2017 (11) TMI 1304 - HC - Income Tax

Disallowance made under Section 36(1)(vii) - Scope and ambit of the proviso to Section 36(1)(vii) - whether deduction of the bad and doubtful debts actually written off in view of Section 36(1)(vii) limits the deduction allowable under the proviso to the excess over the credit balance made under clause (viia) of Section 36(1) Held that - This issue has been specifically considered in the decision of the Supreme Court in Catholic Syrian Bank Vs. Commissioner of Income Tax reported in (2012 (2) TMI 262 - SUPREME COURT OF INDIA) wherein, in similar circumstance, the Supreme Court considered the provision of Section 36(1)(vii) and 36(1)(viia). It was thereafter held that for the purpose of sub-section (viia) which applied to district cooperative bank that had made rural advances, it is not a requirement of law that the debt should have been written off before an allowance could be made. It was thus held that in such cases even it appears that an allowance has been made to write off a bad debt the assessee could claim such expenditure. - Decided in favour of the assessee and against the revenue. Exemption u/s 10(34) availability in respect of dividend income - claim not raised at the time of assessment - Held that - In so far as it is not disputed to the department that the assessee received dividend income, it cannot be said that the same would become taxable at the hands of the assessee. It was also open to the Assessing Officer to have examined the correct aspect himself and to grant the benefit, if the said amount was not taxable. Merely because the assessee did not raise the claim at the time of his assessment it did not stop him from raising the claim before first appellate authority. In that regard it is not disputed that as a fact an additional ground was raised in the first appeal and that was allowed. Even at present, the department had been required to verify the correctness of the claim and to grant benefit to the assessee if the claim is found to be verified. - Decided in favour of the assessee

Summary

Issues:
1. Disallowance of bad debts claimed by the assessee.
2. Taxation of dividend income of the assessee.

Analysis:

Issue 1: Disallowance of Bad Debts
The appeal was filed against the order of the Income Tax Appellate Tribunal regarding the disallowance of bad debts claimed by the assessee. The Assessing Authority disallowed the provision for bad debts under Section 36(1)(vii) of the Income Tax Act, 1961. However, the first appellate authority allowed the appeal, stating that as a District Cooperative Bank making advances in rural areas, the assessee was entitled to the allowance on account of 'provision' of bad debts without actually writing off such debts. The Tribunal also upheld this decision, citing the provisions of Section 36(1)(viia), which do not require the debt to be written off for the allowance to be claimed. The Supreme Court's decision in a similar case supported this interpretation, clarifying that making a provision for bad debts may be allowable without insisting on an actual write-off. Therefore, the Tribunal's decision was upheld, and the appeal lacked merit.

Issue 2: Taxation of Dividend Income
The second issue concerned the taxation of dividend income of the assessee. The Tribunal did not allow the claim of the assessee but settled the principle to be applied. The department acknowledged that the source of income of ?20,03,000 was dividend income received by the assessee, which was exempted. The Court referred to a previous case where it was held that the department should not take advantage of the assessee's ignorance, and the unclaimed exemption did not make the receipt taxable. Therefore, the Tribunal's decision was upheld, and it was noted that the Assessing Officer could have examined the correct aspect and granted the benefit if the amount was not taxable. The assessee's right to raise the claim before the first appellate authority was also recognized, and the department was required to verify the correctness of the claim and grant the benefit if found valid. Consequently, the second question was answered in favor of the assessee, and the appeal was dismissed with no costs awarded.