2018 (2) TMI 1468 - HC - Income Tax

Claim for written back of excess provision for bad and doubtful debts - Held that - If an allowance or deduction has been made in the assessment for any year in respect of loss expenditure or trading liability and the same is written back in the books of accounts the said written back expenditure loss or trading liability shall be eligible to levy of tax as income. The burden lies on the Revenue to prove that the provision for bad and doubtful debts written back was allowed as expenditure reducing profit in the profits and loss account for the previous year. It is the case of the assessee that as per RBI guidelines for provisioning of bad and doubtful debts in terms of Section 36(1)(viia) provision was made. The same being excess was written back in the books of accounts. Recovery if any from such written of accounts is being offered to tax on yearly basis under the head Miscellaneous income by the bank. The appellate authority as well as the Tribunal placing reliance on the decision of the ITAT Delhi Bench in the case of Bank of Tokyo Vs. JCIT (2009 (7) TMI 178 - ITAT DELHI-B) and considering the fact that the Revenue has not established that the excess provision written back in the profit and loss account was allowed as deduction in the previous years has given a finding against the Revenue. We do not find any infirmity or irregularity in such finding - Decided in favour of assessee.

Summary

Issues:
- Interpretation of Section 36(1)(viia) of the Income Tax Act, 1961 regarding provision for bad and doubtful debts.
- Application of Section 41(1) of the Act on excess provision written back by the assessee.
- Burden of proof on Revenue to establish allowance or deduction made in previous years for written back provisions.

Analysis:
1. The appeal before the Karnataka High Court involved the interpretation of provisions under the Income Tax Act, 1961, specifically focusing on the treatment of excess provision for bad and doubtful debts by a Rural Regional Bank for the Assessment Year 2007-08.
2. The dispute arose when the assessing authority disallowed the deduction of excess provision of bad and doubtful debts, resulting in an addition of a significant amount to the total income of the assessee. This decision was challenged before the Commissioner of Income Tax (Appeals) and subsequently before the Tribunal by the Revenue.
3. The appellant/Revenue argued that the excess provision written back should be treated as income under Section 41(1) of the Act since the provision for bad debts had been allowed as expenditure in previous years. On the other hand, the respondent-assessee contended that the provision made for bad and doubtful debts was in accordance with Section 36(1)(viia) of the Act, and the write back should not be taxed as income.
4. The Tribunal, as the final fact-finding authority, found that there was no evidence to suggest that the excess provision written back had been allowed as a deduction in previous assessments. Therefore, the Tribunal ruled in favor of the assessee, emphasizing the lack of proof from the Revenue to establish the treatment of the provision in prior years.
5. The Court analyzed the relevant provisions of Section 36(1)(viia) and Section 41(1) of the Act to determine the taxability of written back provisions. It highlighted that if an allowance or deduction had been made for a loss or expenditure and subsequently written back, it would be considered income, subject to tax. However, the burden of proof lies with the Revenue to demonstrate the previous treatment of such provisions.
6. Relying on precedents and the absence of evidence from the Revenue, the Court upheld the decisions of the lower authorities and ruled in favor of the assessee. The judgment concluded that the excess provision for bad and doubtful debts written back by the assessee should not be taxed as income in the absence of proof of allowance or deduction in prior assessments.
7. Consequently, the appeal by the Revenue was rejected, affirming the decision in favor of the respondent-assessee based on the interpretation of relevant provisions and the burden of proof regarding the treatment of provisions in previous assessments.