1995 (2) TMI 157 - AT - Income Tax

Summary

Issues Involved:

1. Whether the "provision for doubtful overdue instalments under Hire Purchase Finance Agreements" can be treated as bad debts under section 36(1)(vii) of the Income-tax Act.
2. Whether the adjustment made by the Assessing Officer under section 143(1)(a) was justified.
3. Whether the application for rectification under section 154 was rightly rejected by the Assessing Officer and upheld by the CIT(A).

Issue-Wise Detailed Analysis:

1. Treatment of "Provision for Doubtful Overdue Instalments" as Bad Debts:

The assessee-company had debited Rs. 1,69,37,818 as "provision for doubtful overdue instalments under Hire Purchase Finance Agreements" in its profit and loss account and claimed it as bad debts under section 36(1)(vii) of the Income-tax Act. The Assessing Officer disallowed this claim, stating that the amount represented a mere provision for doubtful debts and could not be treated as bad debts. The Tribunal upheld this view, emphasizing that bad debts must be irrecoverable and perceived as such by the assessee. The Tribunal cited the Bombay High Court decision in Jethabhai Hirji & Jethabhai Ramdas, which requires debts to be objectively irrecoverable and written off based on honest judgment. The Tribunal concluded that the provision for doubtful overdue instalments did not meet these criteria, as it was a collective and omnibus deduction rather than specific irrecoverable debts.

2. Justification of Adjustment under Section 143(1)(a):

The Assessing Officer made an adjustment under section 143(1)(a), disallowing the provision for doubtful overdue instalments. The Tribunal agreed with this adjustment, stating that the claim was prima facie inadmissible based on the information in the return, accounts, and documents. The Tribunal noted that the assessee had made a separate claim for bad debts amounting to Rs. 47,42,762, which was distinct from the provision for doubtful overdue instalments. The Tribunal held that the provision for doubtful debts could not be equated with bad debts, as the former were not perceived as irrecoverable by the assessee. The Tribunal referenced multiple decisions, including Kantilal Chimanlal Shah v. CIT and Sidhramappa Andannappa Manvi v. CIT, to support the view that doubtful debts cannot be treated as bad debts.

3. Rejection of Application for Rectification under Section 154:

The assessee filed an application under section 154 for deletion of the adjustment, arguing that the allowability of the provision for doubtful instalments was a debatable issue. The Assessing Officer rejected this application, and the CIT(A) upheld the rejection. The Tribunal concurred, stating that the provision for doubtful overdue instalments was clearly distinct from a claim for bad debts and was prima facie inadmissible. The Tribunal referenced the decisions in Khatau Junkar Ltd. v. K.S. Pathania and S.R.F. Charitable Trust v. Union of India, which emphasize that disallowance can be made based on information available in the return and accompanying documents. The Tribunal concluded that the Assessing Officer was justified in issuing an intimation of adjustment and rejecting the application under section 154.

Conclusion:

The Tribunal dismissed the appeal, affirming that the provision for doubtful overdue instalments under Hire Purchase Finance Agreements could not be treated as bad debts. The adjustment made by the Assessing Officer under section 143(1)(a) was justified, and the application for rectification under section 154 was rightly rejected. The Tribunal emphasized that bad debts must be irrecoverable and perceived as such by the assessee, and the provision for doubtful debts did not meet these criteria. The Tribunal relied on various judicial precedents to support its conclusions.