2001 (2) TMI 303 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of provision for doubtful debts.
2. Deduction of foreclosure premium on loans.
3. Depreciation on vehicles.
4. Deduction u/s 35D.
5. Change in method of accounting for hire purchase transactions.
6. Levy of interest u/s 234B.
7. Deductibility of provision made for doubtful advances as per RBI guidelines.

Summary:

1. Deduction of Provision for Doubtful Debts (Assessment Year 1995-96):
The assessee claimed a deduction for a provision of Rs. 2,78,000 for doubtful debts. The AO disallowed it for not being written off in the books as required by section 36(1)(vii) of the Act. The Tribunal upheld the assessee's claim, stating that commercial meaning of bad debt must be adopted, allowing the provision for bad & doubtful debts to be deducted from the total income.

2. Deduction of Foreclosure Premium on Loans (Assessment Year 1995-96):
The assessee paid Rs. 56,15,126 as foreclosure premium for early closure of high-interest loans. The AO rejected the claim, but the Tribunal allowed it, recognizing it as a business decision laid out wholly for business purposes, thus justifying the deduction in the year it was incurred.

3. Depreciation on Vehicles (Assessment Year 1996-97):
The claim for depreciation on vehicles at 40% was directed by CIT(A) to be allowed by the AO, and the Department did not contest this in appeal.

4. Deduction u/s 35D (Assessment Year 1996-97):
The AO and CIT(A) rejected the claim for deduction u/s 35D, stating the expenses were not incurred in connection with setting up an industrial unit. The Tribunal remitted the issue to the AO for verification and allowance of one-tenth of the expenses incurred on heads covered by section 35D.

5. Change in Method of Accounting for Hire Purchase Transactions (Assessment Year 1996-97):
The assessee changed its method of income recognition from 'Sum of Digits' to 'Capital Recovery' method, claiming a reduction of Rs. 1,16,47,467. The AO and CIT(A) rejected the claim. The Tribunal upheld the rejection, stating the change in method for tax purposes only was not tenable.

6. Levy of Interest u/s 234B (Assessment Year 1996-97):
The levy of interest u/s 234B was stated as consequential, and the Tribunal directed the AO to recalculate the interest after giving effect to the order.

7. Deductibility of Provision Made for Doubtful Advances as per RBI Guidelines:
The common issue in both appeals was the deductibility of provisions made for doubtful advances based on RBI guidelines. The Tribunal held that the assessee is entitled to deduction for the provision made for doubtful loans and advances as prescribed by RBI. The AO was directed to examine each loan item for compliance with RBI norms and allow the deduction if found adequate.

Conclusion:
The appeals were allowed in part, with specific directions for the AO to verify and allow claims based on compliance with RBI guidelines and other relevant provisions of the Income-tax Act.