2019 (1) TMI 412 - HC - Income Tax

Provision for bad and doubtful debts - Held that - Section 36(1)(vii) read with the proviso and Explanation would enable the assessee only to deduct amounts written off in excess of the deduction allowed as provision for bad and doubtful debts under Section 36(1)(viia). We see from the assessment order that the assessee had, as in the earlier year also claimed write off of ₹ 3,50,41,439/- in the A.Y. 1996-97 and ₹ 5,60,87,000/- in the A.Y. 1997-98 relying on Vithaldas H.Dhanjibhai Bardanwala v. C.I.T., 1980 (8) TMI 40 - GUJARAT HIGH COURT as relied on by the assessee is no longer good law in view of the decision in Southern Technologies Ltd. v. Joint C.I.T., 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 THE Finance Act, 2001 with retrospective effect from 01.04.1989 and overruled the said decision. We, hence, answer that question of law in favour of the Revenue and against the assessee for the respective years. Cost of compliments supplied to the share holders who attended the annual general body meeting of the appellant company - expenditure incurred wholly and exclusively for the purpose of the business - Held that - Compliments given to the shareholders in the Annual General Meeting is to ensure participation of the members in the AGM. This brings in more transparency and ensures democratic decision making. In such circumstances, it was held to be a business expenditure. Write off claimed of a bad investment - Held that - the assessee bank in the subject assessment year was holding it as investment and by a resolution of the Board of Directors on 17.05.1999 the character of the investment was converted into stock-in-trade. The conversion was made in the financial year 1999-2000, which is the relevant previous year to the next assessment year ie 2000-2001. The Tribunal also noticed that in the subsequent year the issue was remanded back for consideration to the Assessing Officer. However, in the subject assessment year, the assessee had been holding the portfolios as investments, there is no question of claiming write off of the loss said to have been occasioned. Disallowance in the light of the rule introduced for the purpose of section 14A - Held that - he Hon ble Supreme Court in Commissioner of Income Tax v. Essar Teleholdings Ltd., 2018 (2) TMI 115 - SUPREME COURT OF INDIA held that the provision would be applicable only from the assessment year 2007-08. Hence, the question is answered in favour of the assessee and against the Revenue.

Summary

Issues:
1. Interpretation of provisions for bad and doubtful debts deduction under Section 36(1)(vii) and (viia) of the Income Tax Act, 1961.
2. Allowability of cost of compliments to shareholders as a business expenditure.
3. Treatment of write-off and bad investment claims in the assessment years.
4. Application of Section 14A of the Act for disallowance and reconsideration of bad debt written off under Section 36(1)(vii).

Analysis:

1. Interpretation of Provisions for Bad and Doubtful Debts Deduction:
The Tribunal affirmed the lower authorities' orders regarding the deduction of bad and doubtful debts under Section 36(1)(vii) and (viia). The court relied on the Explanation introduced by the Finance Act, 2001, overruling previous decisions. The court held that the Gujarat High Court decision cited by the assessee was no longer valid law. Consequently, the question was answered in favor of the Revenue for the respective assessment years.

2. Allowability of Cost of Compliments to Shareholders:
The court considered whether the cost of compliments provided to shareholders attending the annual general body meeting could be considered a business expenditure. Relying on a previous Division Bench judgment, the court held that such compliments aimed at ensuring shareholder participation in the AGM promoted transparency and democratic decision-making, thus qualifying as a business expenditure. The question was answered in favor of the assessee against the Revenue.

3. Treatment of Write-off and Bad Investment Claims:
Regarding the write-off claims and treatment of bad investments, the court examined specific instances where the Tribunal's findings were upheld. In one instance, the conversion of an investment into stock-in-trade was considered, leading to the denial of the write-off claim. The court found no reason to interfere with the Tribunal's decisions in these matters.

4. Application of Section 14A and Bad Debt Disallowance:
The court addressed the applicability of Section 14A for disallowance and the issue of bad debt written off under Section 36(1)(vii). Citing relevant judgments, the court clarified that the matter was covered by a judgment of the Hon'ble Supreme Court, and no legal question arose. Consequently, the Revenue's appeal on the ground of bad debt disallowance was rejected, affirming the lower authorities' orders.

In conclusion, the court rejected certain appeals while allowing others, based on the interpretation of relevant provisions and precedents, ensuring consistency in the application of tax laws and principles.