2008 (5) TMI 281 - HC - Income Tax

Bad Debts prima facie adjustment u/s 143(1) section 36(1)(ii) held that - Since assessee is a Scheduled Bank, the further question that requires to be considered is whether in assessee s case that provision for bad debt claimed stands on a different footing - Section 36(1)(vii)(a) in terms of RBI guidelines pertaining to advances made in rural areas. Besides the claim under Section 36(1)(vii)(a), it is seen that assessee had in fact made a huge claim of Rs.8,97,66,930/- towards bad debt written off which included provision of Rs.2,18,56,250/- claimed and disallowed in the preceding year - Since assessee itself does not have a case that it is not written off in the accounts and the claim was only a provision for bad debt, we are of the view that the claim is prima facie inadmissible under Section 36(1)(vii) as the Section does not authorize granting of deduction of any debt unless it is written off in the accounts for the previous year - claim is rightly treated as prima facie inadmissible and no enquiry or hearing is required to disallow the claim

Summary

Issues:
1. Challenge to the order of the Income Tax Appellate Tribunal under Section 143(1)(a) for the assessment year 1994-95.
2. Whether provision for bad debt claimed by the assessee could be added to the returned income as a prima facie inadmissible deduction authorized under proviso (iii) to Section 143(1)(a) of the Income Tax Act.

Analysis:
The appellant, a banking company, challenged the order of the Income Tax Appellate Tribunal regarding the addition of Rs.3,04,22,000 representing provision towards bad debt for the assessment year 1994-95. The Tribunal upheld the proceedings issued by the Assessing Officer under Section 143(1)(a) of the Income Tax Act. The central issue revolved around whether the provision for bad debt claimed by the appellant could be added to the returned income as a prima facie inadmissible deduction under proviso (iii) to Section 143(1)(a) of the Act.

The appellant contended that as a Scheduled Bank, it is bound to prepare its accounts based on RBI guidelines, and the provision for bad debt is created in accordance with these guidelines. However, the Standing Counsel for the department argued that Section 36(1)(vii) does not authorize deduction of any provision for bad debt, allowing only deduction of bad debts actually written off in the accounts. The appellant claimed the provision under Section 36(1)(vii) and not under Section 36(1)(vii)(a) of the Act, leading to a debate on the eligibility for deduction of the provision for bad debt.

The court examined the Explanation introduced to Section 36(1)(vii) by the Finance Act 2001, effective from 1.4.1989, which clarified that any bad debt or part thereof written off as irrecoverable shall not include any provision for bad and doubtful debts made in the accounts of the assessee. The court upheld that the provision for bad debt claimed by the appellant was not written off in the accounts, making it prima facie inadmissible under Section 36(1)(vii). The court also held that the Explanation was clarificatory and did not alter the main provision's requirement for deduction of bad debt only when it is written off as irrecoverable in the accounts for the previous year.

Ultimately, the court upheld the Tribunal's order, stating that the proceedings under Section 143(1)(a) regarding the addition of provision for bad debt were valid. The court dismissed the appeal, emphasizing that the claim was rightly treated as prima facie inadmissible under Section 36(1)(vii) of the Act.