DARSHAN ROADLINES P.LTD,MUMBAI vs. ACIT 6(2)(1), MUMBAI

We have heard the rival contentions and perused relevant material on record. So far as the factual matrix is concerned, we find that it is undisputed fact that the assessee has debited the impugned amount in the Profit & Loss account and reduced the corresponding amount from aggregate of Sundry Debtors in the Balance Sheet. The lower authorities have denied the claim on the premises that the impugned expenditure was mere provision in nature and secondly the individual accounts of the debtors were not closed by the assessee.

On the question whether it was imperative for the assessee to close each and every individual account and its debtors in its books or a mere reduction in the loans and advances to the extent of the provision for bad and doubtful debt was sufficient, the answer given by the Tribunal was that, in view of the decision of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981 130 ITR 95], the CIT(A) was right in coming to the conclusion that, since the assessee had written off the impugned bad debt in its books by way of a debit to the profit and loss account simultaneously reducing the corresponding amount from Loans and Advances or Debtors depicted on the asset side in the balance sheet at the close of the year, the assessee was entitled to deduction under section 36(1)(vii) of 1961 Act. This view was not accepted by the High Court which came to the conclusion by placing reliance on a relied upon judgment in the case of CIT v. Wipro Infotech Ltd. (See Page 5 of the Paper Book), that, in view of the insertion of the Explanation vide Finance Act, 2001, with effect from 1-4-1989, the decision of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra) no more held the field and, consequently, mere creation of a provision did not amount to actual write off of bad debts, hence, these civil appeals.

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 1-4-1989, 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 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 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 Darshan Roadlines Private Limited Assessment Year-2012-13 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 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 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 judgment 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 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 its impugned judgment. 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 its books, as indicated above.

Coming to the second question, we may reiterate that it is not in dispute that section 36(1)(vii) of 1961 Act applies both to Banking and Non-Banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance-sheet is shown as net of the provisions for impugned debt. However, what is being insisted upon by the Assessing Officer is 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) of 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-bank might be taking the benefit of deduction under section 36(1)(vii) of1961 Act, twice over. [See Order of CIT (A) at pages 66, 67 and 72 of the Paper Book, which refers to the apprehensions of the Assessing Officer]. In this context, it may be noted that there is 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 is based on an apprehension that, if the assessee fails to close each and every individual account of its debtor, it may result in assessee claiming deduction twice over. In this case, we are concerned with the interpretation of section 36(1)(vii) of 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for details of individual debtor's account if the Assessing Officer has reasonable grounds to believe that assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. Assessee has instituted recovery suits in Courts against its debtors. If individual accounts are to be closed, then the debtor/defendant in each of those suits would rely upon the Bank statement and contend that no amount is due and payable in which event the suit would be dismissed.

Before concluding, we may refer to an argument advanced on behalf of the Department. According to the department, it is necessary to square off each individual account failing which there is likelihood of escapement of income from assessment. According to the Darshan Roadlines Private Limited Assessment Year-2012-13 department, in cases where a borrower's account is 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 if the borrower repays the loan, the assessee will credit the repaid amount to the Loans and Advances Account and not to the profit and loss account which would result in escapement of income from assessment. On the other hand, if bad debt is written off by closing the borrower's account individually, then the repaid amount in subsequent years will be credited to the profit and loss account on which the assessee-bank has to pay tax. Although, prima facie, this argument of the Department appears to be valid, on a deeper consideration, it is not so for three reasons. Firstly, the Head Office Accounts clearly indicate, in the present case, that, on repayment in subsequent years, the amounts are 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 is not credited to the profit and loss account of the Head Office, which is ultimately what matters, then, there would be a mis-match between the Rural Branch Accounts and the Head Office Accounts. Lastly, in any event, section 41(4) of 1961 Act, inter alia, lays down that, where a deduction has been allowed in respect of a bad debt or a part thereof under section 36(1)(vii) of 1961 Act, 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, we are of the view that the Assessing Officer is sufficiently empowered to tax such subsequent repayments under section 41(4) of 1961 Act and, consequently, there is no merit in the contention that, if the assessee succeeds, then it would result in escapement of income from assessment.

For the afore-stated reason, we uphold the judgment of the Tribunal dated 31-7-2003, and set aside the impugned judgment of the High Court. Consequently, the assessee's appeals stand allowed with no order as to costs The ratio of the above decision has been followed by Hon’ble Bombay High Court in CIT Vs. Tainwala Chemicals & Plastics India Ltd. [34 Taxmann.com 159] wherein the Hon’ble Court has held as under:- 3. In so far as question (c) is concerned, the Tribunal by the impugned order has followed the decision of the Apex court in the matter of Vijaya Bank Ltd. v. CIT [2010] 323 ITR 166/190 Taxman 257, wherein it has been held that once the provision of doubtful debt has been debited to the profit and loss account and corresponding provision has been credited or reduced from the debtors account in the balance-sheet, then, this would amount to writing off. In the present case, the Tribunal recorded a finding of fact that the respondent-assessee has debited the provision of doubtful debt to the profit and loss account and correspondingly reduced the assets by reducing the amount of unsecured loans. On the aforesaid facts, the Tribunal held that this would amount to writing off of the debt. Thus, on examination of facts it concluded that the respondent-assessee has written off the loan and would be entitled to the claim of bad debts. The Tribunal by the impugned order also recorded a finding of fact that once the respondent-assessee has lent Darshan Roadlines Private Limited Assessment Year-2012-13 surplus money and offered the interest to tax as business income, then the activity of the respondent-assessee of lending money is a business activity. Therefore, the debt qualifies for deduction under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961. In view of the finding of fact recorded by the Tribunal that the provision has been written off and reliance placed on the decision of the Apex Court in the matter of Vijaya Bank (supra), we see no reason to entertain question (c). Respectfully following the binding judicial pronouncement, we concur with the stand of Ld. AR and delete the impugned additions.

It is noticed that certain unforeseen typographical error has occurred in the above order passed by the co-ordinate Bench of Tribunal on 25/07/2018 which are being sought to be rectified by way of this corrigendum.

The relevant modifications in the above order are carried out as under: - (a) Para-9 of the Order read as follows: