GOLDIAM JEWELLERY LIMITED,MUMBAI vs. ACIT-CC 1(2), MUMBAI

2. At the very outset, the Ld. AR appearing on behalf of the assessee made statement at bar that he is not pressing Ground No. 1 and 3, consequently, considering his statement ground No. 1 and 3 stands dismissed as not pressed.

3. Now there remains only one ground for adjudication i.e Ground No. 2, wherein the assessee has challenged the order of the CIT(A) in confirming the action of the Ld.AO in making addition of Rs. 1,48,50,000/- on account of provision for doubtful debts claimed as deduction.

At the outset, we may state that, in these civil appeals, broadly, two questions arise for determination. The first question which arises for determination concerns the manner in which actual write off takes place under the Accounting principles. The second question which arises for determination in these civil appeals is, whether it is imperative for the assessee-Bank to close the individual account of each debtor in it's Books or a mere reduction in the "Loans and Advances Account" or Debtors to the extent of the provision for bad and doubtful debt is sufficient?

The first question is no more res integra. Recently, a Division Bench of this Court in the case of Southern Technologies Limited vs. Joint Commissioner of Income Tax, reported in [2010] 320 ITR 577, [in which one of us [S.H. Kapadia,J.] was a party] had an occasion to deal with the first question and it has been answered, accordingly, in favour of the assessee vide Paragraph (25), which reads as under:

"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 vs. 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 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."

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 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.

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) of 1961 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 it's 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 flip- side to the argument of the Department. Assessee has instituted recovery suits in Courts against it's 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 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 judgement of the Tribunal dated 31st July, 2003, and set aside the impugned judgement of the High Court. Consequently, the assessee's appeals stand allowed with no order as to costs.

9.1 Now the controversy arises whether the assessee can claim a deduction for the provision of doubtful debts without giving adjustment in the individual ledger account of the sundry debtors. This issue has been decided in favour of the assessee by this Tribunal in the case of Vidras India Ceramics (Pvt.) Ltd. Vs D.C.I.T. bearing for AY 2014-15 vide order dated 09/07/2021. The relevant extract of the order is reproduced as under:

The second question which arises for determination in these civil appeals is, whether it is imperative for the assessee-bank to close the individual account of each debtor in its books or a mere reduction in the "Loans and Advances Account" or Debtors to the extent of the provision for bad and doubtful debt is sufficient?

15.2 The above question was answered by the Hon'ble Supreme Court in the manner as detailed below:

"8. 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."

15.3 In the case on hand we have seen the relevant page of profit and loss account placed on page 39 of the paper book where the assessee has claimed deduction for the provision of doubtful debts amounting to Rs. 55,69,760/- which was adjusted against the trade receivables as evident from the relevant schedule of the Balance Sheet of the assessee placed on page 34 of the paper book.

15.4 Besides this we also note that the tribunal in the own case of the assessee for the assessment year 2013-14 involving identical facts and circumstances has allowed the issue on hand in its favour in vide order dated 17.5.2019. The relevant extract is reproduced as under:

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 Jurisdictional High Court in the case of CIT- vs-Vodafone Essar Gujarat Ltd. While deciding the identical issue in favour of the assessee, the 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)(vil), 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 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."

17/The Supreme Court (in Vijaya Bank) further observed as under:

"7. 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 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."

Respectfully, relying upon the judgment cited above, we do not hesitate to conclude that the assessee is entitled to be allowed the provision for bad and doubtful debts on the identical facts and circumstances of the case since it has 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.

15.5 At the time of hearing, the learned DAR drew our attention on the various orders of the Hon'ble Courts and the Tribunal. But in our considered view those judgments are not applicable to the facts of the present case in the given circumstances.

