2007 (8) TMI 414 - HC - Income Tax

1. Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in holding that the appellant is not entitled to deduction of the provision made in respect of non-performing assets which are considered irrecoverable ? - 2. Whether the Appellate Tribunal was justified in not appreciating that the provision made in respect of non-performing assets if not allowable as a bad debt is allowable as a business loss ? - 3. Whether on the facts and in the circumstances of the case the Tribunal was right in treating the amount of Rs. 36, 47, 585 collected as contingent deposit as income of the appellant ? The first and second questions of law are inter-related to each other. Learned counsel appearing for the assessee submits that the issue involved in these questions of law is squarely covered by the decision of this court in the case of T. N. Power Finance and Infrastructure Development Corporation Ltd. v. Joint CIT 2008 - TMI - 9396 - MADRAS High Court against the assessee. - In the said judgment the Division Bench of this court has held that the assessee was not entitled to deduction in view of the Explanation to section 36(1)(viia) of the Income-tax Act which says that the provision for bad and doubtful debt made in the accounts of the assessee is not an allowable deduction. Likewise the third question of law is also covered by the decision of this court in the case of CIT v. Sakthi Finance Ltd. 2008 - TMI - 13357 - MADRAS High Court wherein it was held that as long as the receipt of the amount by the assessee was clearly associated with liability to refund the amount such receipt of the amount would not be characterised as an income and therefore; the same cannot be taxed vide K. C. P. Limited v. CIT 2008 - TMI - 5815 - SUPREME Court - the tax case appeal is dismissed

Summary

Issues:
1. Deduction of provision for non-performing assets
2. Allowability of provision for non-performing assets as a business loss
3. Treatment of contingent deposit as income

Analysis:

Issue 1: Deduction of provision for non-performing assets
The appellant, engaged in hire purchase financing and equipment leasing, contested the disallowance of the deduction for provision for non-performing assets for the assessment year 1998-99. The Commissioner of Income-tax (Appeals) allowed the appeal, but the Income-tax Appellate Tribunal decided against the appellant, citing a previous court decision. The court noted that the provision for bad and doubtful debt is not an allowable deduction under the Income-tax Act, as per the Explanation to section 36(1)(viia). The court relied on the precedent set in T. N. Power Finance and Infrastructure Development Corporation Ltd. v. Joint CIT [2006] 280 ITR 491 to dismiss the appellant's claim for deduction of the provision for non-performing assets.

Issue 2: Allowability of provision for non-performing assets as a business loss
The appellant argued that if the provision made for non-performing assets is not allowable as a bad debt, it should be considered as a business loss. However, the court reiterated that the provision for bad and doubtful debt is not deductible, as established in previous judgments. The court did not entertain the argument that the provision could be claimed as a business loss, as the issue had already been settled against the appellant based on existing legal precedents.

Issue 3: Treatment of contingent deposit as income
Regarding the treatment of a contingent deposit as income, the court referred to the decision in CIT v. Sakthi Finance Ltd. [2007] 291 ITR 83 (Mad), which emphasized that if the receipt of an amount is associated with a liability to refund, it cannot be characterized as income. The court cited cases such as K. C. P. Limited v. CIT [2000] 245 ITR 421 (SC) and CIT v. Southern Explosives Co. [2000] 242 ITR 107 (Mad) to support this position. Consequently, the court dismissed the appellant's argument and upheld the Income-tax Appellate Tribunal's decision to treat the amount of Rs. 36,47,585 collected as a contingent deposit as income of the appellant.

In conclusion, the court dismissed the tax case appeal, finding that all the questions of law raised by the appellant had already been decided against them based on existing legal precedents.