in law and on facts in deleting the addition of bad debts claim of ?11,72,22,554 made by the Assessing Officer?
2. Whether the Appellate Tribunal was right in law and on facts in deleting the disallowance of excess provision written back of ?10,00,00,000?

Analysis:

Issue 1:
The first issue involves the appellant's challenge to the deletion of the bad debts claim by the Income Tax Appellate Tribunal. The respondent, a cooperative bank, had claimed bad debts of ?15.35 crores for the assessment year 2008-09, including ?11.72 crores shown in the statement of income. The Assessing Officer disallowed the claim, citing the requirement that bad debts must be written off in the books of account. However, the Tribunal reversed this decision, noting that the bad debt was written off by squaring up debtor accounts and debiting the bad debt reserve account, which constituted an actual write-off. The Tribunal emphasized that the Supreme Court's decision in T. R. F. Ltd. v. CIT clarified that recording bad debts as irrecoverable in the accounts is sufficient, without the need for a direct write-off in the profit and loss account. The Tribunal also addressed the applicability of the proviso to section 36(1)(vii) of the Income Tax Act, determining that it did not limit the bad debts claim in this case. The High Court upheld the Tribunal's decision, emphasizing the correct write-off procedure followed by the bank.

Issue 2:
The second issue concerns the disallowance of ?10 crores of excess provision returned back by the bank. The Assessing Officer added this amount to the bank's income, invoking section 41(1) of the Act. The Commissioner of Income Tax (Appeals) upheld this decision, arguing that the reversal of interest expenses constituted income under the Act. However, the Tribunal disagreed, stating that since the provision was never claimed as a deduction and was added back in the income computation, section 41(1) did not apply. The Tribunal clarified that the creation and reversal of the provision were tax-neutral, irrespective of the bank's income eligibility under section 80P. The Tribunal highlighted that section 41(1) only applies when an allowance or deduction has been made in respect of a loss or expenditure, which was not the case here. Consequently, the Tribunal overturned the decision of the Revenue authorities and dismissed the Tax Appeal.

In conclusion, the High Court upheld the Tribunal's decisions on both issues, emphasizing the correct interpretation of tax provisions and the application of legal principles in determining the tax treatment of bad debts and excess provisions returned back by the cooperative bank.