M/S. VAASAUTOMATION PRIVATE LIMITED,KANCHIPURM vs. ACIT, COPRPORATE CIRCLE-3(2), CHENNAI

आदेश / O R D E R PER AMITABH SHUKLA, A.M : This appeal is filed against the order bearing DIN & Order No.ITBA/NFAC/S/250/2023-24/1058073451(1) dated 20.11.2023 of the Learned Commissioner of Income Tax [herein after “CIT(A), National Faceless Appeal Center[NFAC], Delhi, for the assessment year 2015-16. Through the aforesaid appeal the assesse has challenged order u/s 250 dated 20.11.2023 passed by NFAC, Delhi.

2. The Ld' CIT(A) also erred in stating that the Appellant did not provide proof for the debt turning bad to the Assistant Commissioner of Income Tax (OSD) - Corporate Circle 3(2)- (hereinafter the "Assessing Officer") at the time of scrutiny assessment despite the appellant has submitted the proof of insolvency, correspondences to the Authorized Dealer for seeking RBl permission to write-off this overseas receivable and also evidence of surrender of export benefit received in the form of Duty drawback, in TR-6 Challans, in spite of the legal provision not warranting the appellant to establish the debt.

3. The Ld' CIT(A) has also erred in stating that the facts of the case in T.R.F Ltd ([2010] 323 ITR 397 (SC)) is different from the appellant's case and denied the stand taken by the Hon'ble Apex court that it is not necessary for the assesse to establish the debt as long as the conditions laid down section 36(1)(vii) read with sec.36(2) are satisfied. The Ld.CIT(A) has also erred in insisting that the appellant has not produced additional evidence for the dissolution of the receivable party, despite the appellant producing the proof of dissolution both during the assessment proceedings and also during appeal proceeding before the Ld.CIT(A).

4. That the appellant prays that the addition of Rs.1,78,11,798 made in respect of disallowance of bad debts claimed, may be deleted.

