2009 (4) TMI 361 - HC - Income Tax

Bad Debts- Writing off debts- Whether the appellate authorities were correct in holding that for the purpose of writing off of bad debts it was not essential to square off each individual account of every debtor and it would be sufficient if the debit entries are made into the profit and loss account and conesponding credit is made in a bad debt reserve account contrary to the provision of the Act and especially the Explanation to clause (vii) of section 36(1) of the Act brought into effect from April 1, 1989, by the Finance Act, 2001? Held that- there was a clear finding of fact by the Assessing officer that the provision for non-performing assets created by the assessee and deduction of provision for non-performing assets out of advances did not amount to writing off of debts. The Tribunal was not justified in holding that it was not essential to square off each individual account of every debtor and it would be sufficient if the debit entries were made in the profit and loss account and corresponding credit entries were made in a bed debt reserve account.

Summary

Issues:
Interpretation of provisions for writing off bad debts under section 36(1)(vii) of the Income-tax Act, 1961.

Analysis:
The High Court addressed the issue of whether it is necessary to square off each individual account of every debtor for writing off bad debts or if making debit entries into the profit and loss account with corresponding credits in a bad debt reserve account is sufficient. The court examined the findings of the Assessing Officer and the first appellate authority, which were set aside by the second Appellate Tribunal. The Tribunal referred to section 36(1)(vii) and the Explanation along with section 36(2) of the Income-tax Act, as well as the Gujarat High Court judgment in H. Vithaldas Dhanjibhai Bardanwala v. CIT. The court emphasized that the provision for bad and doubtful debts should be viewed as an actual write-off, as clarified by the Explanation inserted through the Finance Act, 2001. The court cited a previous case where a similar question was answered in favor of the Revenue, indicating that the provision should be treated as an actual write-off.

The court distinguished between creating a provision for non-performing assets and actually writing off bad debts. It noted that the mere creation of a provision does not amount to writing off bad debts, and deduction of a provision for non-performing assets from advances does not constitute a write-off. Despite the findings of the Assessing Officer and the first appellate authority being affirmed, the Appellate Tribunal set them aside, stating that there was an actual write-off of bad debts. The court highlighted that no material document was presented to demonstrate the actual writing off of bad debts by the assessee.

The court rejected the argument presented by the senior counsel for the respondent, emphasizing that the Explanation to section 36(1)(vii) of the Act, which clarified the treatment of bad debts, had retrospective effect from 1989. Referring to a previous case where a similar issue was decided in favor of the Revenue, the court concluded that the question had already been answered in a consistent manner. Therefore, the court allowed the appeals and answered the question in favor of the Revenue.