2005 (7) TMI 70 - HC - Income Tax

Court rules provision for bad debts insufficient without actual write-off

The court held that the assessee's claim for bad debts was not allowable as the debts were not actually written off as irrecoverable in the accounts for ... Bad debt - provision/writting off - '1. Whether Tribunal was right in allowing the assessee's claim for a bad debt, when the bad debt had not actually been written off in the books of account? 2. Whether, Tribunal was right in allowing the claim for bad debt on the ground that the provision had been shown under the head 'Expenditure' in the annual report of the assessee-company? 3. Whether an assessee other than a banking company can be allowed a claim for a bad debt on the basis of a mere provision?' - In the present case, it can be seen that the assessee did not write off the debt in question as irrecoverable in his accounts for the previous year. Hence on the plain language of section 36(1)(vii) the debt cannot be allowed as a 'bad debt' -Making a provision is not the same thing as writing off a debt as irrecoverable. – Thus, impugned judgment of Tribunal, and of the CIT (Appeals) with respect to the claim of the assessee regarding bad debts are set aside, and the order of AO is restored Issues Involved:1. Whether the Tribunal was right in allowing the assessee's claim for a bad debt when the bad debt had not actually been written off in the books of account.2. Whether the Tribunal was right in allowing the claim for bad debt on the ground that the provision had been shown under the head 'Expenditure' in the annual report of the assessee-company.3. Whether an assessee other than a banking company can be allowed a claim for a bad debt on the basis of a mere provision, as per section 36(1)(vii) of the Income-tax Act, 1961.Detailed Analysis:1. Claim for Bad Debt Without Actual Write-Off:The court examined whether the Tribunal was correct in allowing the assessee's claim for a bad debt when it had not been written off in the books of account. The court noted that the relevant assessment year was 1997-98, and the assessee claimed a bad debt of Rs. 3 lakhs. The Assessing Officer disallowed this claim on the grounds that the amount was shown as a provision for bad and doubtful debts, but not actually written off as irrecoverable. The court emphasized that post the amendment effective from April 1, 1989, section 36(1)(vii) of the Income-tax Act requires that for a bad debt to be deductible, it must be written off as irrecoverable in the accounts of the assessee for the previous year. The court concluded that since the debt was not written off as irrecoverable, the claim could not be allowed.2. Provision Shown Under 'Expenditure':The Tribunal had allowed the claim on the basis that the provision for bad debts was shown under the head 'Expenditure' in the annual report. The court, however, clarified that making a provision is not equivalent to writing off a debt as irrecoverable. The court reiterated that the plain language of section 36(1)(vii) necessitates an actual write-off for the deduction to be permissible. Thus, the Tribunal's reliance on the provision being shown under 'Expenditure' was not sufficient to meet the statutory requirement.3. Applicability of Section 36(1)(vii) to Non-Banking Companies:The court addressed whether an assessee other than a banking company could claim a bad debt deduction on the basis of a mere provision. It was clarified that section 36(1)(viia) pertains specifically to banking companies and public financial institutions, allowing them to make provisions for bad and doubtful debts. However, the assessee in this case was a manufacturing company, and thus, only section 36(1)(vii) was applicable. The court underscored the distinction between clauses (vii) and (viia) post the 1989 amendment, highlighting that clause (vii) mandates the actual write-off of the debt as irrecoverable in the accounts of the assessee.Conclusion:The court applied the principle of plain or literal interpretation to the taxing statute, emphasizing that the statutory language must be adhered to strictly. It was held that the assessee's claim for bad debts could not be allowed because the debts were not written off as irrecoverable in the accounts for the previous year. Consequently, the judgments of the Income-tax Tribunal and the Commissioner of Income-tax (Appeals) were set aside, and the order of the Assessing Officer was restored. The appeal by the Department was allowed.