5. The appellant craves, leave to add, alter, amend or vary and / or withdraw any or all of the aforesaid grounds of appeal or at time of hearing of the above appeal. 2.0 The assesse has raised grounds of appeal 1 to 4 which all are contesting the action of the Ld.CIT(A) in confirming the order of the Ld.AO qua denial of write off of bad debts claimed by the assesse by way of a provision entry. All the grounds centering around this principle controversy are therefore adjudicated together. 3.0 Before proceeding further, it is necessary to examine the brief factual matrix of the case. The assesse, M/s VAAS Automation Private Limited, holding PAN AAACH2759N, is a Private Limited Company registered under the Companies Act and is in the business of manufacture of Industrial Valves and actuators .The assesse had field its return of income for the A.Y. 2015-16 on 27.11.2015 admitting a loss of Rs. 1,16,74,105. The return of income was selected for scrutiny and assessment proceedings under the section 143(3) were initiated. During the relevant financial year, the Assesse had written off bad debts to the tune of Rs. 1,78,11,798/-due from its overseas customer, M/s. VAAS Europe (this happens to be a fellow subsidiary of the same holding company as that of the assesse), on the premise that the debtor company was liquidated and the amount could not be recovered. The assesse had made a provision for the said bad debts on the strength of confirmation from the customer that the amount will not be settled and has become irrecoverable. 3.1 As the sum was a foreign currency receivable, the assesse submitted a formal application to the Authorized Dealer being State Bank of India seeking approval for the write-off of the amount in the books. During the course of assessment proceedings, the Ld. Assessing Officer questioned the validity of the bad debt written off in the books of accounts and asked the assesse to submit evidence for efforts taken by the company in recovering the amount from the customer as well as RBI approval for write off the amount from the books. In response to the queries, the assesse had submitted a confirmation from UK Company House, the regulator for companies in UK, confirming the dissolution of the Customer Company. Also, the assesse had submitted the last audited financial statements of the Customer Company for year ending 31st Mar 2014, with their regulators in which it was stated in the Accounting Policies' section that the inter- company balances with VAAS Automation Pvt Ltd would not be repaid in full. This uncertainty of going concern was also qualified as an 'Emphasis of matter" in the Audit report. 3.2 The assesse had also submitted various correspondences towards its application and follow-ups made to the Authorized Dealer (SBI, SME Branch, Guindy, Chennai) and the foreign exchange department of the RBI seeking approval of the write-off. 3.3 The Assesse has also indicated efforts taken in fulfilling the requirements of RBI for the write-off. 3.4 Before the Assessing Officer the Assesse placed reliance upon a plethora of judicial pronouncements in support of its bad debts claim made u/s 36(1)(vii) based upon provisions created. Before the Ld.CIT(A) the assesse made identical submissions who after considering the same concluded as under .. “…..510 The appellant has brought to my attention the decisions of the Hon'ble Supreme Court in the case of TRE Limited in which it has held that it is not necessary an assesse to establish that the debt in fact has become irrecoverable. However, the facts in the appellant's case are distinguishable. It is a case where an assesse has written off an amount receivable from its related party situated outside India. The transactions between the assesse company and its related party M/s. VAAS Europe have been classified as ‘International transactions' u/s 92B of the Act and subjected to Transfer Pricing Audit. The transactions are in the nature of export of goods by the appellant company to its associated enterprise situated outside India. The report of the Transfer Pricing Audit has also been filed for earlier years in Form 3CEB. That being the case, when the assesse has claimed that the transactions of export of goods by the appellant company to its Associated enterprise has been carried out at arm's length, subsequently writing off such receivables would defeat the entire Transfer Pricing Audit. Therefore, in the appellant's case, there is a greater degree of onus thrust upon the appellant to show whether the foreign Associate of the appellant has actually become bankrupt and is not in a position to repay its liabilities. In this connection, the appellant was asked to file details as to whether the company M/s. VAAS Europe has become bankrupt, and if so, whether all its creditors lost their entire receivables similar to that of the appellant company. The appellant was also asked to clarify whether any pro rata payments were made to creditors by M/s. VAAS Europe. However, the appellant expressed its inability to furnish its evidence. The relevant portion of the appellant's response is reproduced hereunder:

------------------------------------- ------------------------------- --------------------------- 5.11 Except for stating that M/s. VAAS Europe was dissolved due to insolvency, the appellant could not bring in any other information or evidence. It is to be noted at this point that the appellant company and M/s. VAAS Europe were fellow subsidiaries of the same holding company during the year under consideration. That being the case, the appellant's inability to get the information is questionable…..” 4.0 Before us the Ld. Council of the assesse argued heavily relying upon the decision of the Hon’ble Co-ordinate Bench of Ahmadabad Tribunal delivered in the case of Vidras India Ceramics Pvt. Ltd. Vide for AY-2014-15 dated 09.07.2021. It was argued that the assesse’s case is fully covered by the decision delivered by the Hon’ble Co-ordinate Bench Supra. 5.0 The Ld.DR argued in favour of order of the Ld. Assessing Officer and Ld.CIT(A). It was submitted that the decision in the case of Vidras India Ceramics Pvt. Ltd is purely distinguished on the facts of the case. It was submitted that while delivering the impugned judgement the Hon’ble Co-ordinate Bench had relied upon the decision of the Hon’ble Apex Court in the case of Vijaya Bank vide Civil Appeal Nos. 3286-3287 of 2010 dated 15.10.2010. The Ld.CIT DR argued that the decision in the case of Vijaya Bank Supra is further distinguished on the facts of the present case. 6.0 We have heard rival submission in the light of facts of the case and material brought on records. It is an undisputed fact of the case that the assesse has made a claim of write off of bad debts on the basis of provisions created in its accounts. The basic controversy that has arisen in this case is as to whether ‘provisions of the write off bad debts’ are to be given the same treatment and allowed as deduction or not to an assesse. Thus a distinction is required to be made between a normal write off bad debts viz-a-viz a provisions of the write off bad debts. 6.1 Before proceeding further, it is considered necessary to examine the statutory provisions governing the write off of bad debts as contained in section- 36 of the IT Act. Section-36 of the IT Act. Other deductions.—(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— ------------------- ------------------- (vii) Subject to the provisions of sub-section (2), the amount of 5[any bad debt or part thereof which is written off as irrecoverable in the accounts of the assesse for the previous year:] 211 1[Provided that in the case of 2[an assesse] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause:] 1—--------------------------------------------- ---------------------------------------- [Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assesse of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub- section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.] 4[5[Explanation1].—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assesse shall not include any provision for bad and doubtful debts made in the accounts of the assesse;] 6[Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;] 7[(viia) 8[in respect of any provision for bad and doubtful debts made by— (a) a scheduled bank [not being 9*** a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank 10[or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount 11[not exceeding 12[eight and one-half per cent.]] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 13[ten per cent.] of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner: 14[Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:] 212 1[Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words ―five per cent‖, the words ―ten per cent.‖ had been substituted:] 1. Ins. by Act 20 of 2002, s. 19 (w.e.f 1-4-2003).

