2019 (1) TMI 96 - AT - Income Tax

Claim for bad and doubtful debts made by way of a provision - Claim denied by AO on the ground that the provision implies a contingent, and not an ascertained, liability, inadmissible in computing business income - quantum of claim - Held that - The profile or the constitution of the rural advances recoverable admittedly changing with time, a provision in its respect would only be with reference to that outstanding at any given point of time. As such, this part of the provision, i.e., referable to the rural advances, could not exceed, at any given time, 10% of the advances computed in the manner provided in the Rules. In fact, this is the accepted position; the assessee s reply dated 29/12/2014 in the assessment proceedings whereat it says that the provision qua rural advances, including that already made earlier, thus, does not exceed 10% of its rural branch advances. This was in fact also the unanimous view of the learned representatives before us. The other component of the provision u/s. 36(1)(viia) is with reference to a percentage of the income (prior to the provision for bad and doubtful debts). This, of course, would stand to be made, and accordingly claimed, on a year-to-year basis. The assessee, as observed by the tribunal in its order for AY 2008-09 maintained separate provision accounts for the two components. Subject, therefore, to the quantum limitation prescribed by law, as explained by us, the assessee s claim for deduction toward provision for bad and doubtful debts is to be allowed under section 36(1)(viiia), and the assessee succeeds in principle. The AO shall, while confirming the same the provision component linked to income being required to be revised on each revision in the assessee s income in appeal, also clarify the exact amount of provision made by the assessee in its books; the ld. CIT(A) pointing to some difference therein, i.e., while giving appeal effect to this order, which is in conformity with the judicial rulings. Further, the write off of debts as bad and doubtful, i.e., in future, needless to add, would be by way of debit to the provision account, which is to be replenished, each year, on the basis of the parameters provided

Issues Involved:
1. Claim for bad and doubtful debts.
2. Disallowance of provision for bad and doubtful debts.
3. Specific claims under section 36(1)(viia) of the Income Tax Act, 1961.
4. Loss on sale of car and write-off of perishable goods.
5. Unrealized interest reversal.

Detailed Analysis:

1. Claim for Bad and Doubtful Debts:
The primary issue involves the assessee's claim for bad and doubtful debts amounting to ?340 lacs, which was denied by the Assessing Officer (AO) on the grounds that the provision implies a contingent liability, not admissible in computing business income. The Tribunal referenced its previous order in the assessee’s case for AY 2008-09, where it was held that the provision against standard loans, being a provision for bad and doubtful debts, stands covered under section 36(1)(viia) of the Income Tax Act, 1961. Thus, subject to the limit prescribed under section 36(1)(viia), the assessee is entitled to the provision against standard assets.

2. Disallowance of Provision for Bad and Doubtful Debts:
The Tribunal discussed the AO’s disallowance of the provision at the rate of 0.25% on standard loans, which was accepted by the CIT(A) as covered by section 36(1)(viia). The Tribunal found no reason for the Revenue to impugn the provision against standard assets, provided it does not breach the 7.5% income limit prescribed under section 36(1)(viia).

3. Specific Claims Under Section 36(1)(viia):
The Tribunal examined the assessee's claims under section 36(1)(viia) and noted that the assessee bank had made a further provision of ?850 lacs, comprising ?100 lacs against standard assets and ?750 lacs against rural advances. The CIT(A) restricted the deduction for the provision for bad and doubtful debts to ?98.31 lacs, resulting in a disallowance of ?1.69 lacs. The Tribunal held that the provision under section 36(1)(viia) should be considered in totality, and both components must be considered together, as long as the total provision is within the prescribed limits.

4. Loss on Sale of Car and Write-Off of Perishable Goods:
The Tribunal noted that the loss on sale of car and write-off of perishable goods could not be regarded as a provision for bad and doubtful debts. The assessee was given a final opportunity to present its case before the AO in the appeal effect giving proceedings.

5. Unrealized Interest Reversal:
The Tribunal addressed the claim of ?1.43 lacs for unrealized interest, which was denied as it could not be regarded as a provision for bad and doubtful debts. The Tribunal upheld the CIT(A)’s view that the interest, booked as income for AY 2007-08 and not realized during AY 2008-09, constitutes a reversal of interest and should be debited to the provision account.

Conclusion:
The Tribunal concluded that the issue of disallowance of ?1.69 lacs sustained by the CIT(A) and ?848.31 lacs deleted by him are correlated. The matter was restored to the file of the AO for fresh adjudication after allowing the assessee a reasonable opportunity to present its case. The assessee's claim for deduction towards provision for bad and doubtful debts is to be allowed under section 36(1)(viia), subject to the quantum limitation prescribed by law. The AO is directed to confirm the exact amount of provision made by the assessee in its books while giving appeal effect to this order. The write-off of debts as bad and doubtful in the future would be by way of debit to the provision account, which is to be replenished each year based on the provided parameters.

Order Pronounced:
The Revenue’s appeal is disposed of accordingly, with the order pronounced in the open Court on December 04, 2018.

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