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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI MAHAVIR SINGH, HON’BLE & SHRI MANJUNATHA.G, HON’BLE
आदेश / O R D E R
PER MANJUNATHA.G, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-1, Madurai, dated 19.12.2019, and pertains to assessment year 2016-17.
At the outset, we find that there is a delay of ‘4’ days in appeal filed by the revenue. During the course of hearing, when defect was brought to the notice of learned DR present for the Revenue, he submitted that delay in filing of appeal is mainly due to lockdown imposed by the Govt. on account of spread of Covid-19 infections, and which needs to be excluded for computing limitation in view of judgment of the Hon’ble Supreme Court in Miscellaneous Petition No.21 of 2022 in Suo Motu Writ Petition (C) No.3 of 2020, and if the period of delay covered within the period specified in the order of the Apex Court, is excluded, then, there is no delay in filing appeal.
2.1 The learned AR, on the other hand, fairly agreed that delay may be condoned in the interest of justice.
2.2 Having heard both sides and considered reasons given by the learned DR, we find that the Hon’ble Supreme Court in Miscellaneous Petition No.21 of 2022 in Suo Motu Writ Petition (C) No.3 of 2020, has extended limitation applicable to all proceedings in respect of courts and tribunals across the country on account of spread of Covid-19 infections w.e.f.15.03.2020, and said general exemption has been extended from time to time up to 28.02.2022. We further noted that delay noticed by the Registry pertains to the period of general exemption provided by the Hon'ble Supreme Court extending limitation period applicable for all proceedings before Courts and Tribunals, and thus, considering facts and circumstances of the case, and also in the interest of natural justice, we condone delay in filing appeal filed by the Revenue.
The Revenue has raised the following grounds of appeal:
1. The order of the CIT(A) is opposed to law on the facts and in the circumstances of the case.
2. The CIT(A) erred in allowing the appeal of the assessee claiming deduction u/s 36(l)(vii) of the provision for bad and doubtful debts, ignoring the fact that deduction u/s.36(1)(vii) is allowable for only the bad debts actually written off as irrecoverable from the books of the assessee.
3. The CIT(A) has erred in allowing the appeal of the assessee based on the decision of the Hon'ble Supreme Court in the case of Vijaya Bank reported in (2010) 323 ITR 166. Vijaya Bank is an entity eligible for deduction of provision for bad debts u/s 36(1)(viia). In view of the first proviso to sec. 36(1)(vii), there is a difference in the applicability of sec.36(1)(vii) between the banking companies eligible for deduction u/s.36(1)(viia) and other entities.
4. The CIT(A) failed to take cognizance of the fact that even in the relied case of Vijaya Bank, the Apex Court has accepted the fact that post insertion of the Explanation to section 36(1)(vii) vide Finance Act 2001, with effect from 01.04.1989, mere debit of the impugned amount of bad debt to the P&L account would not amount to actual write off, and therefore would not be eligible for deduction u/s
5. The CIT(A) failed to take cognizance of the fact that in the case of Vijaya Bank, the decision was given in favour of the assessee only after the Apex Court held that the assessee in that case had debited the P&L account and also reduced the corresponding amount from the "Loans and Advances/Debtors" on the assets side of the balance sheet and it accounted to actual write off. On the contrary, in the present case in hand, the assessee has reduced the corresponding amount from the "Provisions for bad debts" on the liability side of the balance sheet and therefore would not amount to actual write off.
6. For these and such other grounds that may be adduced at the time of hearing it is prayed that the order of the CIT(A) may be reversed and that of the Assessing Officer restored.
The brief facts of the case are that the assessee company is engaged in the business of manufacturing and sale of cotton yarn. The company had filed its return of income for AY 2016-17 on 26.09.2016, admitting total income of Rs.26,59,50,750/-. The case was selected for scrutiny and during the course of assessment proceedings, it was noticed that the assessee company has made a provision for bad debts in respect of amount receivables from M/s.VTX Industries Ltd., amounting to Rs.5,66,98,830/- by debiting into P & L A/c and reducing the same from sundry debtor’s account in the assets side of the balance sheet. The AO called upon the assessee to file necessary details, including reasons for claiming deduction for provision for bad debts. In response, the assessee submitted that it has made a provision for bad debts towards amount receivable from M/s.VTX Industries Ltd., because, the party was not paying the outstanding dues for many years. The assessee further submitted that the company filed a creditor’s winding up petition under the Companies Act, against M/s.VTX Industries Ltd., and the Hon’ble Madras High Court passed an order of liquidation and also order of decree for recovery of proceedings.