“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 assesse before the Supreme Court was a bank. The issue considered by the Supreme Court was whether it was imperative for the assesse 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 assesse(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 assesse and crediting the amount to the account of the debtor, the assesse was still entitled to deduction under section 36(1)(vii). 7 Asstt. Year 2014-15 [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 assesse will not include any provision for bad and doubtful debt made in the accounts of the assesse. 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 assesse 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 assesse 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 assesse would not be entitled to deduction after April 1, 1989."

Respectfully, relying upon the judgment cited above, we do not hesitate to conclude that the assesse 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 assesse 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.

As discussed in preceding paragraphs the principle controversy 6.3 germane to the case is as to whether an assesse’s claim made by way of a provision for write off of debts is eligible or not. Discussions made in preceding paragraphs indicate that explanation-1 to 36(1)(vii) which is available on statute with retrospective effect from 01.04.1989 prohibits an assesse to make such a claim meaning thereby that all such claims will have to be denied by the AO. It is however pertinent to note that section 36(1)(viia) available on statute w.e.f 01.04.1980 provides that an assesse being a scheduled bank a public / a state financial institution / corporation non-banking financial company etc would be eligible for claim of provisions for any bad and full debts. It is an undisputed fact of the case that the assesse under consideration is a Pvt. Ltd. Company registered under the companies act and is in the business of manufactures of industrial valves and actuators. It is also an undisputed fact of the case that the assesse is merely created a provision for the write off of bad debts and is contesting thereof. It is pertinent to point out sub-ground 2.5 of assesse’s grounds of appeal contested in this appeal which proves this position.

On the issue of the assesse having made its claim of write off of bad debts by way of a provision the following extracts comprising part of appeal documents filed by the assesse are relevant for reproduction :- Financial Statement appended with the balance sheet / profit & loss account showing related parties disclosures Financial Statement appended with the balance sheet / profit & loss account showing trade receivables.

Application of assesse to the Reserve Bank of India for permission to write off bad debts in the self write off category.

