2013 (1) TMI 12 - AT - Income Tax

Penalty u/s. 271(1)(c) - disallowance of provision for bad and doubtful debts - Held that - The only rider would be where the condition(s) of section 36(2) are not satisfied. The assessee, while divulging the primary facts during the course of assessment proceedings, submitted the details of its claim that while the amount of Rs. 2,69,706/- lacs pertains to earlier year (s), that for Rs. 6.25 lacs relates to the current year. The assessee s only income (Rs. 2.40 lacs, P.Y. Rs. 3.60 lacs) is by way of rent received, besides a negligible amount as interest on FDR/s. A few questions spring immediately in the mind, and which would require being answered as to how could be the amount of suspense and cheque in transit qualify for inclusion as income, as required u/s, 36(2)(i)? How could Rs. 6.25 lacs pertain to the current year when its gross income for the year is at Rs. 2.40 lacs only? The entire amount of provision forms part of the assessee s loans and advances portfolio and, thus, it is not clear as to how the same forms part of its income for any year, a prerequisite in terms of s. 36(2). The premise of a claim for a bad debt, it may be appreciated, is that the same having already offered as income (for any year), its subsequent non-recovery would warrant a reduction in income (for the year of write off). Further, it could also be that the same (loan and advances) represent a part of the assessee s money lending business, to which the law draws an exception as the same represents a part of the stock-in-trade of such business (s. 36(1)(vii) r/w s. 36(2)(i)). However, there is nothing on record which indicates so, or even if the assessee is in money lending business. That is, there is an apparent non-satisfaction of the essential condition of sec. 36(2), and which clearly impacts not only the assessee s claim u/s. 36(1)(vii), which in any case stands disallowed, but also, concomitantly, the merits of its claim and, thus, that of its explanation in the penalty proceedings. How could then, under such circumstances, one may ask, the assessee s claim be, or considered to be, bona fide, or an explanation in its respect be so ? The matter is restored back to the file of the AO to adjudicate the same afresh per a speaking order in accordance with law, allowing the assessee a proper opportunity to present its case as to how, despite an uncontested disallowance in its respect, the deduction claimed u/s. 36(1)(vii) does not suffer from lack of any bona fides or does not fall within either Explanation 1(A) or 1(B) of section 271(1)(c). Whether ITAT in deciding this appeal has travelled outside its scope - Held that - As decided in in the case of Kapurchand Shrimal v. CIT 1981 (8) TMI 2 - SUPREME COURT it is well-known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute - Revenue s appeal is allowed for statistical purposes.

Issues Involved:
1. Exigibility of penalty u/s. 271(1)(c) of the Income-tax Act, 1961.
2. Validity of the assessee's claim for deduction of provision for bad and doubtful debts u/s. 36(1)(vii) of the Act.
3. Bona fides of the assessee's explanation for the claim.
4. Compliance with the conditions of section 36(2) of the Act.

Issue-wise Detailed Analysis:

1. Exigibility of Penalty u/s. 271(1)(c):
The primary issue in this case is the applicability of penalty under section 271(1)(c) of the Income-tax Act, 1961, concerning the disallowance of the assessee's claim for Rs. 8,94,706/- related to the provision for bad and doubtful debts. The Assessing Officer (AO) disallowed the claim and initiated penalty proceedings, stating that the provision against a bad debt does not qualify as a write-off under section 36(1)(vii) of the Act. The CIT(A) later deleted the penalty, considering it a technical error in nomenclature, relying on the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158.

2. Validity of the Assessee's Claim:
The assessee argued that the amount was irrecoverable and the claim was bona fide, with all relevant details on record. The AO, however, maintained that a provision for bad debts does not equate to a write-off, thus invalidating the claim under section 36(1)(vii). The Tribunal noted that the law requires a write-off in the accounts for a valid claim and that a mere provision does not satisfy this requirement, as clarified by the Explanation to section 36(1)(vii) introduced by the Finance Act, 2001.

3. Bona fides of the Assessee's Explanation:
The Tribunal examined whether the assessee's explanation was bona fide. The assessee claimed that the provision was a technical mistake and intended as a write-off. The Tribunal emphasized that the difference between a write-off and a provision is factual and not merely technical. However, if the assessee could demonstrate that the provision effectively acted as a write-off (e.g., by not carrying over the provision and corresponding debtor accounts to the following year), the claim might be considered valid. The Tribunal found the assessee's balance-sheet submission uncertified and unsubstantiated, necessitating a remand to the AO for further verification.

4. Compliance with Section 36(2):
The Tribunal also highlighted the importance of satisfying section 36(2), which requires that the debt must have been included as income in the previous years. The assessee's details raised questions about the inclusion of amounts like 'suspense' and 'cheque in transit' as income and the relevance of the amounts to the current year's income. The Tribunal noted that these aspects were not examined at any stage, impacting the merits of the assessee's explanation. The Tribunal directed the AO to adjudicate afresh, considering all aspects, including compliance with section 36(2).

Conclusion:
The Tribunal restored the matter to the AO for a fresh adjudication, allowing the assessee an opportunity to substantiate its claim and explanation. The Tribunal emphasized the need for a detailed examination of whether the provision effectively acted as a write-off and whether the conditions of section 36(2) were satisfied. The appeal was allowed for statistical purposes, with directions for a comprehensive review by the AO.

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