2020 (2) TMI 1020 - HC - Income Tax

Deduction claimed towards bad and doubtful debts u/s 36(viia) - HELD THAT - A conjoint reading of provision contained in Section 36(1)(viia) and explanatory note dated 30.06.1982 it is evident that deduction provided in Section 36(1)(viia) shall be allowed in respect of the matters dealt therein in computing the income. The condition precedent for claiming deduction under Section 36(1)(viia) of the Act is that a provision for bad and doubtful debt should be made in the accounts of the assessee. The aforesaid Section mentions the maximum amount for which such a provision should be made. If a provision is made in excess of the limits prescribed under the Section, the assessee would not be entitled to deduction of the excess amount. Once a provision is made and the amount of deduction is within the limit prescribed under the Act, the assessee would be entitled to deduction of the amount for which provision is made in the books of accounts. Language employed in Section 36(1)(viia) of the Act is clear and unambiguous. It is well established Rule of interpretation stated by LORD CAIRNS that if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of law the case might otherwise appear to be. It is equally well settled legal proposition that in a taxing act once has to look merely as what is said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. SEE COMMISSIONER OF INCOME TAX, MADRAS VS. KASTURI AND SONS LTD.- 1999 (3) TMI 6 - SUPREME COURT and MAHIM PATRAM (P) LTD. VS. UNION OF INDIA - 2007 (2) TMI 73 - SUPREME COURT See PRINCIPLES OF STATUTORY INTERPRETATION, JUSTICE G.P. SINGH, 14TH EDITION, PAGE 879 . Therefore, the question of going into intention or object behind the provision viz., Section 36(1) (viia) of the Act does not arise. The submission that even in the absence of any provision, the assessee is entitled to deduction cannot be accepted. The assessee is entitled to deduction to the extent provision made in the accounts subject to limit mentioned in Section 36(viia) of the Act. - Decided in favour of revenue

Summary

Issues Involved:
1. Deduction towards bad and doubtful debts without making provision.
2. Tribunal's order considered perverse by overlooking provisions of the I.T. Act.
3. Deduction of interest on zero coupon bonds.

Detailed Analysis:

Issue 1: Deduction towards bad and doubtful debts without making provision

The primary issue revolves around the interpretation of Section 36(1)(viia) of the Income Tax Act, 1961. The assessee, a public limited company engaged in banking, claimed deductions for bad and doubtful debts without making the necessary provisions in their accounts. The revenue contended that deductions under Section 36(1)(viia) require a provision to be made in the accounts, which the assessee failed to do. The court noted that the language of Section 36(1)(viia) is clear and unambiguous, stating that a provision for bad and doubtful debts should be made in the accounts for the deduction to be valid. The court referenced the decision in 'CATHOLIC SYRIAN BANK LTD VS. COMMISSIONER OF INCOME TAX' to support the view that Sections 36(1)(vii) and 36(1)(viia) are independent provisions, but emphasized that the deduction under Section 36(1)(viia) is contingent upon making a provision in the accounts.

Issue 2: Tribunal's order considered perverse by overlooking provisions of the I.T. Act

The revenue argued that the tribunal's order was perverse as it allowed the assessee's appeal by overlooking the provisions of the I.T. Act. The court examined the tribunal's decision and found that it failed to adhere to the statutory requirements outlined in Section 36(1)(viia). The court reiterated that the assessee is only entitled to deductions to the extent of the provision made in the accounts, subject to the limits prescribed under the Act. The tribunal's decision was thus found to be flawed as it did not comply with the statutory provisions.

Issue 3: Deduction of interest on zero coupon bonds

The third issue pertained to whether the tribunal was right in allowing the deduction of interest on zero coupon bonds, which is not an exempt income under the provisions of the I.T. Act. The Commissioner of Income Tax (Appeals) had previously ruled that since no interest accrued on zero coupon bonds, making an addition in respect of book profit under Section 115JB of the Act was not warranted. The tribunal upheld this view, but the revenue challenged it. The court referred to its earlier judgment dated 17.01.2020 in ITA No.97/2010, which addressed similar issues and concluded that the tribunal erred in allowing the deduction for interest on zero coupon bonds.

Conclusion:

The court answered the substantial questions of law in favor of the revenue. It held that the assessee must make a provision in the accounts to claim deductions under Section 36(1)(viia) and that the tribunal's order was perverse for overlooking statutory provisions. Additionally, the court ruled that the tribunal erred in allowing the deduction of interest on zero coupon bonds. The appeals were disposed of accordingly.