Now, in view of the above, it is therefore clear that the claim of assesse qua any write off of bad debts would fall squarely within the meanings of section 36(1)(vii). Consequently, the assesse’s case also falls within the mischief of explanation-1 to 36(1)(vii) thus excluding it for eligibility to claim write off of bad debts made by way of a provision. On the issue of interpretation of statute, there exist a plethora of judgements prescribing wherever law is unambiguously clear, its different interpretation is not permissible. In the instant case the clear position of law is that an assesse which is not into business of banking would not be allowed write off bad debts claimed by way of creation of a provision. It is pertinent to briefly examine as to what constitutes a provision. A provision in normal understanding of the matter primarily denotes a contingent transaction and is hence in the nature of a contingent liability. A provision is an unascertained liability. Given its nature of being a contingent liability and not being a definite transaction, it is not allowed as a deduction (in the nature of expense) under the provisions of the Income Tax Act 6.4 Further, It is also considered necessary at this stage to briefly examine and distinguish a normal claim of a financial transaction viz-a-viz a claim made by way of a provision. A bad debt is primarily that sales of an assesse in respect of which the sale proceeds receipts become doubtful to come. As per accounting standard whenever sales is made the sales account is debited and when the party to whom sales is made makes payment then party’s account is credited. Now in a situation when a party fails to make any payment, in part or full, then said party’s account is credited by the amount, in part of full, which was to be received by an entry “by bad debts”. Correspondingly, the amount of unrealized sale proceeds, in part or full which has been credited as by an entry “by bad debts” would be taken to the assets side of the balance sheet and reduced from the overall figure of sundry debtors. Thus the underlying principle for claim and allowance of bad debts is that the account of the party has to be credited qua claim of a genuine bad debts. Thus once party’s account is credited and bad debt claimed the assesse looses perpetually all its rights to claim any amount in respect of such bad debts which have been written off. The exception to this accounting rule however is made in the case of Banks and Financial Institutions who are allowed to create a provision and yet claim write off a bad debts. For a bank the loans advanced by it are having the nature and character of a sale. A bank is allowed to create a provision in respect of loans which become bad or to say non-performing assets so as to enable it to maintain a healthy balance sheet and at the same time retaining its rights over the defaulted loan. In this regard, it also merits examination as to why banks are not allowed or to say they do not credit borrowers account while claiming bad debts and do it by way of a provision only. Banks are holders of public money and trust. The loans advanced by them, recovery of some of which become difficult in times to come, are sourced through deposits from public. Besides, banks have a significantly longer lien period over their claims. Thus the banks do not credit borrowers accounts while claiming write off of bad debts through a provision. The latter merely being an exercise to maintain healthy accounts / financial statements. Assuming the situation that a bank as against creating a provision for write off chose to credit the individual’s party account for formally claiming write off its bad debts, then in such a situation the bank would be permanently loosing its right in a situation, if and, when the party becomes capable returning the loan. It is because of this reason that banks are permitted to claim write off bad debts without crediting the part’s account and by merely creating a provision. This financial principle has been approved by the Hon’ble Apex Court in the case of Vijaya Bank Supra. 6.5 There is also another undisputed facts on record which comes in the way of the assesse becoming eligible for allowance of the impuged bad debts amounting to Rs. 1.78Crores app. through a “provision” entry for claiming write off of its bad debts. Provisions of section 36(1)(Vii) clearly stipulates that the bad debts are allowed to an assesse only if, it is written off by him as “irrecoverable” in its account for the previous year under consideration. In the instant case the said amount of Rs.1.78 Crores app. pertains to an overseas party and therefore as per the extant rules covering the subject, the assesse is required to obtain prior permission of the RBI before declaring the impugned amount as irrecoverable and writing it off. As per contemporary rules of the RBI an assesse was eligible to write off its unrealizable sales proceeds under a category called “self write off” provided the amount to be written off was not exceeding 5% of the total exports volume. Details provided by the assesse indicates that it had made an initial application to the RBI for write off of the impugned amount but the approval from the RBI was not forthcoming apparently because the amount to be written off was exceeding 5% of the total exports volume. Subsequently, the assesse got merged with another company and