2017 (6) TMI 494 - AT - Income Tax

Addition of provision for certain doubtful debts u/s 36(i)(vii) - Held that - Upon perusal of statutory provisions, we find that any expenditure laid out or expended wholly and exclusively for the purposes of business shall be allowed provided that same is not personal expenditure or capital expenditure and not of the nature covered by Section 30 to 36. However, prime condition to claim the same is that the expenditure, at the first instance, must have crystallized during the impugned AY before which the same could be claimed by the assessee and this factor, in our opinion, is missing in the instant case. Upon perusal of documents placed on record, we find that the assessee could not produce any evidence to show that the suppliers refused to pay the outstanding amount or denied their liability in any manner which can lead to a conclusion that the impugned provision crystallized during the year. The expenditure to be admissible, at the threshold, must be capable of being classified as an expenditure at the first instance and deduction of mere provisions / estimation could not be allowed to the assessee unless provided by the statute. On the same analogy, the same is not admissible either under Section 28(i). Therefore, to conclude, we hold that the impugned expenditure, being mere provisions, were not allowable to the assessee which results into dismissal of all grounds of assessee s appeal.

Summary

Issues:
Disallowance of provision for doubtful debts under Section 36 of the IT Act.

Detailed Analysis:

1. Issue of Disallowance of Provision for Doubtful Debts under Section 36:
- The appellant contested the disallowance of ?530.47 Lacs under Section 36 of the IT Act for the Assessment Year 2009-10.
- The Commissioner of Income Tax (Appeals) confirmed the disallowance, stating that the provision for doubtful debts is not allowable under Section 36(i)(vii) as it does not constitute bad debts written off.
- The appellant argued that since no amount was recovered from the debt for which the provision was made, it should be allowed as a business loss or bad debt under Section 36/37 of the IT Act.
- The contention was that the losses written off during the year were on account of damages during the cloth processing by a process house and were finally not recoverable.

2. Facts and Assessment:
- The appellant, a resident corporate assessee engaged in the textile business, was assessed for the impugned Assessment Year at a loss.
- The sole addition made by the Assessing Officer was disallowance of ?530.47 Lacs against provision for doubtful debts under Section 36(i)(vii).

3. Arguments and Observations:
- The Commissioner of Income Tax (Appeals) confirmed the disallowance, stating that the provision was not written off and was still outstanding in the books of the company.
- The appellant's claim under Section 36(i)(vii) was deemed not tenable as per the Explanation to the section, which excludes provisions for bad and doubtful debts.

4. Contentions and Legal Position:
- The appellant contended that the provision for doubtful advances should be allowed as a business loss under Section 37/28(i) of the IT Act.
- Various judicial pronouncements were relied upon to support the appellant's contentions regarding the treatment of the provision.
- The Departmental Representative argued against the allowance of deductions for provisions for advances.

5. Decision and Analysis:
- The Tribunal analyzed the nature of the expenditure claimed by the appellant under the head 'Provision for doubtful advances.'
- It was observed that the expenditure was treated as a provision in the books of accounts and was not written off during the impugned Assessment Year.
- The Tribunal held that the expenditure did not crystallize during the year and was not allowable under Section 37 as it was merely a provision and not an actual expenditure.
- The reliance on judicial pronouncements was distinguished as they were related to different sections of the IT Act.

6. Conclusion:
- The Tribunal dismissed the appellant's appeal, stating that the provision for doubtful debts was not allowable as an expenditure under Section 37.
- The judgment emphasized the distinction between provisions and actual expenditures, highlighting the requirement for crystallization of expenditure during the relevant Assessment Year for it to be allowable.