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TMI Blog2017 (2) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... account, the debtors were reduced to that extent. Further, the profit and loss account has already been debited with the corresponding amount as per the accounting procedure followed by the assessee as narrated above. Thus, both the conditions stand fulfilled. The second condition was fulfilled in the year before us. Thus, in our view, the assessee became eligible to claim deduction on account of bad debts in the year before us. Under these circumstances, we find that the assessee is principally eligible to claim bad debts in the year before us. - I. T. A. No. 1112/Mum/2015 - - - Dated:- 23-11-2016 - Amit Shukla (Judicial Member) And Ashwani Taneja (Accountant Member) For the Appellant : A. L. Sharma For the Respondent : Prakash Mane ORDER Ashwani Taneja (Accountant Member) 1. This appeal has been filed by the assessee against the order of the Commissioner of Income-tax (Appeals)-3, Mumbai (hereinafter called the CIT(A) ) dated January 29, 2015 passed against the assessment order under section 143(3) dated March 29, 2012 for the assessment year 2011-12 on the following grounds : (1) (A) The learned Commissioner of Income-tax (Appeals) erred in conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax (Appeals) has granted relief to the appellant ; (iv) Lastly, it was submitted that the bad debts are written off in the books by debiting the bad and doubtful debts reserve account and crediting the debtor's accounts. 5. Thereafter, the learned Commissioner of Income-tax (Appeals) analysed the entire facts of the case and agreed with the assessee on the first limb of the argument that in case the assessee did not make claim under section 36(1)(viia) then the assessee was entitled to make claim of deduction under section 36(1)(vii) of the Act as a normal assessee by observing as under : I have perused the facts of the matter. The first objection of the Assessing Officer is that the assessee has not debited the provision account. I find that this issue came up before my predecessor for the assessment year 2007-08, who held as follows : '1.2 I have perused the facts of the case and I do not agree with the findings of the Assessing Officer. The crux of the provisions contained in proviso to section 36(1)(vii) and in section 36(2)(v) is that no assessee is allowed to claim deduction twice on account of debts which are in the category of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of section 36(1)(vii). The Assessing Officer on the other hand has held that the write off would necessarily involve a debit to the profit and loss account. It is an accepted position that provision and reserves are two separate items. The provision is a liability, whereas reserve is the assessee's own funds. A reserve is appropriation of the profits, whereas a provision is an expenditure on the profits. Therefore, the assessee is required to make only a provision in its accounts for bad debts, even though the amount was not actually written off by debiting the profit and loss account of the assessee. However, by insertion of new Explanation in section 36(1)(vii) with effect from the assessment year 1989-90, it was clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debts. In the present case, the appellant has debited the reserve account and credited the sundry debtors. There is therefore, clearly no debit in the profit and loss account in either the current year or in the earlier years. In fact, the appellant has not created any provision for bad and doubtful debts in its balance-she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respective debtors in those years. But in the year before us, the amount has been written off/credited in the account of the respective debtors, and thus both the conditions of section 36(1)(vii) stood complied with in the year before us. Therefore, the assessee became entitled for deduction in the year before us and that the claim was rightly made which should have been allowed. The learned counsel also drew our attention on various pages of the paper book with a view to demonstrate these facts. 9. Per contra, the learned Departmental representative fairly and principally agreed that the assessee has to be allowed claim of bad debts in any one of the years, i.e. either in the year when provision was made or in the year when amount is credited in the respective debtor's account. The deduction could not have been allowed without crediting the amount written off in the debtor's account, and therefore, as per law the deduction of bad debt can be allowed in the year when ultimately amounts were credited in the respective debtor's account. He also submitted that the facts could not be fully demonstrated by the assessee that all the impugned amounts were duly credited in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othing on record to show that the assessee had made any double claim of deduction. Thus, the order of the learned Commissioner of Income-tax (Appeals) on this issue is upheld. However, the learned Commissioner of Income-tax (Appeals) has rejected the claim of the assessee on the other ground that there was no debit in the profit and loss account by the asses see during the year before us. In this regard, we have analysed the complete facts and find that the lower authorities could not appreciate the accounting procedure followed by the assessee in this regard. With the assistance of the parties, we understood the accounting procedure followed by the assessee for making the provision and the claim of bad debts. It is noted that first of all the assessee makes the following entry in the year when provision is made : Profit and loss account. . . . . . . .Dr To provision for bad and doubtful debts reserve (Being provision made for bad debts) Thereafter, in the year when bad debts are written off in the account of respective debtors, following entry is made by the assessee in its books of account : Provision for bad and doubtful debts reserve. . . . .Dr To advance (deb ..... X X X X Extracts X X X X X X X X Extracts X X X X
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