15.6 In view of the above, we hold that the assessee is entitled to claim the deduction with respect to the provisions made by it against the trade receivables in the given facts and circumstances. Accordingly, we are not convinced with the finding of the authorities below and therefore the same deserves to be reversed. Thus we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

9.2 From the above, we note that the ITAT in the case of Vidras India Ceramics (P.) Ltd (Supra) after considering and relying on the judgment of Hon'ble SC in the case of Vijaya Bank (Supra) has granted relief to the assessee for the provision made with respect to doubtful debts. Respectfully following the same we hold that assessee is eligible for deduction on account of provision for doubtful debts in the given facts and circumstances. It is for this reason that the assessee in the present case has written off the provision of doubtful debts in the profits and loss account and also has given effect in the balance sheet of the assessee. Thus to our understanding the principle laid down by the Hon'ble S.C in the case Vijay Bank as discussed above cannot be denied for its application merely on the reasoning that the word provision for doubtful debts has been used by the assessee in its Financial Statements.

9.3 It is also important to note that the assessee has not written off the provision for doubtful debts in the individual ledger account of the sundry debtors for the reason that it will lose it right in the Civil proceedings for recovery of its dues from the sundry debdtors. This argument of the Ld. A.R was not controverted by the Ld. DR for the assessee at the time of hearing. Accordingly, we hold that the assessee is entitled to the deduction for the provision of doubtful debts in the given facts and circumstances.

9.4 Regarding the provision for doubtful advances, we note that the same stand on the footing of doubtful debts as long as they were given in the course of the business. Therefore, on the same line of reasoning we also hold that the assessee is allowed for the deduction of the provision for doubtful advances under the provision of section 37 of the Act. In view of the above and after considering the facts in totality we reverse the order of the authority below and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. 9.5. In the result the appeal filed by the assessee is allowed.

8. Apart from the above, we have also gone through the decision of Vidras India Ceramics Pvt Ltd, [2021] 129 taxman.com 320 (Ahmadabad Trib) wherein it was held as under:

INCOME TAX: Where assessee-company has debited provision made in respect of doubtful debts to profit and loss account and also reduced same amount in balance sheet from sundry debtors/trade receivable, such simultaneous reduction from sundry debtors amounted to actual write off of debt and hence, same was to be allowed as deduction under section 36(1)(vii II. Section 36(1) (vii) of the Income-tax Act, 1961 Bad debts (Write off) - Assessment year 2014-15 Assessee-company engaged in manufacturing and trading of ceramics tiles, claimed provision made for doubtful debts Assessing Officer disallowed same under explanation to clause (vii) of section 36(1) - Whether, since assessee-company has debited provision made in respect of doubtful debts to profit and loss account and also reduced same amount in balance sheet from sundry debtors/trade receivable, such simultaneous reduction from sundry debtors amounted to actual write off of debt and hence same was to be allowed as deduction under section 36(1)(vii) Held, yes [Para 15.6] [In favour of assessee] 9. Apart similar question was also decided by the jurisdictional High Court of Mumbai in the case of CIT Vs. Tainwala Chemicals & Plastics India Ltd., [2013] 34taxmann.com 159 (Bombay), wherein it was held as under:

IT: Where assessee-company made provision for doubtful debt given to its group concern and had debited same to profit and loss account and correspondingly reduced assets by reducing amount of unsecured loans, doubtful debt qualified for deduction under section 36(1)(vii) Section 36(1) (vii) of the Income-tax Act, 1961 Bad debts (Provision for doubtful debt] - Assessment year 2004-05-Assessee-company made provision for doubtful debt given to its group concern and claimed same to be allowed as deduction under section 36(1)(vii) - It had debited provision of doubtful debt to profit and loss account and correspondingly reduced assets by reducing amount of unsecured loans It had lent surplus money and offered interest income to tax as business income Whether doubtful debt in question qualified for deduction under section 36(1)(vii) read with section 36(2) Held, yes [Para 3] [In favour of assessee]

Therefore, respectfully following the decisions mentioned above and also considering the facts of the case, we hold that the assessee is eligible for deduction on account of provision for doubtful debt in the given facts and circumstances. Therefore, while concurring with the stand of Ld. AR, we direct the Ld.AO to delete the impugned additions.

Order pronounced in the open court on 27.11.2024.

Sd/- Sd/- (PADMAVATHY S) (SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 27/11/2024 KRK, PS आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent. 2. संबंिधत आयकर आयु� / The CIT(A) 3. आयकर आयु�(अपील) / Concerned CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, मु�बई / DR, ITAT, Mumbai 5. गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, स�ािपत �ित //True Copy//