2018 (2) TMI 1716 - HC - Income Tax

Provision for doubtful overdue installments under hire purchase finance agreements - adjustment u/s 143(1)(a) relating to disallowance of the claim for bad debts under Section 36(1)(viii) - Held that - While mere making of provision for bad debts will not by itself (on application of amended law) entitle the party to deduction, yet it would be a matter where the assessee should be given an opportunity to establish its claim. This by producing its evidence of the manner in which it treated the provision of bad debts written off in accounts as well as in its Balance Sheet. The disallowance cannot be made by intimation under section 143(1)(a) as it requires that a party be given an opportunity to establish its claim before disallowing it. It would have been a completely different matter if the Apex Court had ruled that in no case can provision for bad debts be allowed as a bad debt under section 36(1)(vii). The allowance of the claim of provision for bad debt is entirely dependent upon how it is reflected in the Balance Sheet and its accounts. Therefore, for the above purpose it is necessary that the party to be given an opportunity to establish its claim. Therefore, in the present facts, adjustment by way of disallowing deduction by intimation under section 143(1)(a) of the Act is not proper. - Decided in favour of assessee.

Issues Involved:
1. Whether the Tribunal was right in holding that the Assessing Officer was justified in making an adjustment under Section 143(1)(a) relating to the disallowance of the claim for bad debts under Section 36(1)(vii) in respect of a sum representing "provision for doubtful overdue installments under hire purchase finance agreements."

Issue-Wise Detailed Analysis:

1. Tribunal's Justification for Adjustment under Section 143(1)(a):
The Tribunal held that the Assessing Officer was justified in making an adjustment under Section 143(1)(a) of the Income Tax Act, 1961. The assessee had claimed a deduction of ?1,69,37,818/- as bad debts under Section 36(1)(vii), representing "provision for doubtful overdue installments under Hire Purchase Finance Agreements." The Assessing Officer disallowed this claim, considering it merely a provision for doubtful debts, not actual bad debts. The Tribunal concluded that the claim was prima facie inadmissible based on the return of income and accompanying documents.

2. Assessee's Arguments:
The assessee argued that the disallowance was improper as the issue was debatable. They relied on the Gujarat High Court's decision in Vithaldas H. Dhanjibhai Bardanwala (130 ITR 95), which allowed provisions for bad debts if debited to the profit and loss account and credited to the Bad Debt Reserve account. The assessee contended that the Assessing Officer should have issued a notice under Section 143(2) for further inquiry instead of making an adjustment under Section 143(1)(a).

3. Revenue's Arguments:
The Revenue argued that the claim for "provision for doubtful overdue installments" was distinct from a claim for bad debts and was prima facie inadmissible. They cited several judicial decisions supporting the view that mere provisions for doubtful debts do not qualify as bad debts under Section 36(1)(vii). The Revenue emphasized that the provision lacked certainty and was part of an annual exercise, not specific to any irrecoverable debts.

4. Legal Interpretation and Judicial Precedents:
The Court referred to Section 143(1)(a) of the Act, which allows adjustments for prima facie inadmissible claims without further inquiry. It cited the Bombay High Court's decision in Khatau Junkar Ltd. (196 ITR 157), which interpreted "prima facie inadmissible" to mean claims that do not require further inquiry. The Court noted that if a claim is based on a judicial decision, it becomes debatable and cannot be disallowed under Section 143(1)(a) without giving the assessee an opportunity to explain.

5. CBDT Instruction and Supreme Court Decision:
The Court highlighted CBDT Instruction No.1814, which states that claims based on judicial decisions are debatable and cannot be disallowed under Section 143(1)(a). It also referred to the Supreme Court's decision in Vijaya Bank (323 ITR 166), which clarified that mere provisions for bad debts are not sufficient for deduction under Section 36(1)(vii); the corresponding amount must be reduced from the asset side of the Balance Sheet.

6. Court's Conclusion:
The Court concluded that the issue was debatable as the assessee's claim was based on the Gujarat High Court's decision. Therefore, the adjustment under Section 143(1)(a) was improper. The Court emphasized that the assessee should have been given an opportunity to establish their claim. The question was answered in favor of the assessee, and the reference was disposed of accordingly.

Final Judgment:
The question was answered in the negative, in favor of the applicant assessee, and against the respondent Revenue. The reference was disposed of with no order as to costs.

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