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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI PRAMOD KUMAR&
PER Ms. MADHUMITA ROY - JM: The instant appeal filed by the assessee is directed against the order dated 12.10.2017 passed by the Commissioner of Income Tax (Appeals)-8, Ahmedabad under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) arising out of the order dated 01.03.2016 passed by the DCIT, Circle – 4(1)(2), Ahmedabad for the Assessment Year 2013-14 with the following grounds: 1. “The learned CIT(A) has erred in confirming addition of Rs. 2,21,627/- under Section 36(1)(va) read with Section 2(24)(x) in as much as the assessee has paid such contribution before the end of accounting year for Vidres India Ceramics Pvt. Ltd. vs DCIT Asst.Year –2013-14 all months except for the month of February and March and the Gujarat High Court decision in the case of CIT V/s. GSRTC 366 ITR 170 is not applicable on the facts of the case.
The learned CIT(A) has erred in confirming addition of provision for bad and doubtful debts of Rs. 5,23,625/- under Section 36(1)(vii) in as much as the assessee is covered by SC decision in the case of CIT vs. Vijya Bank 323 ITR 166 (SC).”
Ground No.1 : At the time of hearing of the instant appeal the Learned Counsel appearing for the assessee submitted before us that he does not want to proceed with this ground of appeal. Therefore, the same is dismissed as not pressed.
Ground No.2 : This ground of appeal relates to confirming addition of provision for bad and doubtful debts of Rs.5,23,625/- u/s 36(1)(iii) of the Act.
The assessee engaged in the business of manufacturing and trading of ceramic tiles chemicals and trading of ceramic machine spares, filed its return of income on 29.11.2013 declaring total income at Rs.19,68,48,120/- which was processed u/s 143(1) of the Act. Subsequently, notice u/s 143(2) under scrutiny dated 08.09.2014 followed by a notice u/s 143(2) r.w.s.129 and 142(1) dated 04.06.2015 was served upon the assessee. Further that, on 09.07.2015 a questionnaire was issued to the assessee along with note of information regarding the date of hearing on 13.08.2015, was served.
During the course of assessment proceeding, it was found from the Profit and Loss account that the assessee has claimed an amount of Rs.5,23,625/- in the Profit and Loss account as provision for bad and doubtful Asst.Year –2013-14 debts and hence the assessee was asked as to why the same should not be disallowed and added to the total income of the assessee. In reply whereof the assessee by and under a representation dated 27.01.2016 submitted that during the course of business in case of certain debtors has created provision on the same. On the basis of the Supreme Court decision in the case of CIT-vs-Vijaya Bank reported in 323 ITR 166 SC wherein the provision for bad and doubtful debts is allowable only when the said provision is debited to the Profit and Loss account and such provision is deducted from the balance of the trade receivable, the assessee company has debited the said provision to the Profit and Loss account and also reduced the same from the balance from trade receivable (debtors). Hence prayed for such claim. However, the explanation extended by the assessee was not found acceptable and thus the same was rejected by the Learned AO upon addition which was, in turn, confirmed by the Learned CIT(A). Hence, the instant appeal filed by the assessee before us.
At the time of hearing of the instant appeal, the Learned AR appearing for the assessee submitted before us that the case is squarely covered by the Judgment passed by the Hon’ble Supreme Court in the case of Vijaya Bank (supra) and also by the Gujarat High Court in the case of CIT-vs-Vodafone Essar Gujarat Ltd. reported in [2017] 397 ITR 55 (Guj). The Learned AR further submitted in this particular case, the assessee has debited the provision to the Profit and Loss account in respect of doubtful debts and the same amount is reduced in the balance sheet from sundry debtors – trade receivable which is evident from the balance sheet in Note No.14 to the accounts which was also placed before the Learned CIT(A), however, without any result. The reduction from the sundry debtors amounts to actual write off as held by the Vidres India Ceramics Pvt. Ltd. vs DCIT Asst.Year –2013-14 Hon’ble Apex Court in the case as cited above as also submitted by the Learned AR. The said judgment is applicable to the non-banking company also. In that view of the matter, he prayed for deletion of addition made by the authorities below. On the contrary, the Learned DR relied upon the order passed by the authorities below.
Heard the respective parties, perused the relevant materials available on record. It appears that the assessee has actually debited the provision of Rs.5,23,625/- to Profit and Loss account in respect of such doubtful debts and the same was also reduced in the balance sheet from sundry debtors/trade receivable.
It also appears from the records that the judgment passed by the Hon’ble Supreme Court in the case of Vijaya Bank has been distinguished by the authorities below on the ground that said judgment relates to actual write off bad debts and not provision of bad debts. However, the judgment relied upon by the Learned AR has clearly laid down the ratio that mere debit to profit and loss account is not sufficient and simultaneously obliterating of provision from accounts by reduction from loans and advances or debtors on assets side of balance sheet amounts to writing off for grant of deduction. Moreso, disallowance for failure to close individual account of each debtors in account books is not justified.
