2022 (3) TMI 712 - AT - Income Tax

Disallowance of provision for Bad Debt Written off - assessee has made a provision for bad and doubtful debts @ 2.5% of sundry debtors on sale of power and claimed that such provision is required to be made in terms of Electricity (Supply) Annual Account Rule, 1985 - assessee is into business of generation, transmission and distribution of electricity to consumers in the State of Tamil Nadu - HELD THAT - In the present case, the assessee is into business of generation, transmission and distribution of electricity to consumers in the State of Tamil Nadu. As claimed by the assessee, it has made ad-hoc provision @ 2.5% on total sundry debtors at the end of financial year as provision for bad and doubtful debts for possible bad debts arise in the future course of business in terms of Part IV of Electricity (Supply) Annual Account Rule, 1985. As claimed by the assessee, the assessee has not examined individual consumer account and identified possible bad debt accounts to make provision. The assessee has made provision on ad-hoc basis on total sundry debtors without identifying individual bad debt accounts as irrecoverable. Therefore, in the given facts and circumstances of this case, what we understand is that provision made by the assessee at fixed percentage on sundry debtors is only a mere provision for bad doubtful debts, but not written off of actual bad debts which is irrecoverable. Therefore, from the facts of present case, it is very clear that the assessee has made ad-hoc provision for bad and doubtful debts on fixed percentage in terms of certain regulatory requirements without identifying individual consumers accounts as bad debts which is irrecoverable. Therefore, provision made by the assessee for bad and doubtful debts is only a provision, but not actual written off of bad debts which is irrecoverable. Hence, we are of the considered view that the assessee is not entitled for deduction towards provision made for bad and doubtful debts u/s. 36(1)(vii) of the Income Tax Act, 1961. CIT(A), after considering relevant facts has rightly upheld additions made by the Assessing Officer towards disallowance of provision for bad and doubtful debts. Hence, we are inclined to uphold the findings of learned CIT(A) and reject grounds taken by the assessee - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of provision for bad debt written off amounting to ?10,19,08,345/-.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Bad Debt Written Off Amounting to ?10,19,08,345/-
The primary issue in this appeal is whether the assessee is entitled to a deduction for the provision for bad and doubtful debts amounting to ?10,19,08,345/- under section 36(1)(vii) of the Income Tax Act, 1961. The assessee, a Public Sector Undertaking of the State Government of Tamil Nadu, engaged in the business of electricity generation, transmission, and distribution, made this provision at 2.5% of sundry debtors as per the Electricity (Supply) Annual Account Rule, 1985. The assessee argued that this provision is mandatory and should be allowed as a deduction since it is reduced from the sundry debtors account in the balance sheet.

The Assessing Officer (AO) disallowed the provision, stating it was a mere provision and not an actual write-off of bad debts. The AO emphasized that according to section 36(1)(viia) read with section 36(2) of the Income Tax Act, provisions cannot be claimed as deductible unless specifically allowed.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that although the assessee is required to create such provisions by regulatory authority rules, these provisions do not meet the conditions prescribed under section 36(1)(vii) read with section 36(2) of the Act. The CIT(A) referenced the Supreme Court's decision in Southern Technologies Ltd. vs. JCIT, which clarified that mere provisions for bad debts are not deductible unless they are actual write-offs.

The assessee argued that the provision should be allowed as a deduction, relying on the Supreme Court's decision in Vijaya Bank vs. CIT. In this case, the Supreme Court held that if a bad debt is written off and reduced from the asset side in the balance sheet, it amounts to an actual write-off, satisfying the conditions of section 36(1)(vii) read with section 36(2). However, the CIT(A) rejected this argument, highlighting that the assessee's provision was not based on identifying individual bad debts but was an ad-hoc provision, thus not meeting the criteria for a deduction.

The Income Tax Appellate Tribunal (ITAT) examined the legal provisions and the Supreme Court's decisions in Southern Technologies Ltd. and Vijaya Bank. The ITAT noted that the amendment to section 36(1)(vii) effective from 01.04.1999 clarified that any bad debt written off as irrecoverable does not include mere provisions for bad and doubtful debts. The ITAT emphasized that the assessee must prove that the debt is bad and has been written off in the books of account as irrecoverable to claim the deduction.

The ITAT concluded that the assessee's provision at a fixed percentage of sundry debtors was a mere provision and not an actual write-off of bad debts. Therefore, the assessee was not entitled to the deduction under section 36(1)(vii). The ITAT upheld the CIT(A)'s decision, dismissing the appeal filed by the assessee.

Conclusion:
The appeal filed by the assessee was dismissed. The ITAT upheld the disallowance of the provision for bad and doubtful debts amounting to ?10,19,08,345/-, concluding that the provision was not an actual write-off of bad debts and thus did not meet the conditions for a deduction under section 36(1)(vii) of the Income Tax Act, 1961.