2021 (6) TMI 597 - AT - Income Tax

Deduction u/s 36(1)(vii) - Assessee filed the revised return of income by claiming provision for bad and doubtful debts - HELD THAT - There is no doubt that the assessee is engaged in the business of banking and has made provision for bad and doubtful debts for loans and advances. The AO doubted whether it was a reserve or provision. But, the assessee in the second revised computation of income in the profit loss account, it changed as provision in place of reserve As decided in M/S. VIJAYA BANK, 2020 (11) TMI 486 - KARNATAKA HIGH COURT deduction u/s 36(1)(vii) can be allowed when the provision is made for bad debts in P L Account. It is clear from the order of the CIT(A) that in the revised Profit Loss Account, the disputed issue was debited in the Profit Loss Account. Therefore, following the ratio laid down by the Hon ble Court, we set aside the order of the CIT(A) and direct the AO to allow the assessee s claim of the provision for bad and doubtful debts - Appeal of the assessee is allowed.

Summary

Issues:
- Allowability of deduction u/s 36(1)(viia) for provision for bad and doubtful debts.
- Determination of whether the amount debited to the P&L account is a provision or reserve.
- Compliance with the provisions of Sec 36(1)(viia) for eligibility of deduction.
- Interpretation of the distinction between the words "Provision" and "Reserve" in the context of tax deduction.
- Consideration of audited financial statements to determine the nature of the amount debited to the P&L account.
- Applicability of the decision in CIT Vs. Vijaya Bank regarding deduction under section 36(1)(vii) for provision for bad debts.

Analysis:
1. The appeal involved the question of the allowability of a deduction under section 36(1)(viia) for the provision for bad and doubtful debts. The Assessing Officer (AO) disallowed the claim as the assessee did not provide documentary evidence from the books of accounts to support the claim. The assessee contended that the provision was below the specified limit and thus eligible for deduction under the relevant section.

2. The issue of whether the amount debited to the Profit & Loss (P&L) account constituted a provision or a reserve was central to the case. The AO initially questioned this classification, but the assessee revised the computation to reflect it as a provision. The Tribunal referred to a relevant High Court decision to determine that the provision for bad debts in the P&L account warranted the deduction under section 36(1)(vii).

3. Compliance with the provisions of Sec 36(1)(viia) was crucial for the eligibility of the deduction. The assessee argued that the provision for bad and doubtful debts was in line with the requirements of the section, supported by the revised Profit & Loss Account. The Tribunal found merit in this argument based on the legal interpretation provided by the High Court decision.

4. The distinction between the terms "Provision" and "Reserve" was highlighted in the context of tax deduction eligibility. The Tribunal emphasized the importance of correctly categorizing the amount debited to the P&L account, ultimately deciding in favor of the assessee's claim for deduction under the specified section.

5. The consideration of audited financial statements played a role in determining the nature of the amount debited to the P&L account. The Tribunal acknowledged the submissions made by the assessee, including the relevant documentation, to support the claim for deduction, leading to a favorable decision in light of the provided evidence.

6. The Tribunal applied the precedent set by the decision in CIT Vs. Vijaya Bank to support its ruling regarding the deduction under section 36(1)(vii) for provision for bad debts. By aligning with the legal interpretation established in the cited case, the Tribunal set aside the order of the lower authority and directed the AO to allow the assessee's claim for the provision for bad and doubtful debts, resulting in the appeal being allowed in favor of the assessee.