Further that, we have also carefully considered the judgment passed by the Hon’ble Juri ictional High Court in the case of CIT-vs-Vodafone Essar Asst.Year –2013-14 Hon’ble High Court took into consideration of the judgment passed in the matter of Vijaya Bank and observed as follows:
“16. We may however, appreciate the implication of the ratio laid down by the Supreme Court in case of Vijaya Bank (supra), on the true interpretation of clause(i) to the explanation 1 and the decisions of Karnataka High Court in cases of Yokogawa India Ltd. (supra) and Kirloskar Systems Ltd. (supra). Vijaya Bank (supra) was a case arising under section 36(1)(vii) of the Act. The assessee before the Supreme Court was a bank. The issue considered by the Supreme Court was whether it was imperative for the assessee bank to close the individual account of each of its debtors in its books or a mere reduction in the loans and advances or debtors on the asset side of its balance sheet to the extent of the provision for bad debt, would be sufficient to constitute a write-off. In this context, the Supreme Court considered the issue as to the manner in which the actual write off takes place under the accounting principle. It was noticed that prior to 1.4.1989 amendment in section 36(1)(vii), even the provision for the bad debt could be treated as write off. After 1.4.1989 however, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii) of the Act. In context of such statutory change, the Supreme Court referred to the decision in case of Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577/187 Taxman 346, in which the following observations were made : "Prior to April 1, 1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction under section 36(1)(vii). [See CIT v. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom.) and Vithaldas H. Dhanjibhai Bardanwala v. CIT (1981) 130 ITR 95 (Guj.)] Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 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 April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to section 36(1) (vii). Consequently, after April 1, 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 profit and loss account and credits the asset account like Asst.Year –2013-14 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 profit and loss 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 the latter case, the assessee would not be entitled to deduction after April 1, 1989."
The Supreme Court (in Vijaya Bank) further observed as under :
"
One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra] was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1st April, 1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in Section 36(1)(vii) with effect from 1st April, 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 him, 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. He 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 was the very reason why the Explanation stood inserted. According to him, prior to Finance Act, 2001, many assessees used to take the benefit of deduction under Section 36(1)(vii) of 1961 Act by merely debiting the impugned bad debt to the Profit and Loss Account and, therefore, the Parliament stepped in by way of 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 this extent, we agree with the contentions of Shri Bhattacharya. 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 it's 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 Vidres India Ceramics Pvt. Ltd. vs DCIT Asst.Year –2013-14 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 it's impugned judgement. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under Section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in it's Books, as indicated above."
It can thus be seen that in case of Southern Technologies Ltd. (supra), the Supreme Court explained that if an assessee debits an amount of doubtful debt to the Profit and Loss account and credits the asset account like sundry debtor's account, it would constitute a write-off of an actual debt. On the other hand, if an assessee debits provision for doubtful debt to the Profit and Loss 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 and in such a case after 1.4.1989, the assessee could claim no deduction under section 36(1)(vii) of the Act.
This principle was further clarified in case of Vijaya Bank (supra) by observing that in case on hand, the assessee besides debiting the profit and loss account and creating a provision for bad and doubtful debt, had 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 of loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision for the bad debt. Thereafter, the Supreme Court rejecting the Revenue's contention that for the bank to take benefit of section 36(1)(vii), must close the account of the debtors, decided the question in favour of the assessee.
Above decisions of Supreme Court in cases of Southern Technologies Ltd. (supra) and Vijaya Bank (supra) thus bring out a clear distinction between a case where the assessee may make a provision for doubtful debt and a case where the assessee after creating such a provision for bad and doubtful debt by debiting in Profit and Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset aside of the balance sheet. The later would be an instance of write- off and not a mere provision.” Asst.Year –2013-14 debited the provision of Rs.5,23,625/- to the Profit and Loss account in respect of doubtful debts and also reduced the same amount in the balance sheet from sundry debtors – trade receivable. Such reduction from sundry debtors amounts to actual write off and hence we are of the considered opinion to delete the addition made by the authorities below. We order accordingly.
In the result, assessee’s appeal is allowed. This Order pronounced in Open Court on 17/05/2019 ( PRAMOD KUMAR ) ( Ms. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 17/05/2019 Priti Yadav, Sr.PS
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त(अपील) / The CIT(A)-8, Ahmedabad.
"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड" फाईल / Guard file. आदेशानुसार/ BY ORDER, स"या"पत ""त //// उप/सहायक पंजीकार (Dy./Asstt.