2012 (6) TMI 619 - HC - Income Tax

Bad debt disallowance of deduction - assessee had created a provision for bad and doubtful debts under section 36(1)(viia) of the Act Held that - Assessee is entitled to the deduction of any bad debt which is written off in its books of account to the extent it exceeds the credit balance in the provision for bad and doubtful debts accounts - Provision created by the assessee and claimed as deduction under section 36(1)(viia) will also be considered while computing the deduction under section 36(1)(vii) In favor of Revenue

Summary

Issues:
Interpretation of provisions of section 36(1)(vii) and 36(1)(viia) for deduction of bad debts.

Analysis:

1. Background and Facts: The appeal was filed under section 260A of the Income-tax Act, 1961 against the order passed by the Income-tax Appellate Tribunal related to the assessment year 1995-96. The assessee, a corporation engaged in development activities, claimed a deduction of Rs. 19,77,535 for bad and doubtful debts under section 36(1)(viia) of the Act.

2. Contentions of the Assessee: The assessee contended that the provision made for bad debts was admissible as a deduction under the relevant sections of the Act.

3. Legal Provisions: Section 36(1)(vii) allows a deduction for bad debts written off as irrecoverable, subject to conditions specified in section 36(2). The proviso to section 36(1)(vii) limits the deduction to the amount exceeding the credit balance in the provision for bad debts account. Section 36(1)(viia) provides for a deduction in respect of provisions for bad debts made by banks and financial institutions.

4. Tribunal's Decision: The Tribunal found that the assessee had created a provision for bad and doubtful debts under section 36(1)(viia) and reduced this amount from the actual bad debts claimed under section 36(1)(vii). The Tribunal emphasized that the deduction under section 36(1)(vii) is available only for the previous year when taxable income is computed.

5. Judgment and Conclusion: The Tribunal's decision was based on the proviso to section 36(1)(vii) and section 36(2)(v) of the Act, which restricts the deduction of bad debts in cases where provisions have already been made under section 36(1)(viia). The Tribunal's finding was deemed to be in line with the legal provisions, and the appeal was dismissed as the assessee was not entitled to claim the deduction of the provision for bad debts made during the current year.

In summary, the judgment clarified the interplay between sections 36(1)(vii) and 36(1)(viia) regarding the deduction of bad debts, emphasizing the importance of the proviso and relevant legal provisions in determining the admissibility of such deductions.