2019 (9) TMI 994 - AT - Income Tax

Disallowance of bad debt under proviso to section 36(1)(vii) - HELD THAT - Explanation to Section 36(1)(vii), introduced by the Finance Act, 2001, has to be examined in conjunction with the principal section. The explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. The concept of making a provision for bad and doubtful debts will fall outside the scope of Section 36(1)(vii) simplicitor. The proviso, as already noticed, will have to be read with the provisions of Section 36(1)(viia) of the Act. Once the bad debt is actually written off as irrecoverable and the requirements of Section 36(2) satisfied, then, it will not be permissible to deny such deduction on the apprehension of double deduction under the provisions of Section 36(1)(viia) and proviso to Section 36(1)(vii). This does not appear to be the intention of the framers of law. The scheduled and non-scheduled commercial banks would continue to get the full benefit of write off of the irrecoverable debts u/s 36(1)(vii) in addition to the benefit of deduction of bad and doubtful debts under Section 36(1)(viia). There is no double deduction claimed by assessee in the computation of total income. Proviso to section 36(1)(vii) ensure that double deduction will not be allowed, the said proviso provides that in cases where clause (viia) applies, the amount of deduction relating to bad-debt under section 36(1)vii) shall be limited to the amount by which debt or part thereof exceed the credit balance in the provision of bad and doubtful debts. CIT(A) has correctly allowed the deduction under section 36(1)(vii), which we affirmed. Hence, this ground of appeal is dismissed. Disallowance of gratuity payment after close of previous year - HELD THAT - Section 43B also makes it clear that such gratuity payment are allowable as deduction on the basis of actual payment made prior to date of filing of return of income. In Taparia Tools Ltd. vs. JCIT 2015 (3) TMI 853 - SUPREME COURT held that as a general rule, revenue expenditure to be allowed in the year in which incurred. We have noted that the AO instead of examining the liability and the actual payment of gratuity disallowed it holding that it pertains to earlier years. As we have noted that revenue expenditure to be allowed in the year in which incurred. CIT(A) allowed it by following the same principle.We have noted that the CIT(A) has given categorical finding that actual payment was made during May 2011 i.e. prior to date of filing of return. Therefore, we do not find any infirmity or illegality in the order passed by ld. CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Deletion of disallowance of ?6,66,52,645/- as bad debt written off.
2. Confirmation of addition of ?6,66,52,645/- as bad debt written off due to higher credit balance in provision for bad and doubtful debt account.
3. Allowance of deduction of ?3,26,86,648/- on account of gratuity payment made after the close of the previous year.

Issue-wise Detailed Analysis:

1. Deletion of disallowance of ?6,66,52,645/- as bad debt written off:

The Revenue's contention was that the bad debt of ?7,79,92,836/- was not written off in the Profit & Loss Account and was not clarified under which provision it was claimed. The assessee argued that it had no rural branch, and the bad debt written off included ?6.66 crore advanced to Madhavpura Mercantile Cooperative Bank Ltd. and ?1.13 crore for 47 individual debtors. The CIT(A) found that the write-off was reflected in the P&L account and adequately supported by documents. The CIT(A) allowed the deduction under Section 36(1)(vii), stating that the reserve for bad and doubtful debts did not include amounts claimed as deductions under the Income-tax Act. The Tribunal affirmed this, noting that the Supreme Court in Catholic Syrian Bank Ltd. vs. CIT held that Section 36(1)(vii) applies to all banks and allows deduction for bad debts written off, subject to Section 36(2). The Tribunal concluded that there was no double deduction and upheld the CIT(A)'s decision.

2. Confirmation of addition of ?6,66,52,645/- as bad debt written off due to higher credit balance in provision for bad and doubtful debt account:

The Revenue argued that the credit balance in the provision for bad and doubtful debts account was higher at ?11,40,24,442/-, warranting disallowance under the proviso to Section 36(1)(vii). The CIT(A) found that the assessee had not created the reserve by claiming deductions under Section 36(1)(viia) and thus was entitled to full deduction under Section 36(1)(vii). The Tribunal affirmed that the methodology followed by the assessee was acceptable and that the write-off qualified for deduction. The Tribunal also referenced the Supreme Court's ruling in Catholic Syrian Bank Ltd. vs. CIT, which clarified that the proviso to Section 36(1)(vii) applies only when the case falls under Section 36(1)(viia).

3. Allowance of deduction of ?3,26,86,648/- on account of gratuity payment made after the close of the previous year:

The Revenue contended that the gratuity payment of ?3.26 crore should be disallowed as it was treated as deferred revenue expenses and only one-fifth was allowed. The assessee argued that the entire payment was allowable as it was paid before the due date for filing the return. The CIT(A) found that the gratuity liability of ?4.08 crore was based on actuarial valuation and paid to LIC in May 2011. The CIT(A) concluded that the entire expenditure was allowable as it was crystallized during the relevant previous year and paid before the due date for filing the return. The Tribunal upheld this, referencing the Supreme Court's decision in Taparia Tools Ltd. vs. JCIT, which held that revenue expenditure should be allowed in the year incurred. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal.

Decision:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on all grounds. The Tribunal upheld the deletion of disallowance of bad debts and the allowance of gratuity payment, finding no merit in the Revenue's grounds of appeal.