2025 (4) TMI 1086 - HC - Income Tax

Disallowance being provision for non-performing assets - HELD THAT - We have also perused the books of accounts balance sheet and the Profit and Loss account of the assessee for the Financial Year 1995-96 which is relevant for the assessment year 1996-97 in respect of which respondent had filed a return of income u/s 139 (1) of the Income Tax Act on 11.06.1997. The specific case of the appellant-Income Tax Department is that mere provision in the Books of Accounts viz. Balance Sheet and Profit and Loss Account is not sufficient to claim deduction u/s 36(i) (vii) and 36/29. It is specifically contended that the assessee had not debited the amount to the Profit and Loss account. A reading of the order of the Appellate Commissioner and the impugned order of the Appellate Tribunal impugned herein does not disclose examination of the books of accounts in the light of the decision of the Supreme Court in Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT . In the impugned order it is not indicated whether the assessee had debited the amount in the balance sheet as contemplated apart from debiting the amount from its Profit and Loss Account. This exercise was to be completed in the light of the earlier remand order of the Tribunal. Tribunal has merely relied on the Chartered Accountant s certificate dated 11.07.2005 and arrived at the conclusion based on the treatment given under similar circumstances for the subsequent assessment year. Matter restored back before AO for fresh assessment.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this appeal arising from the Income Tax Appellate Tribunal's dismissal of the Income Tax Department's appeal are as follows:

(a) Whether the Income Tax Appellate Tribunal was correct in confirming the deletion of the disallowance of Rs. 10,86,54,376.89 claimed as a provision for non-performing assets (bad debts) by the assessee;

(b) Whether the Tribunal was justified in applying the Supreme Court's decision in Vijaya Bank Vs. Commissioner of Income Tax, which held that for claiming deduction under the Income Tax Act, it is sufficient if the amount is debited to the Profit & Loss Account and the current assets are correspondingly reduced, even if individual debtor accounts are not written off;

(c) Whether the assessee's treatment of debiting the amount only in the Profit & Loss Appropriation Account (and not the Profit & Loss Account) complies with the statutory requirements under Section 36(i)(vii) and related provisions;

(d) Whether the impugned orders adequately examined the books of accounts and applied the legal principles established by the Supreme Court and Division Bench decisions, including Southern Technologies Ltd. and Ashok Leyland Finance Ltd. cases.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the disallowance of provision for non-performing assets (bad debts)

Legal framework and precedents: Section 36(i)(vii) of the Income Tax Act permits deduction for bad debts actually written off during the year. The Supreme Court in Vijaya Bank Vs. CIT clarified that the deduction is allowable if the amount is debited to the Profit & Loss Account and the corresponding asset (loans and advances/debtors) is reduced so that the balance sheet reflects the net figure after provision for bad debts.

Court's interpretation and reasoning: The Court noted that the Tribunal and the Commissioner of Income Tax (Appeals) had deleted the disallowance without examining whether the assessee had complied with the dual requirement of debiting the Profit & Loss Account and reducing the asset side of the balance sheet. The Court emphasized that mere provision in the books is insufficient; actual write-off reflected in accounts is necessary.

Key evidence and findings: The Court reviewed the assessee's books of accounts, balance sheet, and Profit & Loss Account for the relevant financial year 1995-96 (assessment year 1996-97). It was found that the impugned orders did not indicate if the assessee had debited the amount in the Profit & Loss Account as required, but only in the Profit & Loss Appropriation Account, which is not equivalent.

Application of law to facts: The Court held that the assessment of whether the provision qualifies for deduction under Section 36(i)(vii) must be done in light of the Supreme Court's ruling in Vijaya Bank, which requires both debit to Profit & Loss Account and reduction of loans and advances in the balance sheet.

Treatment of competing arguments: The Income Tax Department argued that the assessee had not debited the amount to the Profit & Loss Account and therefore the deduction was not allowable. The assessee relied on the Chartered Accountant's certificate and the treatment in subsequent years. The Court found the impugned orders insufficiently examined these aspects and thus did not conclusively resolve the issue.

Conclusion: The Court concluded that the matter requires fresh examination to verify compliance with the statutory conditions for claiming bad debt deduction and accordingly set aside the impugned order and remitted the matter for de novo consideration.

