2021 (7) TMI 332 - HC - Income Tax

Claim of deduction u/s 36(1)(viia) - Whether Tribunal was right in holding that the amount deductible u/s 36(1)(viia) would have to be limited to the amount actually provided for in the books? - Tribunal not adjudicating on the Appellant s alternate contention that the shortfall in the present years between the upper limit allowable under Section 36(1)(viia) and the actual amount created as a provision in its books in the present years ought to nevertheless be allowed as a deduction in the present years on account of the provision created in the subsequent years that was in excess of such alleged shortfall and as such deemed to have been made good HELD THAT - The condition precedent for claiming deduction under Section 36(1)(viia) of the Act is that a provision for bad and doubtful debt should be made in the accounts of the assessee. The aforesaid Section mentions the maximum amount for which such a provision should be made. If a provision is made in excess of the limits prescribed under the Section, the assessee would not be entitled to deduction of the excess amount. Once a provision is made and the amount of deduction is within the limit prescribed under the Act, the assessee would be entitled to deduction of the amount for which provision is made in the books of accounts. The assessee is therefore entitled to deduction subject to the limit mentioned in Section 36(1)(viia) of the Act. The substantial Questions of law Nos.1 and 3 framed by this Court, are substantially answered by this Court in I.T.A. 2020 (2) TMI 1020 - KARNATAKA HIGH COURT and therefore, the said questions are answered in favour of the revenue and against the assessee. The Tribunal was right in holding that the deduction computed at the rate of 7.5% of the total income ought to be computed after setting off of brought forwards losses. Decided in favour of the revenue Deduction computed at the rate of 7.5% of the total income ought to be computed after setting off of brought forwards losses - a plain reading of section 36(1)(viia) of the Act, it is clear that the amount of deduction at the rate of 7.5% is to be calculated with reference to total income computed under the head profits and gains of business or profession . The provisions governing the brought forward and set of business loss are not part of the provisions governing the computation of profits under the heads profits and gains of business under Section 28. Hence, we hold that the deduction at the rate of 7.5% of the total income should be computed before setting off the loss brought forward. Hence the reasoning adopted in this regard by the assessing officer and the Commissioner of Income Tax (Appeals) is not in accordance with the provisions of the Act - Decided against the revenue and in favour of the assessee.

Summary

Issues:
Challenge to common order of Income Tax Appellate Tribunal for assessment years 2011-12 and 2012-13 regarding deduction claimed under Section 36(1)(viia) of Income Tax Act, 1961.

Detailed Analysis:

1. Deduction Claimed for Assessment Year 2011-12:
The appellant claimed a deduction of &8377; 9,18,82,49,133/- under Section 36(1)(viia) of the Act for the assessment year 2011-12. However, the Assessing Officer restricted the deduction to the provision made in the books of accounts and set off the brought forward loss for computing the deduction as a percentage of the total income.

2. Deduction Claimed for Assessment Year 2012-13:
Similarly, for the assessment year 2012-13, the appellant claimed a deduction under Section 36(1)(viia) amounting to &8377; 11,25,35,06,311/-. The Assessing Officer also restricted this deduction in the same manner as done for the previous assessment year.

3. Appeals and Tribunal's Decision:
The appellant filed appeals before the Commissioner of Income Tax (Appeals) who confirmed the orders of assessment. Subsequently, the appellant appealed before the Tribunal, challenging the disallowance under Section 36(1)(viia). The Tribunal upheld the Assessing Officer's decision to restrict the deduction to the provision made in the books of accounts.

4. Judicial Precedents and Arguments:
The Tribunal relied on a previous decision regarding a Co-ordinate Bench's ruling for a similar case of the assessee. The appellant contended that the deduction should not be limited to the provision in books and that the deduction as a percentage of total income should be computed before setting off brought forward losses.

5. Substantial Questions of Law:
The Court admitted the appeal to consider substantial questions of law, including whether the deduction under Section 36(1)(viia) should be limited to the provision in books, and if the deduction at 7.5% of total income should be calculated before setting off losses.

6. Legal Interpretation and Decision:
The Court analyzed Section 36(1)(viia) and relevant explanatory notes, emphasizing that the deduction is subject to the prescribed limit and should be based on the provision made in the books. The Court ruled in favor of the revenue regarding the deduction calculation based on total income and set off of losses. However, the Court held that the deduction at 7.5% of total income should be computed before setting off losses, contrary to the Assessing Officer's and Commissioner's decisions.

In conclusion, the Court partially allowed the appeal, answering the substantial questions of law in favor of the revenue for certain aspects and in favor of the appellant for others.