2005 (7) TMI 64 - HC - Income Tax

Whether Tribunal erred in law in holding that Reserve for bad and doubtful debts fell within the permissible adjustments prescribed by rule 5(a) of the First Schedule to the Act? - claim of Reserve for bad and doubtful debts was disallowed on the ground that such a disallowance was not prohibited by rule 5, and credit of the amount of the debts to the Reserve for doubtful debts did not constitute a write off of the debts for the purposes of section 36 - issue whether the Reserve for bad and doubtful debts can be allowed to be deducted while computing the income, has already been concluded by the Division Bench judgment of our High Court in the case of CIT v. General Insurance Corporation of India (No. 2). Hence, we answer the substantial question of law raised in the present petition in the affirmative, in the sense, in favour of the appellant assessee

Summary

Issues:
- Whether the Income-tax Appellate Tribunal erred in law regarding the deduction of 'Reserve for bad and doubtful debts' as per rule 5(a) of the First Schedule to the Act.

Analysis:
The appellant filed an income return for the year 1991-92, declaring income and debiting Rs. 1,01,00,000 under "Reserve for bad and doubtful debts." The assessment disallowed this claim, leading to appeals. The Commissioner of Income-tax (Appeals) allowed the deduction, which was upheld by the Income-tax Appellate Tribunal. The issue revolved around the permissibility of this deduction under rule 5(a) of the First Schedule to the Act.

The appellant argued that the Controller of Insurance accepted the profit and loss account, including the reserve provision. The respondent contended that unless an amount is an expenditure or allowance, it cannot be deducted. The appellant cited the Supreme Court and High Court judgments emphasizing the special provisions for computing taxable income from insurance business and the acceptance of the reserve provision by the Controller of Insurance.

The Division Bench analyzed the relevant sections and rules, emphasizing the requirement for writing off bad debts as irrecoverable. It noted the transfer to the reserve account sufficed as writing off, as per precedents. The judgment highlighted the compliance with statutory requirements and the lack of factual disputes regarding the irrecoverability of debts. The court directed detailed scrutiny of the provision, which was duly approved by the board, supporting the deduction of 'Reserve for bad and doubtful debts.'

The Division Bench's earlier judgment in a similar case was referenced, affirming the allowance of the deduction. The court answered the substantial legal question in favor of the appellant, concluding that the 'Reserve for bad and doubtful debts' could be deducted while computing income, based on compliance with statutory provisions and precedents.

In summary, the judgment delves into the interpretation of rules and statutory provisions governing the deduction of 'Reserve for bad and doubtful debts' in income computation. It emphasizes compliance with requirements for writing off bad debts and the acceptance of the provision by relevant authorities. Precedents and legal analysis support the allowance of the deduction, ultimately ruling in favor of the appellant based on established legal principles and factual evidence.