2023 (6) TMI 520 - AT - Income Tax

Deduction towards Provision for bad debts - Addition u/s 36(1)(vii) - Amount of debts not write off - CIT- A deleted the addition - Alternative argument of allowable business loss u/s. 28 - HELD THAT - As per provisions of Sec. 36(1)(vii) of the Act any bad debt write off as irrecoverable in the accounts of the assessee would not include any provision for bad debts made in the accounts of the assessee. In other words w.e.f.01.04.1989 a mere provision for bad debts per se was not entitled for deduction u/s. 36(1)(vii) of the Act and this legal position is reiterated by the Hon ble Supreme Court in the case of Southern Technologies Ltd 2010 (1) TMI 5 - SUPREME COURT . Therefore it is very clear that in order to claim deduction for any bad debts such bad debts should be write off as irrecoverable in the accounts of the assessee by debiting into P L A/c and crediting into sundry debtor s account in the books of accounts of the assessee. In this case the assessee has made a mere provision for bad debts without actual write off bad debts in the books of accounts of the assessee by crediting into respective debtors account. Therefore in our considered view the assessee did not satisfied the conditions prescribed u/s. 36(1)(vii) r.w.s. 36(2) of the Act to claim deduction towards bad debts. Hon ble Supreme Court in the case of Southern Technologies Ltd. 2010 (1) TMI 5 - SUPREME COURT very clearly held that write off of bad debts cannot include any provision for bad debts made in the accounts of the assessee. Thus the assessee is not entitled for deduction towards provision for bad and doubtful debts because the conditions prescribed u/s. 36(1)(vii) r.w.s.36(2) of the Act are not satisfied. The Ld.CIT(A) without appreciating relevant facts deleted the additions made by the AO and thus we reversed the findings of the Ld.CIT(A) and sustained the additions made by the AO towards disallowance of provision for bad debts. Alternative arguments of the assessee in light of provisions of Sec. 28 - W e find that once any expenditure or allowance falls under particular provision of Income Tax Act 1961 then said expenditure/allowance cannot be considered under general provision of sec. 37(1) or 28 of the Act for deduction. We are of the considered view that the assessee cannot claim deduction towards provision for bad debts as business loss u/s. 28 of the Act since the claim of the assessee directly fall under the provisions of Sec. 36(1)(vii) of the Act and thus we reject the alternative claim of the assessee for deduction towards provision for bad debts u/s. 28 of the Act. Decided against assessee.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Deduction under Section 36(1)(vii) for bad and doubtful debts.
3. Applicability of the Supreme Court decision in Vijaya Bank v. CIT.
4. Alternative claim under Section 28 of the Income Tax Act.

Summary:

1. Delay in Filing the Appeal:
The Revenue's appeal was delayed by 4 days due to the Covid-19 lockdown. The Tribunal condoned the delay, referencing the Supreme Court judgment in Miscellaneous Petition No. 21 of 2022, which extended the limitation period for all proceedings due to the pandemic.

2. Deduction under Section 36(1)(vii) for Bad and Doubtful Debts:
The core issue was whether the assessee's provision for bad debts qualifies for deduction under Section 36(1)(vii). The assessee had made a provision for bad debts by debiting the P&L account and reducing the sundry debtor's account in the balance sheet. The AO disallowed the claim, asserting that the provision did not meet the criteria of actual write-off as required under Section 36(1)(vii) read with Section 36(2).

3. Applicability of the Supreme Court Decision in Vijaya Bank v. CIT:
The CIT(A) allowed the assessee's claim by relying on the Supreme Court's decision in Vijaya Bank v. CIT, which permits deduction if the provision for bad debts is reduced from the sundry debtor's balance in the balance sheet. However, the Tribunal noted that the Vijaya Bank decision pertained specifically to banking companies and distinguished it from the present case. The Tribunal emphasized that the legal position post-1989 requires an actual write-off, not just a provision.

4. Alternative Claim under Section 28 of the Income Tax Act:
The assessee argued that if the provision for bad debts is not deductible under Section 36(1)(vii), it should be considered a business loss under Section 28. The Tribunal rejected this alternative claim, citing the Supreme Court's decision in PCIT v. Khyati Realtors Pvt. Ltd., which held that if an expenditure falls under specific provisions (Sections 30 to 36), it cannot be claimed under the general provision of Section 37 or 28.

Conclusion:
The Tribunal reversed the CIT(A)'s decision and upheld the AO's disallowance of the provision for bad debts, stating that the assessee did not meet the conditions prescribed under Section 36(1)(vii) read with Section 36(2). The appeal filed by the Revenue was allowed.