2003 (11) TMI 286 - AT - Income Tax

Bad Debt - Whether or not, for the purpose of application of proviso to section 36(1)(vii), 'credit balance in the provision for bad and doubtful debts made under clause (viia)' will include provision for the relevant previous year held to be admissible u/s 36(1)(viia)(b) - HELD THAT - The inconsistency has arisen because the Assessing Officer computed the admissible deduction u/s 36(1)(viia)(b) even before computing deduction u/s 36(1)(vi) because he wanted to restrict the deduction u/s 36(1)(vi) on the basis of deduction permissible for the current year u/s 36(1)(viia)(b). This methodology adopted by the Assessing Officer is inherently contrary to the scheme of the Act, and is, in our humble understanding, bound to give results which fail the equation. We are, therefore, of the opinion that the CIT(A) indeed erred in upholding the action of the Assessing Officer in taking into account the admissible deduction u/s 36(1)(viia)(b) for the relevant previous year, for computing shortfall for the purpose of section 36(1)(vi) of the Act. As for the learned CIT(A)'s reliance on Hon'ble Punjab Haryana High Court's judgment in the case of Nandlal Sohanlal 1977 (5) TMI 15 - PUNJAB AND HARYANA HIGH COURT , suffice to mention that, in our considered view, the view canvassed by the revenue is not a correct or acceptable view of the matter. We, therefore, reject the same as an untenable view and decline to go into the controversy as to what will be the legal position in a situation in which more than one views on an issue are possible views. There are two aspects to this issue. In the first place, the ad hoc deduction u/s 36(l)(viia)(b) being the last item on the computation of taxable business profits it cannot be taken into account at the time of allowing deduction u/s 36(1)(vii), and, to that extent, the actual deduction attributable to bad debts i.e. 36(1)(vii) plus 36(1)(viia)(b) will indeed be more than the actual bad debts in that year. However, since the provision so allowed u/s 36(1)(viia)(b) is to be taken into account while allowing deduction for actual bad debts in the subsequent year, the effect of excess deduction, if any, will be squared up in that subsequent year. Secondly, a view seems perfectly acceptable that the provision for bad debts allowable u/s 36(1)(viia)(b) being inherently attributable to the debts outstanding at the end of the year, provision allowable as such is against future bad debts out of debts outstanding at the year end, and, therefore, it need not be mixed up with actual bad debts incurred during the year. Viewed from these points of view, there is no such incongruity as perceived by the learned Departmental Representative. Accordingly, we are not inclined to uphold the objection taken by the revenue. Thus, we deem it fit and proper to direct the Assessing Officer to allow deduction u/s 36(1)(vi), without taking into account the admissible deduction u/s 36(1)(viia)(b) for the relevant previous year, which, in our considered view, can only be taken into account for computing deduction u/s 36(1)(vi) for subsequent year(s). The Assessing Officer shall also make consequential amendments in deduction admissible u/s 36(1)(viia)(b) in terms of the observations above. In the result, the appeal is allowed.

Summary

Issues Involved:
1. Interpretation of the proviso to section 36(1)(vii) regarding the inclusion of 'credit balance in the provision for bad and doubtful debts made under clause (viia)'.
2. Computation of deduction under section 36(1)(vi) and section 36(1)(viia)(b).

Summary:

Issue 1: Interpretation of Proviso to Section 36(1)(vii)
The core issue was whether the 'credit balance in the provision for bad and doubtful debts made under clause (viia)' includes the provision for the relevant previous year held to be admissible u/s 36(1)(viia)(b). The Tribunal held that the deduction u/s 36(1)(vi) is supplemental and comes into play only when the provision for bad debts allowed u/s 36(1)(viia)(b) falls short of the actual bad debts written off as irrecoverable. The Tribunal rejected the Assessing Officer's view that the deduction for bad debts should be restricted by including the provision for the current year u/s 36(1)(viia)(b).

Issue 2: Computation of Deduction under Section 36(1)(vi) and Section 36(1)(viia)(b)
The Tribunal analyzed the legal provisions and concluded that the deduction u/s 36(1)(vi) should be computed without considering the admissible deduction u/s 36(1)(viia)(b) for the relevant previous year. The Tribunal noted that the scheme of the Act does not visualize taking into account the provision for the current year u/s 36(1)(viia)(b) while computing the deduction u/s 36(1)(vi). The Tribunal directed the Assessing Officer to allow the deduction u/s 36(1)(vi) without considering the provision for the current year u/s 36(1)(viia)(b) and to make consequential amendments in the deduction admissible u/s 36(1)(viia)(b).

Additional Observations:
The Tribunal also addressed the CIT(A)'s reliance on the judgment of the Hon'ble Punjab & Haryana High Court in the case of Nandlal Sohanlal v. CIT, stating that the view canvassed by the revenue was not correct or acceptable. The Tribunal further discussed the judgment of the Hon'ble Rajasthan High Court in CIT v. Bank of Rajasthan Ltd., clarifying that the observations made therein did not affect their decision.

Conclusion:
The Tribunal allowed the appeal, directing the Assessing Officer to recompute the deductions as per their observations and to make necessary amendments in the deductions admissible u/s 36(1)(viia)(b).