2023 (8) TMI 92 - HC - Income Tax

Deduction qua bad debts u/s 36(1)(vii) denied- Assessee submits that since the appellant/assessee had not created any provision for bad debts in the AY in issue i.e., AY 2003-04, it could straightaway claim, in law, the entire irrecoverable bad debt crystallized for the AY in issue - HELD THAT - As expounded by the Supreme Court in Catholic Syrian Bank Ltd 2012 (2) TMI 262 - SUPREME COURT in our opinion, the appellant/assessee is entitled to straightaway claim deduction towards irrecoverable bad debts u/s 36(1)(vii) - There is no dispute that the conditions prescribed u/s 36(2) of the Act stand fulfilled. Section 36(1)(vii) and Section 36(1)(viia) of the Act are distinct and independent provisions. In this case, the first proviso appended to Section 36(1)(vii) has no applicability, as there was no provision made for bad and doubtful debts. As is well recognised, ordinarily, the Act does not allow for deduction on account of a mere provision for bad and doubtful debts in computation of taxable profits. Notably, Sub-section 2(v) states that where a debt or part of debt relates to advances made by an assessee to which clause (viia) of Section 36(1) applies, no such deduction would be allowed unless the assessee has debited the amount of such debt or part of the debt in the previous year in issue, to the provision made for bad and doubtful debts in the accounts of the assessee. Thus, as would be evident, the scheme of the aforementioned provisions would exclude the applicability of the first proviso appended to Section 36(1)(vii) of the Act, as there was no provision for bad debts available in the AY in issue i.e., AY 2003-04. The roundabout manner which the Tribunal has followed, appears to be predicated on the fundamental errors of fact. As noticed above, the Tribunal wrongly noted that in AY 2002-03, the profit determined qua the AY amounted to Rs. 215,62,49,368/-. Based on this, it calculated that a provision for bad debts could be created at the rate of 5%, which was Rs. 10,78,12,465/- sic. Rs. 10,78,12,469/- . Having regard to this supposed credit balance, the Tribunal allowed a deduction of Rs. 1,88,87,531/- i.e., the difference between Rs 12,67,00,000 and Rs 10,78,12,469 and thus, disallowed deduction claimed qua the remaining amount, which was Rs. 10,78,12,469/-. It must be emphasized that the flawed formula adopted by the AO would run into rough weather if the appellant/assessee s appeal for AY 2002-03 were to be allowed; which would result in its loss return being accepted. According to us, this roundabout manner of arriving at the addition was flawed, both on facts and in law. Question of law answered in favour of the appellant/assessee.

Summary

Issues involved:
The judgment involves the interpretation of Section 36(1)(vii) of the Income Tax Act, 1961 regarding the deduction of bad debts for Assessment Year 2003-04. The primary issue is whether the Income Tax Appellate Tribunal misdirected itself on facts and in law in disallowing the deduction of Rs. 10,78,12,465/- to the appellant/assessee.

Facts and Decision:
The appellant/assessee filed the return for Assessment Year 2003-04 declaring a taxable income of Rs. 205,74,29,670. The Assessing Officer pegged the income at Rs. 306,89,79,738 and disallowed a deduction of Rs. 10,78,12,469 for bad debts. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this decision. The appellant appealed under Section 260A of the Act, arguing that the authorities erred in their factual and legal assessment.

Legal Arguments:
The appellant's counsel argued that the provisions of Section 36(1)(vii) should be interpreted independently of other sections, and since no provision for bad debts was made in the relevant year, the entire irrecoverable bad debt should be deductible. The counsel cited relevant case law to support this argument.

Court's Analysis:
The Court noted that the appellant had filed a loss return for the previous year, and there was no provision made for bad debts in the current year. Referring to the Supreme Court's decision in Catholic Syrian Bank Ltd., the Court held that the appellant was entitled to claim the deduction under Section 36(1)(vii) without any limitation based on a credit balance in a bad debt provision.

Conclusion:
The Court found that the Tribunal's calculation of the deduction was flawed both factually and legally. The Court ruled in favor of the appellant/assessee, allowing the deduction for the entire irrecoverable bad debt amount. The appeal was disposed of accordingly.