2018 (7) TMI 2355 - AT - Income Tax

Disallowance of provision for bad debts deduction u/s 36(1)(vii) r/w Section 36(2) - lower authorities have denied the claim on the premises that the impugned expenditure was mere provision in nature and secondly the individual accounts of the debtors were not closed by the assessee - whether the reduction of the impugned amounts on aggregate basis without closing individual accounts entitle the assessee to claim the aforesaid deduction or not ? - HELD THAT - As decided in Tainwala Chemicals Plastics India Ltd. 2013 (4) TMI 211 - BOMBAY HIGH COURT as relying on M/S. VIJAYA BANK VERSUS COMMISSIONER OF INCOME TAX ANR. 2010 (4) TMI 46 - SUPREME COURT held assessee has debited the provision of doubtful debt to the profit and loss account and correspondingly reduced the assets by reducing the amount of unsecured loans. On the aforesaid facts, the Tribunal held that this would amount to writing off of the debt. Thus, on examination of facts it concluded that the respondent-assessee has written off the loan and would be entitled to the claim of bad debts. Tribunal by the impugned order also recorded a finding of fact that once the respondent-assessee has lent surplus money and offered the interest to tax as business income, then the activity of the respondent-assessee of lending money is a business activity. Therefore, the debt qualifies for deduction under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of provision for bad debts under Section 36(1)(vii) and Section 36(1)(viia) of the Income Tax Act, 1961.
2. Requirement of actual write-off of bad debts in the accounts of the assessee.
3. Applicability of judicial precedents in determining the allowance of bad debt deductions.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Bad Debts:

The primary issue in this appeal is the disallowance of Rs. 26.88 Lacs claimed as a provision for bad debts by the assessee, a transport contractor, for the Assessment Year 2012-13. The assessing officer (AO) disallowed the claim on the grounds that the provision was not allowable under Section 36(1)(viia) of the Income Tax Act, 1961, as the assessee was not a scheduled bank. Additionally, the AO noted that the debts were not written off from the individual debtors' accounts, leading to the disallowance of the claim under Section 36(1)(vii).

2. Requirement of Actual Write-off:

The assessee contended that the provision was not merely a provision but an actual write-off, as the amount was reduced from the aggregate of 'Sundry Debtors' in the Balance Sheet. The assessee relied on judicial precedents, particularly the Supreme Court's decision in T.R.F. Ltd. and Vijaya Bank, which clarified that post-01/04/1989, it was not necessary to establish that the debt had become irrecoverable; it sufficed if the bad debt was written off as irrecoverable in the accounts. The Tribunal noted that the assessee had debited the amount in the Profit & Loss account and reduced it from the Sundry Debtors, which aligned with the requirements for an actual write-off as per the judicial precedents.

3. Applicability of Judicial Precedents:

The Tribunal examined the applicability of the Supreme Court's decision in Vijaya Bank, which held that it was not imperative to close each individual debtor's account for claiming a deduction under Section 36(1)(vii). The Tribunal found that the assessee's actions were consistent with the principles laid down in Vijaya Bank, where the Supreme Court ruled that a mere reduction in loans and advances or debtors to the extent of the provision for bad and doubtful debt suffices for an actual write-off. The Tribunal also referred to the Bombay High Court's decision in Tainwala Chemicals & Plastics India Ltd., which supported the assessee's position that the reduction from the debtors' account amounted to a write-off.

The Tribunal concluded that the assessee's claim for bad debt deduction was valid and should be allowed, as the reduction from the aggregate of Sundry Debtors met the criteria for an actual write-off. Consequently, the Tribunal deleted the impugned additions made by the revenue.

Conclusion:

The Tribunal allowed the assessee's appeal, holding that the provision for bad debts was indeed an actual write-off as per the judicial precedents, and thus, the disallowance by the AO was not justified. The revenue's appeal was dismissed, and the order was pronounced in the open court on 25th July 2018.