COMMISSIONER OF INCOME TAX vs. M/S SWARAJ MAZDA LTD.

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ITA/324/2004HC Punjab & HaryanaPHHC01051475200428 March 2011Author: MR. JUSTICE AJAY KUMAR MITTAL,MR. JUSTICE ADARSH KUMAR GOEL3 pages
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What did the High Court hold?

The High Court held that the Explanation to Section 36(1)(vii) of the Income Tax Act, 1961, inserted by the Finance Act, 2001, with effect from April 1, 1989, clearly states that any provision for bad and doubtful debts made in the accounts of the assessee is not included in the definition of bad debt or part thereof written off as irrecoverable. The Court reasoned that only an actual debt whose recovery has become bad and which is written off is admissible as a deduction. Therefore, a provision for bad and doubtful debt is not admissible as an expenditure under Section 36(1)(vii). The Tribunal had erred in reversing the CIT(A)'s order and allowing the provision as an expense. The appeal was allowed, and the substantial question of law was answered in favour of the revenue.

What were the facts?

The Revenue, Commissioner of Income-Tax, Chandigarh-II, appealed against an order of the Income Tax Appellate Tribunal (ITAT) dated February 28, 2003, for assessment year 1992-93. The assessee, M/s Swaraj Mazda Ltd., had initially declared a loss. The Assessing Officer framed the assessment at nil income, disallowing a provision for bad and doubtful debts amounting to Rs.36,76,974/-. The CIT(Appeals) upheld this disallowance. However, the ITAT, in its order dated February 28, 2003, accepted the assessee's claim for this provision. The Revenue is challenging the ITAT's decision before the High Court.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in deleting the addition of Rs.36,76,974/- made on account of disallowance of bad debts, considering that the conditions laid down under Section 36(1)(vii) of the Income Tax Act, 1961, were not fulfilled? Assessee's contention: The assessee's counsel supported the order passed by the Tribunal. (No specific arguments or authorities were recorded for the assessee). Revenue's contention: The Revenue argued that the Tribunal erred in allowing the provision for bad and doubtful debts. It relied on the Explanation to Section 36(1)(vii), inserted retrospectively by the Finance Act, 2001, effective from April 1, 1989. The Revenue contended that this explanation clarifies that only debts that have actually become bad and doubtful and are written off in the accounts, specifically relating to the debtor's account, are admissible deductions, not mere provisions for bad and doubtful debts.

Which sections of the Income-tax Act were involved?

Section 260A,Section 143(3),Section 36(1)(vii)

AI-generated summary — verify with the full judgment below

Income-tax Appeal No.324

of 2004

-1- *** IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income-tax Appeal No.324 of 2004 Date of decision: 28.3.2011 The Commissioner of Income-Tax, Chandigarh-II ...Appellant Versus M/s Swaraj Mazda Ltd. ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant. Mr. Pankaj Jain, Advocate for the respondent.

**** AJAY KUMAR MITTAL, J. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) against order dated 28.2.2003 passed by the Income Tax Appellate Tribunal, Chandgiarh Bench 'B', Chandigarh in ITA No.1321/Chandi/95, relating to the assessment year 1992-93, claiming the following substantial question of law:- “Whether on the facts and in the circumstances of the case, the ITAT was right in law in deleting the addition of Rs.36,76,974/- made on account of disallowance of bad debts keeping in view the facts conditions laid down under Section 36(I)(vii) of the Act are not fulfilled?”

2.

The facts as narrated in the appeal necessary for adjudication for the present appeal may be noticed. The assessee

Income-tax Appeal No.324

of 2004

-2- *** had filed return declaring loss of Rs.5,12,29,870/- on 29.12.1992. However, the assessment was framed under Section 143(3) of the Act on 28.2.1995 at nil income. The Assessing Officer amongst other disallowances had made a disallowance regarding claim for provision for bad and doubtful debts amounting to Rs.36,76,974/-. The assessee filed appeal before the Commissioner of Income-Tax (Appeals) (for short “the CIT(A)”) which was partly allowed on 4.9.1995. However, the disallowance for provision for bad and doubtful debts was upheld. On further appeal filed by the assessee, the Tribunal accepted the claim of the assessee relating to provision for bad and doubtful debts vide order dated 28.2.2003. The Revenue feeling dissatisfied with the order of the Tribunal has approached this Court.

3.

We have heard learned counsel for the parties and have perused the record.

4.

Learned counsel for the Revenue submitted that the Tribunal was in error in allowing the provision for bad and doubtful debts as claimed by the assessee. According to the learned counsel, Explanation to Section 36(1)(vii) inserted by Finance Act, 2001 retrospectively with effect from 1.4.1989 provided that provision for bad and doubtful debts was inadmissible as expense and the debt which had become bad and doubtful alone could be claimed as deduction. It was further urged that such bad and doubtful debt had to be written off with relation to the account of the debtor. Learned counsel for the assessee on the other hand supported the order passed by the Tribunal.

Income-tax Appeal No.324

of 2004

-3- ***

5.

It would be advantageous to refer to Explanation to Section 36(1)(vii) inserted by Finance Act, 2001 with effect from 1.4.1989 which reads as under:- “Explanation:- For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.”

6.

A perusal of the said explanation clearly spells out that provision for bad and doubtful debt is not to be included in any bad debt or part thereof written off as irrecoverable in the accounts of the assessee. In other words, it is only actual debt whose recovery has become bad which is written off is admissible and no provision for bad and doubtful debt is admissible as expenditure under Section 36 (1)(vii) of the Act. The Tribunal had thus erred in reversing the order of CIT(A) and allowing the provision for bad and doubtful debt as expense under Section 36(1)(vii) of the Act.

7.

In view of the above, the appeal is allowed and substantial question of law is answered in favour of the revenue.

( Ajay Kumar Mittal) Judge March 28, 2011

(Adarsh Kumar Goel) Pka

Judge

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