Even after the decree, the assessee perused the matter with the company, but they did not pay any amount to the assessee. As amount had become bad debt, the assessee company debited the said amount to the P & L A/c and reduced the same from the trade receivables shown in the balance sheet. In order to keep the balance receivables alive, the amount was directly not credited to debtor’s account and in this regard, relied upon decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT reported in [2010] 323 ITR 166 (SC). The AO, however, was not convinced with the explanation furnished by the assessee and according to the AO, the deduction is allowable only in a case where the assessee has write off bad debt by debiting to P & L A/c and crediting to respective sundry debtor’s account in the books of accounts of the assessee. Since, the assessee has made merely a provision for bad debts by debiting into P & L A/c and reducing the same from sundry debtor’s account in the balance sheet without actually crediting to respective debtor’s account as required u/s.36(1)(vii) r.w.s.36(2) of the Income Tax Act, 1961 (in short “the Act"), the claim of its case, cannot be allowed. Therefore, rejected the arguments of the assessee and disallowed claim for provision for bad debts amounting to Rs.5,66,98,830/-.
Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has reiterated its arguments made before the AO, along with the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT (supra), and contended that even if an individual debtors account is not squared off still deduction can be allowed towards write off bad debts, if the assessee proves that the debt become bad and irrecoverable. The Ld.CIT(A) after considering relevant submissions of the assessee and also by following the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT (supra), deleted the additions made by the AO towards disallowance of bad debts by holding that the case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT (supra), where, it has been clearly held that deduction can be allowed towards provision for bad debts, in case, such provision has been reduced from the sundry debtor’s balance in the assets side of the balance sheet.
The relevant findings of the Ld.CIT(A) are as under:
9. I have considered the submissions made by the authorized representative to decide the dispute regarding the allowability of bad debts in the instant case. It would be worthwhile to visit the decision of the Hon'ble Supreme Court in case of Vijaya Bank (Supra). The relevant portion of the decision of the Hon'ble Court is reproduced below:- "According to the revenue, in view of the insertion of the Explanation in section 36(1)(vii) with effect from 1-4-1989, a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write off. According to it, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. It was submitted that a mere debit to the profit and loss account would constitute a provision for bad and doubtful debt; it would not constitute actual write off and that :: 6 ::
was the very reason why the Explanation stood inserted. According to the department, prior to the Finance Act, 2001, many assesses used to take the benefit of deduction u/s 36(1)(vii) by merely debiting the impugned bad debts to the profit and loss account and, therefore, the parliament stepped in by way of the Explanation to say that mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. To that extent, the contentions of the revenue were to be accepted. However, as stated by the Tribunal, in the instant case, besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee-bank had corresponding amount form 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 assets side of the balance sheet was shown as net of the provision 'for impugned bad debt'. After the insertion of the Explanation the assessee(s) is now required not only to debit the profit and loss account but simultaneously, also to reduce loans and advances or the debtors from the assets 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.
However, what was being insisted upon by the assessing Officer was that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee-bank to close each and every individual account of loans and advances or debtors as a pre-condition for claiming deduction under section 36(1)(vii). That view had been taken by the Assessing Officer because he apprehended that the assessee- bank might be taking the benefit of deduction under section 36(1)(vii). In that context, it must be noted that there was no finding of the Assessing Officer that the assessee had unauthorisedly claimed the benefit of deduction under section 36(1)(vii), twice over. The order of the Assessing officer was based on an apprehension that if the assessee failed to close each and every individual account of its debtor, it might result in the assessee claiming deduction twice over. In the instant case, the Court was concerned with the interpretation of section 36(1)(vii). The matter could not be decided on the basis of apprehensions/desirability. It was always open to the Assessing Officer to call for details of individual debtor's account if the Assessing Officer had reasonable grounds to believe that the assessee had claimed deduction twice over. In fact, that exercise had been undertaken in subsequent years. There was also a flipside to the argument of the department. The assessee had instituted recovery suits in the Courts against its debtors. If individual accounts were to be closed. Then the debtor/defendant in each of those suits would rely upon the bank statement and contend that no amount was due and payable, in which event the suit would be dismissed.
