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2008 (6) TMI 338 - HC - Income TaxBad debts- Deduction- The assessee for the assessment years 1990-91 to 1993-94 debited the provision for bad and doubtful to its books of account in respect of different items though it did not write it off against each individual debtor and on the basis thereof claimed deduction under section 36(1)(vii) of the Income Tax Act 1961. The Assessing officer disallowed deduction on the ground that the claim was only of a provision made by it but not written of in the books of account. The assessee also claimed deduction under section 80-O of the Act which the Assessing officer disallowed on account of assessee s failure to furnish particulars of expense incurred to earn the gross income. The Commissioner (Appeals) upheld the order of Assessing officer. The Tribunal allowed the assessee s appeal by remanding back the matter. Held that- (i) the Assessing officer was required to consider and examine the claim of the assessee on the basis of the facts stated and material available. Thus the Tribunal is justified. (ii) In the absence of non-furnishing of particulars by the assessee to claim the benefit before the Assessing officer for the purpose of section 80-O the claim could not be accepted. Deduction under section 80-O of the Act was to be allowed as against the net income computed in accordance with the provisions of the Act as contemplated under section 80AB of the Act.
Issues Involved:
1. Deductibility of provision for bad and doubtful debts under Section 36(1)(vii) of the Income-tax Act. 2. Deduction under Section 80-0 of the Income-tax Act on gross income versus net income, considering Section 80AB. Detailed Analysis: 1. Deductibility of Provision for Bad and Doubtful Debts: The primary issue revolves around whether the provision made by the assessee for bad and doubtful debts qualifies as an allowable deduction under Section 36(1)(vii) of the Income-tax Act. The Tribunal initially held that the assessee need not prove the debt had become bad, which was contested by the Revenue. The Revenue argued that the Tribunal erred in remanding the case to the Assessing Officer (AO) for verification, asserting that the provision for bad debts should not be allowed as a deduction based on the Explanation to Section 36(1)(vii) introduced by the Finance Act of 2001, effective retrospectively from April 1, 1989. The Tribunal's decision was challenged on the grounds that it ignored the requirement for the assessee to demonstrate the irrecoverability of the debt. The Revenue cited the Allahabad High Court's decision in Jubilant Organosys v. CIT, which was affirmed by the Supreme Court, and the Madras High Court's decision in CIT v. Micromax Systems Pvt. Ltd., both supporting the view that provisions for bad debts are not deductible. The assessee's counsel argued that the AO and the first appellate authority failed to examine the material evidence and particulars available on record, which led to an erroneous conclusion that the deduction claimed was merely a provision. The Tribunal, after reviewing the material evidence, set aside the order of the first appellate authority and remanded the matter to the AO for reconsideration. The High Court, after careful consideration, agreed with the Tribunal's decision to remand the matter, emphasizing the need for the AO to re-examine the material evidence in light of the Explanation to Section 36(1)(vii). The Court concluded that the first substantial question of law does not arise for consideration as the Tribunal's remand order was justified and in compliance with the principles of natural justice. 2. Deduction Under Section 80-0 on Gross Income Versus Net Income: The second issue concerns whether the deduction under Section 80-0 should be allowed on the gross income received by the assessee or after deducting expenses as per Section 80AB. The Tribunal held that the deduction should be allowed on the gross income, which was contested by the Revenue. The Revenue argued that the Tribunal ignored the provisions of Section 80AB, which requires the deduction to be computed on the net income after accounting for expenses incurred to earn that income. The Revenue relied on the Division Bench decision of the Karnataka High Court in Asst. CIT v. Abcon Engineering and Systems Pvt. Ltd., which held that deductions under Section 80-0 should be based on net income. The Tribunal's reliance on the decision in M. N. Dastur and Co. (P.) Ltd. v. Deputy CIT, which was rendered before the amendment of Section 80AB, was deemed erroneous. The High Court agreed with the Revenue, stating that the Tribunal's decision to allow the deduction on gross income was incorrect. The Court emphasized that deductions under Section 80-0 should be computed on the net income after deducting expenses as required by Section 80AB. Consequently, the second substantial question of law was answered in favor of the Revenue, and the Tribunal's judgment on this issue was set aside. Conclusion: The appeals were partly allowed. The High Court upheld the Tribunal's decision to remand the matter regarding the deduction for bad and doubtful debts to the AO for reconsideration, affirming that the first substantial question of law does not arise. However, the Court set aside the Tribunal's decision on the deduction under Section 80-0, concluding that it should be computed on net income, thereby answering the second substantial question of law in favor of the Revenue.
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