Issue 2: Application of the Supreme Court's decision in Vijaya Bank and related precedents

Legal framework and precedents: The Supreme Court in Vijaya Bank clarified the conditions for claiming deduction for bad debts under Section 36(i)(vii). It emphasized simultaneous debit to the Profit & Loss Account and corresponding reduction of loans and advances on the asset side of the balance sheet. Subsequent decisions by the Division Bench of this Court and the Supreme Court in Southern Technologies Ltd. and Ashok Leyland Finance Ltd. reinforced this position.

Court's interpretation and reasoning: The Court observed that the impugned orders failed to apply the Supreme Court's ruling adequately, particularly the dual requirement. The Tribunal relied solely on the Chartered Accountant's certificate and treatment in subsequent years without examining the books of accounts in detail as mandated by the Supreme Court.

Key evidence and findings: The Court noted the absence of explicit findings on whether the assessee had reduced the loans and advances in the balance sheet corresponding to the provision created, which is a critical requirement post the Vijaya Bank judgment.

Application of law to facts: The Court held that the Tribunal's reliance on the Chartered Accountant's certificate and subsequent year treatment was insufficient without a proper audit of the accounts in the light of the Supreme Court's decision.

Treatment of competing arguments: The Income Tax Department contended that the decision in Vijaya Bank was binding and required strict compliance, which was not met. The assessee argued that the provision was made and certified by its Chartered Accountant. The Court found the Department's argument more persuasive given the statutory requirements.

Conclusion: The Court directed a fresh examination to ensure compliance with the Supreme Court's principles and remanded the matter accordingly.

Issue 3: Adequacy of examination of the books of accounts and compliance with remand orders

Legal framework and precedents: The Income Tax Appellate Tribunal had earlier remanded the matter to the Commissioner of Income Tax (Appeals) to verify whether the amount was actually written off and conditions for claiming bad debt deduction were fulfilled, as per Section 36(i)(vii).

Court's interpretation and reasoning: The Court found that the earlier remand order dated 05.06.2006 required a detailed verification of the accounts and compliance with the statutory conditions. However, the impugned orders did not show that this exercise was conducted effectively.

Key evidence and findings: The Court noted that the Tribunal relied on a Chartered Accountant's certificate dated 11.07.2005 and the treatment in subsequent years but did not examine the relevant financial statements for the year under dispute as required.

Application of law to facts: The Court emphasized that the statutory conditions for deduction under Section 36(i)(vii) require actual write-off reflected in the accounts, which necessitates examination of the books of accounts and balance sheet.

Treatment of competing arguments: The Income Tax Department argued that the remand was not properly complied with, while the assessee relied on the certificate and subsequent treatment. The Court found the Department's submission well-founded.

Conclusion: The Court held that since the accounts were not examined as mandated, the impugned order was unsustainable and remitted the matter for fresh adjudication.

3. SIGNIFICANT HOLDINGS

"However, as stated by the Tribunal, in the present case, besides debiting the Profit and Loss Account and creating a provision for bad and doubtful debt, the assessee-Bank had correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from Loans and Advances/debtors on the asset side of the Balance Sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the Balance Sheet was shown as net of the provision 'for impugned bad debt'. In the judgement of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra], a mere debit to the Profit and Loss Account was sufficient to constitute actual write off whereas, after the Explanation, the assessee(s) is now required not only to debit the Profit and Loss Account but simultaneously also reduce loans and advances or the debtors from the asset side of the Balance Sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in its impugned judgement."

Core principles established include:

(a) Deduction for bad debts under Section 36(i)(vii) requires actual write-off reflected by both debit to the Profit & Loss Account and corresponding reduction of loans and advances/debtors in the balance sheet;

(b) Mere provision or debit in the Profit & Loss Appropriation Account without corresponding adjustment in the asset side is insufficient;

(c) The assessment authority must examine the books of accounts in detail and verify compliance with statutory conditions, especially when prior remand orders require such exercise;

(d) Reliance solely on Chartered Accountant's certificates or subsequent year treatment without detailed scrutiny of accounts is inadequate.

Final determinations:

The Court set aside the impugned order of the Income Tax Appellate Tribunal and remitted the matter to the Assessing Officer for fresh assessment in accordance with the principles laid down by the Supreme Court in Vijaya Bank and subsequent decisions, directing the Assessing Officer to complete the assessment de novo within six months and to hear the assessee or its successor before passing final orders.

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