2005 (10) TMI 38 - HC - Income Tax

Whether the Tribunal is correct in upholding the order of the Commissioner of Income-tax (Appeals) in disallowing provisions for non-performing assets which was debited to the profit and loss account? - Commissioner (Appeals), on the facts of the case, found that merely because the Reserve Bank of India has directed the assessee to provide for non-performing assets, that direction cannot override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia) which stipulate for deduction not exceeding 5 per cent, of the total income only in respect of the provision for bad and doubtful debts which are predominately revenue in nature or trade related and not for provision for non-performing assets which are of predominately capital nature, and held that the Assessing Officer was right in disallowing the provision of ₹ 30 lakhs debited in the profit and loss account of the assessee towards non-performing assets - Tribunal was right in upholding the order of the Commissioner of Income-tax (Appeals)

Summary

Issues:
1. Interpretation of section 36(1)(vii) of the Income-tax Act regarding the disallowance of provisions for non-performing assets debited to the profit and loss account.

Analysis:
The judgment pertains to an appeal against the order of the Appellate Tribunal regarding the disallowance of provisions for non-performing assets debited to the profit and loss account. The primary issue revolves around the interpretation of section 36(1)(vii) of the Income-tax Act, specifically concerning the deduction of bad debts and the treatment of non-performing assets. The assessee, engaged in long-term finance for infrastructure development, admitted a total income for the assessment year 1998-99. The Assessing Officer questioned the provision for non-performing assets debited to the profit and loss account, citing the Explanation to section 36(1)(vii) which restricts the allowance of such provisions. The Commissioner of Income-tax (Appeals) and the Appellate Tribunal upheld the disallowance, leading to the current appeal.

The crux of the matter lies in the application of section 36(1)(vii) which deals with deductions for bad debts. The Explanation to this section explicitly states that any provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction. Despite the assessee's argument that the purpose for which the finance was used should not affect the deduction of debts written off, the counsel for the assessee conceded that the provision for bad and doubtful debts is not entitled to deduction as per the Explanation. Furthermore, the Commissioner (Appeals) emphasized that the Reserve Bank of India's directive to provide for non-performing assets does not override the provisions of the Income-tax Act, particularly section 36(1)(viia) which limits deductions for bad and doubtful debts predominantly of revenue or trade nature, not for non-performing assets of capital nature.

Ultimately, the High Court affirmed the decision of the Appellate Tribunal in upholding the disallowance of the provision for non-performing assets debited to the profit and loss account. The judgment favored the Revenue, stating that the provision for non-performing assets, being predominantly of capital nature, is not eligible for deduction under section 36(1)(vii). Consequently, the appeals were dismissed with no costs awarded.