as a sequal to the merger the amount of write off viz-a-viz total export sales fell less than 5% actually aggregating to about 1.89%. The assesse therefore made another application to the RBI requesting for allowance of write off in the self help category in subsequent financial years. The assesse has not placed on records any approval from the RBI. Thus the assesse can only write off the impugned amount as irrecoverable and claim it a bad debts only upon receipt of any valid approval from the RBI and as the same was pending, it can be safely concluded that the statutory stipulations mandated in section 36(1)(Vii) were not fulfilled by the assesse so as to warrant any allowance of its claim of bad debts. This without prejudice that even after receipt of RBI’s approval, the assesse would not have acquired the right to write off its bad debts by way of a mere provision entry. 6.6 Coming to the reliance of the assesse upon the decision of Hon’ble Coordinate Bench of the Ahmadabad Tribunal in the case of the Vidras India Ceramics Pvt Ltd Supra it is seen that the same is not Pari Materia to the present case. The principle of Pari Materia stipulates that statutes or legal provisions relating to the same subject should be interpreted together to ensure consistency and harmony in the law. It is seen that Hon’ble Coordinate Bench of the Ahmadabad Tribunal Supra has relied upon the ratio laid down by the Hon’ble Apex Court in the case of Vijaya Bank Supra. It is pertinent to point out that the decision of the Hon’ble Apex Court therein was with reference to an assesse in the capacity of Bank. In this regard, the following opening observations of the Hon’ble Apex Court in the impugned order are extracted as under: “Whether it is imperative for the assesse-Bank to close the individual account of each of it’s debtors in it’s books or a mere reduction in the Loans and Advances or Debtors on the asset side of it’s Balance Sheet to the extent of the provision for bad debt would be sufficient to constitute a write off is the question which we are required to answer in these civil appeal?”. Thus it is abundantly clear that the decision of the Hon’ble Apex Court is with respect to assesse’s who are banks and not to Non-banking assesse’s. The issue which the Hon‘ble Supreme Court decided was as to whether the explanation-1 of section 36(1)(vii) was adversely impacting claims of provision of write off of full debts particularly in the light of decision of Hon’ble Gujarat Higher Court in the case of Vithal Dass H D Bardanwala. Analyzing its own decision in the case of Southern Technologies Ltd 320 ITR 577, the Hon’ble court held that prior to 1.4.1989 a provision was admissible for claim of deduction under section 36(1)(vii) but not post 01.04.1989. There is nothing in the order of Hon’ble Supreme Court to allude that is prescribed in the case of Vijaya Bank Supra would be applicable to case of non-banking assesses also. As the decision of Hon’ble Apex Court is only with the reference to treatment of write off bad debts by way of provisions in respect of banks, Accordingly in above view of the matter, it is difficult to place any reliance upon the impugned decision of Hon’ble Coordinate Bench of Ahmadabad. It is not out of place to mention here, as pointed out by the Ld.DR that the present case is fully covered by the ratio laid down by the Hon’ble Supreme Court in the case of Southern Technologies Ltd. 320 ITR 577 clearly mandating that post 01.04.1989 “if an assesse debits an amount of doubtful debts to the profit & loss account and credits the asset account like Sundry Creditors account, it would constitute a write off of an actual debt. However, if an assesse debits 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 debts. In the latter case the assesse would not be entitled to deduction after April 1, 1989..”. 6.7 At the cost of repetition it is emphasized that the assesse has merely claimed a write off bad debts on the basis of a mere provision created by its financial statements. The assesse has not provided any evidence to allude that it had credited the exports sales account of the party namely VAAS Europe while claiming the write off of bad debts amounting to Rs.1.78 Crores app. apparently because the assesse was not permitted to do so till it received an approval from the RBI. The assesse is a private limited company dealing in automobile accessories and not a bank to be eligible to claim write off bad debts an account of provisions as mandated by Hon’ble Supreme Court in the case of Vijaya Bank Supra. The case of the Revenue is covered by the decision of the Hon’ble Apex Court in the case of Southern Technologies 320 ITR 577 which mandates that after 31 -: 01.04.1989 an assesse is not allowed to claim write off of its bad debts through a provision entry. 7.0 Accordingly, we are of the view that the assesse is not entitled for its claim of deduction of Rs.1,78,11,798/- on account of provisions created for bad debts written off. We do not find any infirmity with the decision of Ld.CIT(A) sustaining the order of the AO. We therefore, confirm the order of the Ld.CIT(A) holding that the assesse is not entitled for its claim of deduction of Rs.1,78,11,798/- on account of provisions created for bad debts written off. 8.0 In the result, all the grounds of appeal raised by the assesse are dismissed. Order pronounced on 31st July, 2024 at Chennai.