According to the department, it was necessary to square off each individual account failing which there was likelihood of escapement of income from assessment. According to the department, in cases where a borrower's account was written off by debiting profit and loss account and by crediting loans and advances or debtors accounts on the asset side of the balance sheet, then as and when in the subsequent years the borrower would repay the loan, the assessee would result in escapement of income from assessment. On the other hand, if bad debt was written off by closing the borrower's account individually, then the repaid amount in the subsequently years would be credited to the profit and loss account on which the assessee-bank would have to pay tax. Although, prima-facie, the argument of the department appeared to be valid, on a deeper consideration, it was not so for three reasons. Firstly, the head officer accounts clearly indicated in the instant case that on repayment in subsequent years, the amounts were duly offered for tax. Secondly, one has to keep in mind that, under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years would not be credited to the profit and loss account of the head office, which is ultimately what matters, then there would be a mismatch between the rural branch's accounts and the head office accounts. Lastly, in any event section 41(4), inter alia, lays down that, where a deduction has been allowed in respect of a bad debt or a part thereof under section 36(a)(vii), then if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess shall be deemed to be profits and gains of business and, accordingly, chargeable to income-tax as the income of the previous year in which it is recovered. In the circumstances, the Assessing officer was sufficiently empowered to tax such subsequent repayments under section 41(4) and, consequently, there was no merit in the contention that if the assessee would succeed, then it would result in escapement of income from assessment." 9.1. The fact in the case of the appellant company is very similar to the facts in case of M/s.Vijaya Bank (Supra) which has been decided by the Hon'ble Supreme Court. Respectfully following the decision of Hon'ble Supreme Court in the case of Vijaya Bank (Supra), the claim of bad debts of Rs.5,66,98,830/- is allowed and addition made by the Assessing Officer is deleted.
The ld.Sr.DR, Mr. AR.V.Sreenivasan, Addl.CIT, submitted that the Ld.CIT(A) erred in deleting the additions towards disallowance of bad debts by following the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT (supra), even though, the facts of said case is not applicable to the facts of the present case. He, further referring to the decision of ITAT, Chennai Benches in the case of M/s.Tamil Nadu Generation and Distribution Corporation Ltd., in dated 28.02.2022, and also decision of the Hon’ble Supreme Court in the case of PCIT v. Khyati Realtors Pvt. Ltd., in Civil Appeal No.(SLP) 672 of 2020, submitted that the amount of any bad debt or part thereof, has to be written off as irrecoverable in the accounts of the assessee for the previous year and the assessee obliges to prove to the AO that the case satisfy the ingredients of sec.36(1)(vii) r.w.s.36(2) of the Act. In this case, there is no dispute with regard to fact that the assessee has made a mere provision in the books without actual write off of bad debts by crediting into debtor’s account in the books of accounts of the assessee. The AO, after considering relevant facts has rightly disallowed the claim for bad debts. However, the Ld.CIT(A) by wrong appreciation of facts, followed the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT (supra), and allowed relief to the assessee.
The Ld.Counsel for the assessee, supporting the order of the Ld.CIT(A) submitted that there is no dispute with regard to the fact that the debt receivable from M/s.VTX Industries Ltd., is bad and irrecoverable.
Further, the Hon’ble Madras High Court has passed an order for recovery of dues and also winding up of the company, which clearly proves that the amount receivable from said company is a bad and doubtful. The assessee had also write off the debt by debiting to provision for bad and doubtful debts account and reducing the same from outstanding sundry debtor’s account in the balance sheet. The Ld.Counsel for the assessee further referring to the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT and also decision of ITAT Chennai in the case of M/s.Tamil Nadu Generation and Distribution Corporation Ltd. (supra), submitted that no doubt, the co-ordinate Bench had distinguished the Vijaya Bank case, while dealing with provision for bad debts and fact remains that in the case of M/s.Tamil Nadu Generation and Distribution Corporation Ltd., the assessee has made an adhoc provision for bad debts, whereas, in the present case, the assessee has identified the debt which is bad and irrecoverable and also reduced the same from the sundry debtor’s balance in the balance sheet which tantamount to write off of bad debts. Therefore, the case of the assessee squarely covered by the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT (supra). The Ld.CIT(A) after considering relevant facts has rightly allowed relief to the assessee and their orders should be upheld.
the Ld.Counsel for the assessee, further submitted that assuming for a moment, what was claimed towards deduction is only provision for bad debts, then, it is a business loss to the assessee incurred wholly and exclusively, and thus, allowability of said loss needs to be verified in the context of provisions of Sec.28 of the Act, and thus, the matter may be set aside to the file of the AO for further verification.
