2013 (12) TMI 413 - AT - Income Tax

Order passed u/s 263 Whether provision for bad and doubtful debts is allowed to the assessee who is a cooperative bank engaged in banking activities - Held that - The assesse did not recognise the interest attributable to the Bad and doubtful debts by debiting P&L and crediting the reserve for overdue interest The assessee transferred the interest to Reserve for overdue interest account - Following CIT v ELGI Finance Ltd 2007 (6) TMI 180 - MADRAS High Court - The assessee was justified in not recognizing interest income from non-performing assets in consonance with the notification issued by the RBI and AS-9 issued by ICAI - Interest income on bad and doubtful debts does not accrue at all. Whether the interest on bad and doubtful debts, the overdue interest of Rs. 2,40,61,848.00 accounted by the Assessee but transferred to Overdue interest can really said to have accrued and realizable Held that - Following Godhra Electricity Co Ltd v CIT 1997 (4) TMI 4 - SUPREME Court - Income charged to tax is the income that is received or is deemed to be received in India in the previous year relevant to the year for which assessment is made or on the income that accrues or arises or is deemed to accrue or arise in India during such year - The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis - What is to be taxed is only the real income and not on the basis of Book entries The issue was set aside for determining whether the amount of Rs. 2,40,61,848.00 represented real income of the assessee.

Summary

Issues:
1. Allowance of provision on doubtful debts
2. Allowance of provision for bad and doubtful debts
3. Allowance of reversal of amount on expenditure side by making a 'provision'

Issue 1: Allowance of provision on doubtful debts

The appeal was against the order of CIT-III, Hyderabad for the assessment year 2007-08. The CIT found the order passed by the Assessing Officer erroneous as it allowed provisions created on doubtful debts, which were not allowable under the IT Act. The CIT directed the Assessing Officer to revise the assessment order by enhancing the total assessed income with the amount of Rs. 41.41 lakhs. The AR of the assessee argued that the provision was made following RBI guidelines but the CIT held that provisions made were not allowable under the IT Act.

Issue 2: Allowance of provision for bad and doubtful debts

The CIT observed that the cooperative bank did not fall under the category eligible for claiming provisions under section 36(1)(viia) towards bad and doubtful debts. The CIT directed the Assessing Officer to revise the assessment order to enhance the amount of Rs. 18,43,318/- as the deduction claimed was not allowable. The AR of the assessee argued that the provision did not impact the profit & loss account but was for accounting purposes only.

Issue 3: Allowance of reversal of amount on expenditure side by making a 'provision'

Regarding the third point raised on the allowance of Rs. 2,40,61,848/- being a reversal of amount on the expenditure side by making a 'provision', the CIT found that cooperative banks were allowed to make provisions only from 2007 onwards. Therefore, the provision for bad debt was not allowable for the assessment year. The CIT directed the Assessing Officer to enhance the order by the amounts of Rs. 2,40,61,848/- and Rs. 18,43,318/-, both being provisions created.

The appellate tribunal heard the arguments of both parties and reviewed the records. It was noted that the Assessee did not claim a deduction under section 36(1)(viia) and excluded interest attributable to bad and doubtful debts by transferring it to a reserve for overdue interest. Citing relevant case laws, the tribunal emphasized that income to be taxed should represent real income and not merely book entries. The tribunal set aside the issue to the Assessing Officer for further review to determine if the amount of Rs. 2,40,61,848/- represented real income, providing the Assessee with a reasonable opportunity to support their case. Ultimately, the appeal of the Assessee was allowed for statistical purposes.