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TMI Blog2022 (8) TMI 1141X X X X Extracts X X X X X X X X Extracts X X X X ..... , and also under Section 142(1) of the Act, calling for various details. The assessee filed its response thereto. The scrutiny assessment was completed by the AO under Section 143(3) on 30.12.2011, determining the total income of the assessee at Rs. 87,880/-. The assessee contended that an amount of Rs. 10 crores was deposited with one M/s C. Bhansali Developers Pvt. Ltd. towards acquisition of commercial premises two years prior to the assessment year in question (i.e., in 2007). It was contended that the project did not appear to make any progress, and consequently, the assessee sought return of the amounts from the builder. However, the latter did not respond. As a result, the assessee's Board of Directors resolved to write off the amount as a bad debt in 2009. It was also contended that the amount could also be construed as a loan, since the assessee had 'financing' as one of its objects. In a letter dated 26.12.2011 to the AO, the assessee inter alia contended as follows: "We submit that as per provisions of Section 36(2), in respect of monies advanced in the ordinary course of business, the same allowable as bad debts even if the amount has not been taken into account in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to prove to the AO that the case satisfies the ingredients of both Section 36(1)(vii) and Section 36(2) of the Act. It was urged that the ITAT and the High Court erred in accepting the assessee's contentions, which were not supported by any material or document. It was submitted that the assessee's claim of giving Rs. 10 crores to M/s C. Bhansali Developers Pvt. Ltd. for the alleged project was not substantiated by any material. Additionally, the assessee had also pleaded that the amount was given as a 'loan' to the developer, which was a different plea altogether. This plea was bereft of any material as to the terms of the loan, or the conditions of repayment, including interest. It was submitted that by virtue of Section 36(2) of the Act, the AO has to be satisfied that the action of writing off is on sound and reasonable basis, and not a device. Reliance was placed on Catholic Syrian Bank Ltd. v. Commissioner of Income Tax, Thrissur (2012) 3 SCC 784 to urge that the assessee is obligated to prove to the AO that the claim satisfies the ingredients of both Section 36(1)(vii) on the one hand and Section 36(2) of the Act as well. 6. The Revenue further argued that the assessee's su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax 1990 (186) ITR 412 (Bom) to buttress her submissions. Analysis and Conclusions 11. Section 36 of the Act occurs under the heading 'other deductions', and its relevant extract, for the purpose of this case, is as follows: "36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- *** (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause: Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the 1st day of April, 1988, or any earlier assessment year) and the Assessing Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of Section 155 shall apply; (v) where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause." Section 37 reads as follows: "37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1.-For the removal of doubts, it is hereby declared that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Joint Commissioner of Income Tax, Coimbatore (2010) 2 SCR 380: "25. [B]y insertion (w.e.f. 1.4.1989) of a new Explanation in Section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before 1.4.1989, even a provision could be treated as a write off. However, after 1.4.1989, a distinct dichotomy is brought in by way of the said Explanation to Section 36(1)(vii). Consequently, after 1.4.1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii). To understand the above dichotomy, one must understand "how to write off". If an assessee debits an amount of doubtful debt to the P&L Account and credits the asset account like sundry debtor's Account, it would constitute a write off of an actual debt. However, if an assessee debits "provision for doubtful debt" to the P&L Account and makes a corresponding credit to the "current liabilities and provisions" on the Liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to claim a deduction. This position was reiterated again in Catholic Syrian Bank (supra): "5. The language of Section 36(1)(vii) of the Act is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the Assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the Assessee for the previous year. This benefit is subject only to Section 36(2) of the Act. It is obligatory upon the Assessee to prove to the assessing officer that the case satisfies the ingredients of Section 36(1)(vii) on the one hand and that it satisfies the requirements stated in Section 36(2) of the Act on the other. The proviso to Section 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the Assessee is one which falls squarely under Section 36(1)(viia) of the Act. We may also notice that the explanation to Section 36(1)(vii), introduced by the Finance Act, 2001, has to be examined in conjunction with the principal section. The explanation specifically excluded any provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be written-off as irrecoverable in the accounts of the assessee for the previous year; (ii) Such bad debt or part of it written-off as irrecoverable in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee; (iii) No deduction is allowable unless the debt or part of it "has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year", or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (iv) The assessee is obliged to prove to the AO that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act. 18. In the present case, the record shows that the accounts of the assessee nowhere showed that the advance was made by it to M/s C. Bhansali Developers Pvt. Ltd. in the ordinary course of business. Its primary argument was that the amount of Rs. 10 crores was given for the purpose of purchasing constructed premises. However, the amount was written-off on 28.03.2009. As noted by the CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of Rs. 10 crore as a bad and doubtful debt could not have been allowed. The findings of the ITAT and the High Court, to the contrary, are therefore, insubstantial and have to be set aside. 20. The second issue relates to the admissibility of an expenditure as a deduction, which does not fall within the provisions of Sections 28 to 43, and is not capital in nature, but is laid out or spent exclusively for the purpose of business, under Section 37 of the Act. A similar provision existed under the old Income Tax Act, 1922 as in the case of provision for bad debts, by Section 10(2) - Section 10(2): [Such profits or gains shall be computed after making the following allowances, namely :- *** (xi) When the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money lending business such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits or gains must be calculated after deducting outgoings reasonably attributable as business expenditure but so as not to deduct any portion of an expenditure of a capital nature. If an expenditure comes within any of the enumerated classes of allowances, the case can be considered under the appropriate class; but there may be an expenditure which, though not exactly covered by any of the enumerated classes, may have to be considered in finding out the true assessable profits or gains. This was laid down by the Privy Council in Commissioner of Income-tax v. Chitnavis I.L.R. (1932) IndAp 290 and has been accepted by this Court. In other words, s. 10(2) does not deal exhaustively with the deductions, which must be made to arrive at the true profits and gains. 8. To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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