Per contra, the Ld.DR present for the Revenue referring to the decision of the Hon’ble Supreme Court in the case of PCIT v. Khyati Realtors Pvt. Ltd., (supra) submitted that the Hon’ble Supreme Court clearly held that deduction specified u/s.32 to 36 of the Act, cannot be alternatively considered u/s.37(1) of the Act. Since, the claim of the assessee falls under provisions of Sec.36(1)(vii) of the Act, the same cannot be alternatively considered u/s.37(1) or 28 of the Act, and thus, there is no reason to set aside the appeal to the file of the AO.
We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. There is no dispute with regard to the fact that the assessee has made provision for bad debts in respect of amount receivable from M/s.VTX Industries Ltd., being the value of goods supplied to them on various dates and interest payable thereon. The assessee has made provision when the party did not make the payment even after the Hon’ble Madras High Court passed an order of liquidation and also order of decree for recovery of debt. It is also an admitted fact that the assessee has made only provision for bad debts by debiting to P & L A/c and reducing the same from the sundry debtor’s account in the balance sheet without any actual write off bad debts by crediting to the party account in the books of accounts of the assessee.
Further, as per provisions of Sec.36(1)(vii) of the Act, any bad debt write off as irrecoverable in the accounts of the assessee, would not include any provision for bad debts made in the accounts of the assessee. In other words, w.e.f.01.04.1989, a mere provision for bad debts per se was not entitled for deduction u/s.36(1)(vii) of the Act, and this legal position is reiterated by the Hon’ble Supreme Court in the case of Southern Technologies Ltd. v. JCIT reported in [2010] 320 ITR 571 (SC). Therefore, from the above, it is very clear that in order to claim deduction for any bad debts, such bad debts should be write off as irrecoverable in the accounts of the assessee by debiting into P & L A/c and crediting into sundry debtor’s account in the books of accounts of the assessee. In this case, the assessee has made a mere provision for bad debts without actual write off bad debts in the books of accounts of the assessee by crediting into respective debtors account. Therefore, in our considered view, the assessee did not satisfied the conditions prescribed u/s.36(1)(vii) r.w.s.36(2) of the Act, to claim deduction towards bad debts.
In so far as, the arguments of the Ld.Counsel for the assessee in light of the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v.
CIT (supra), we find that the decision rendered by the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT (supra), is on unique facts, because, considering the nature of banking industry and accounting treatment given for provision for bad debts in the books of accounts of banks. Therefore, the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT (supra), cannot be applied to other than the banking cases and this legal position has been discussed by co-ordinate Bench of ITAT in the case of M/s.Tamil Nadu Generation and Distribution Corporation Ltd., in where, it has been clearly made a distinction between write off bad debts and provision for bad and doubtful debts in the case of banking companies and other than banking companies. Since, the accounting treatment for provision for bad debts, in a case of banking company is governed by provisions of Sec.36(1)(vii)(a) of the Act, and also banks are operating under unique circumstances, in Vijaya Bank case, it was held that reducing the amount of provision for bad debts from the sundry debtor’s account in the balance sheet tantamount to write off bad debts. However, the Hon’ble Supreme Court in the case of Southern Technologies Ltd. v. JCIT (supra), very clearly held that write off of bad debts cannot include any provision for bad debts made in the accounts of the assessee and this principle has been explained by the Hon’ble Supreme
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Court in the case of PCIT v. Khyati Realtors Pvt. Ltd., in Special Leave Petition (Civil) No.672/2020, where, it has been held as under:
This court did not examine the impact of Section 36(2) and the condition of write off, in the accounts of the assessee during the previous year, in T.R.F Ltd. (supra). However, the judgments in Southern Technologies (supra), and Catholic Syrian Bank (supra) spelt out the conditions subject to which an assessee could write off a bad and doubtful debt. Interestingly, Kapadia, CJ was a party to T.R.F and Catholic Syrian Bank; he in fact authored the judgment in Southern Technologies. Furthermore, Catholic Syrian Bank (supra) is by a bench of three judges, whereas the other decisions are by benches of two Judges. In the circumstances, this Court has to accord primacy to Southern Technologies (supra).
