2010 (11) TMI 1146 - AT - Income Tax

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

- Whether the provision made by the assessee for non-performing assets (NPAs) amounting to Rs.10,86,54,377/- qualifies as a deductible expenditure under section 36(1)(vii) of the Income Tax Act.

- Whether the provision for NPAs, as claimed by the assessee, was in fact a write-off of bad debts in compliance with the conditions prescribed under section 36(1)(vii).

- The applicability and interpretation of the Supreme Court decision in Vijaya Bank Ltd. v. CIT to the facts of the present case.

- Whether the Assessing Officer's disallowance of the provision was justified or whether the deletion of the disallowance by the Commissioner of Income Tax (Appeals) (CIT(A)) was proper.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deductibility of Provision for Non-Performing Assets under Section 36(1)(vii)

Relevant Legal Framework and Precedents: Section 36(1)(vii) of the Income Tax Act permits deduction of any bad debts or part thereof actually written off as irrecoverable in the accounts of the assessee. The Supreme Court in Vijaya Bank Ltd. v. CIT (323 ITR 166) clarified that mere provision for bad debts is not deductible; the debt must be actually written off in the books of account by debiting the profit and loss account and crediting the debtor's account.

Court's Interpretation and Reasoning: The Tribunal examined whether the provision made by the assessee was a mere provision or constituted an actual write-off. The assessee contended that the provision was factually written off by deducting the amount from individual borrower accounts. The CIT(A) accepted this contention relying on the Supreme Court's ruling in Vijaya Bank Ltd.

Key Evidence and Findings: The assessee submitted the annual report and a certificate from statutory auditors confirming that the provision was deducted from individual ledger accounts. The Tribunal scrutinized the balance sheet and notes to accounts, particularly Schedule-M, which stated that the provision against NPAs was made in accordance with Reserve Bank of India prudential norms and was reduced from current assets.

Application of Law to Facts: The Tribunal observed that the provision was debited to the profit and loss account and credited to sundry debtors account, effectively constituting a write-off as per the Supreme Court's criteria. The reduction of the provision from current assets further corroborated this treatment.

Treatment of Competing Arguments: The Revenue argued that the amount was only a provision and not a write-off, hence not deductible. The assessee countered by emphasizing compliance with the Supreme Court's conditions and furnishing documentary evidence. The Tribunal found the assessee's submissions and evidence persuasive and in line with the legal requirements.

Conclusions: The Tribunal upheld the CIT(A)'s order deleting the disallowance and held that the provision was in substance a write-off of bad debts qualifying for deduction under section 36(1)(vii).

Issue 2: Compliance with Procedural Requirements for Claiming Bad Debt Deduction

Relevant Legal Framework and Precedents: The Tribunal relied on its earlier ruling in the assessee's own case for the assessment year 1997-98, where it was held that deduction under section 36(1)(vii) is permissible only upon fulfillment of prescribed conditions, including actual write-off and compliance with accounting norms.

Court's Interpretation and Reasoning: The matter was remitted by the Tribunal to the CIT(A) to verify whether the amount was actually written off and whether the assessee complied with the requisite conditions. On reconsideration, the CIT(A) found that the assessee had complied with the conditions, supported by the auditor's certificate and accounting treatment.

Key Evidence and Findings: The auditor's certificate and the note in the annual report confirming the deduction of provision from current assets were critical in establishing compliance.

Application of Law to Facts: The Tribunal concluded that the procedural and substantive conditions for claiming deduction as bad debts were satisfied.

Treatment of Competing Arguments: Revenue's contention that the provision was not written off was rejected based on documentary evidence and accounting treatment.

Conclusions: The Tribunal confirmed that the assessee complied with the conditions for claiming the provision as bad debt deduction.

3. SIGNIFICANT HOLDINGS

- "Once an assessee debits provision for debts to the profit and loss account and credit an account like sundry debtors account, it would constitute a write off of actual debt."

- The Tribunal held that the provision for non-performing assets, though termed as 'provision', was effectively a write-off in the accounts, satisfying the conditions of section 36(1)(vii) for deduction.

- The assessee's compliance with prudential norms prescribed by the Reserve Bank of India and the accounting treatment of reducing the provision from current assets was significant in establishing the nature of the provision as a write-off.

- The Tribunal dismissed the Revenue's appeal and upheld the deletion of the disallowance by the CIT(A), thereby allowing the deduction of Rs.10,86,54,377/- claimed as provision for NPAs.