2018 (12) TMI 682 - HC - Income Tax

Claim made u/s 36(1)(viia) - excess amounts written off in excess of the provision for bad debts under Section 36(1)(viia) - assessee is labouring under a misapprehension that the AO declined their claim only on the basis of the fact that the loan accounts were not credited with the amounts shown as written off - Held that - There could be no deduction claimed because obviously even if the said amounts are written off in the said year, it would not exceed the provision under Section 36(1)(viia). In such circumstances, we do not think that the question raised requires an answer. The amounts written off were not declined deduction, merely for the reason of the same having not been credited in the party s account; in which context alone, the decision of the Gujarat High Court applies. The learned Standing Counsel for Government of India (Taxes) alertly points out that Gujarat High Court decision as relied on by the assessee is no longer good law in view of the decision in Southern Technologies Ltd. v. Joint CIT 2010 (1) TMI 5 - SUPREME COURT OF INDIA . The very same Section 36(1)(vii) and (viia) came up for consideration before the Hon ble Supreme Court. The Hon ble Supreme Court noticed the Explanation brought in by Finance Act, 2001 with retrospective effect from 01.04.1989. Here, the written off amounts have been granted deduction, only to the extent of the same exceeding the provision under clause (viia) of Section 36(1), which is in accordance with the statutory prescription.

Summary

Issues:
1. Whether the Tribunal was correct in holding that the write-off was not complete despite the appellant debiting the amount in the Profit and Loss account and netting it from total advances outstanding.
2. Interpretation of Section 36(1)(vii) and (viia) in relation to deduction for bad debts written off.

Issue 1:
The High Court analyzed two appeals for the years 1993-94 and 1994-95 concerning the completeness of write-offs claimed by the appellant. The Assessing Officer (AO) disallowed a portion of the claimed write-offs for the year 1993-94, stating they would be considered in the subsequent year. The Gujarat High Court judgment was cited, but the disallowance was affirmed in the first appeal. The Tribunal held that the proviso to Section 36(1)(viia) introduced in 2000 was not applicable to the subject assessment years. The Court clarified that deductions were permissible only for written-off amounts, not provisions for bad and doubtful debts classified by the RBI. The judgment highlighted the distinction between the written-off bad debts and provisions, emphasizing the statutory requirements for deductions under Section 36(1)(vii) and (viia).

Issue 2:
In the context of the assessment for the year 1994-95, the Court examined the deduction for bad debts written off by the appellant. The assessment order showed the calculation of the admissible deduction, considering the written-off amount and the provision outstanding in the balance sheet against rural branch advances. The Court applied the proviso to Section 36(1)(vii) for Banks, limiting the deduction to the excess of written-off amounts over the credit balance in the provision for bad and doubtful debts account. The judgment emphasized that the deduction was granted based on the statutory provisions and the specific requirements for rural branch advances. The Court also clarified that the Gujarat High Court decision cited by the appellant was no longer valid law, citing a Supreme Court decision on the same statutory provisions. Ultimately, the Court refused to answer the legal question raised and dismissed the appeals, directing each party to bear their respective costs.