17. It is evident from the above rulings of this court, that:
(i) The amount of any bad debt or part thereof has to 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(l)(vii) as well as Section 36(2) of the Act.
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 ? 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), there was no material to substantiate this submission, in respect of payment of the amount, the time by which the constructed unit was to be given to it, the area agreed to be purchased, etc. Equally, in support of its other argument that the amount was given as a loan, the assessee nowhere established the duration of the advance, the terms and conditions applicable to it, interest payable, etc. The assessee conceded that it had received interest income for the relevant assessment year. However, it could not establish that any interest was paid (or shown to be payable in its accounts) for the sum of ? 10 crores. Furthermore, there is nothing on record to suggest that the requirement of the law that the bad debt was written-off as irrecoverable in the assessee's accounts for the previous year had been satisfied. Another reason why the amount could not have been written-off, is that the assessee's claim was that it was given to M/s Bhansali Developers Pvt. Ltd. for acquiring immovable property – it therefore, was in the nature of a capital expenditure. It could not have been treated as a business expenditure. In A.V. Thomas and Co. Ltd., Alleppey v. The Commissioner of Income Tax, (Bangalore) Kerala10 this court held as follows:
"16. Now, a question under s. 10(2)(xi) can only arise if there is a bad or doubtful debt. Before a debt can become bad or doubtful it must first be a debt. What is meant by debt in this connection was laid down by Rowlatt J., in Curtis v. J. & G. Oldfield Ltd., (1925) 9 TC 319 as follows :-
"When the Rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profits. "
A debt in such cases is an outstanding which if recovered would have swelled the profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the section a debt means something more than a mere advance. It means something which is related to business or results from it. To be claimable as a bad or doubtful debt it must first be shown as a proper debt... "
In view of the above discussion, it is held that the assessee's claim for deduction of ^ 10 crore as a bad and doubtful debt could not have been allowed. The findings of the IT AT and the High Court, to the contrary, are therefore, insubstantial and have to be set aside.
In this view of the matter and considering the facts and circumstances of case, we are of the considered view that the assessee is not entitled for deduction towards provision for bad and doubtful debts, because, the conditions prescribed u/s.36(1)(vii) r.w.s.36(2) of the Act, are not satisfied. The Ld.CIT(A) without appreciating relevant facts deleted the additions made by the AO, and thus, we reversed the findings of the Ld.CIT(A) and sustained the additions made by the AO towards disallowance of provision for bad debts.
In so far as alternative arguments of the assessee in light of provisions of Sec.28 of the Act, we find that once any expenditure or allowance falls under particular provision of Income Tax Act, 1961, then, said expenditure/allowance cannot be considered under general provision of sec.37(1) or 28 of the Act, for deduction. This principle is upheld by the Hon’ble Supreme Court in the case of PCIT v. Khyati Realtors Pvt. Ltd. (supra), where, the issue has been dealt as under:
This court is of the opinion however, that in the facts of this case, the judgment in Southern Technologies (supra) on this issue (where the claim of bad and doubtful debt was disallowed) is appropriate, and applicable. The relevant extract of the said judgment is as follows:
"44. As stated above, Section 36(1)(vii) after 1.4.1989 draws a distinction between write off and provision for doubtful debt. The IT Act deals only with doubtful debt. It is for the assessee to establish that the provision is made as the loan is irrecoverable. However, in view of Explanation which keeps such a provision outside the scope of "written off" bad debt, Section 37cannot come in. If an item falls under Sections 30 to 36, but is excluded by an Explanation to Section 36 (1) (vii) then Section 37 cannot come in. Section 37 applies only to items which do not fall in Section 30 to 36. If a provision for doubtful debt is expressly excluded from Section 36 (1) (vii) then such a provision cannot claim deduction under Section 37 of the IT Act even on the basis of "real income theory" as explained above. "
In view of the foregoing discussion, the Revenue's appeal has to succeed. The impugned judgment of the High Court and the order of IT AT are hereby set aside. The appeal is allowed, in the above terms, without order on costs.
In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that the assessee cannot claim deduction towards provision for bad debts as business loss u/s.28 of the Act, since, the claim of the assessee directly fall under the provisions of Sec.36(1)(vii) of the Act, and thus, we reject the alternative claim of the assessee for deduction towards provision for bad debts u/s.28 of the Act.
In the result, appeal filed by the Revenue is allowed.
Order pronounced on the 09th day of June, 2023, in Chennai.