2011 (9) TMI 756 - HC - Income Tax

High Court Upholds Deduction Reduction for Bad Debts

IFCI LTD. Versus COMMISSIONER OF INCOME TAX

IFCI LTD. Versus COMMISSIONER OF INCOME TAX - TMI Issues Involved:1. Deduction for bad debts written off.2. Reduction of deduction by the amount transferred from special reserve.3. Adjustment of provision for bad and doubtful debts.Issue-wise Detailed Analysis:1. Deduction for Bad Debts Written Off:The primary issue revolves around the deduction claimed by the assessee for bad debts written off amounting to Rs. 18,624.61 lacs. The Assessing Officer (AO) disallowed this deduction on several grounds, including that the assessee could not claim both the provision for bad and doubtful debts under Section 36(1)(viia)(c) and the actual bad debts written off. The AO also argued that the deduction should be reduced by the cumulative amount of provision for bad and doubtful debts allowed in previous years, as well as amounts withdrawn from special reserves.2. Reduction of Deduction by the Amount Transferred from Special Reserve:The AO also contended that the deduction for bad debts written off should be reduced by the amount withdrawn from the special reserve created under Section 36(1)(viii) and credited to the profit and loss account in previous years. The CIT(A) upheld this view partially, reducing the deduction by Rs. 5,000 lacs transferred from the special reserve. However, the Tribunal reversed this part of the CIT(A)'s order, siding with the assessee.3. Adjustment of Provision for Bad and Doubtful Debts:The CIT(A) held that the deduction on account of bad debts written off should be reduced by the amount of Rs. 570 lacs, being the provision for bad and doubtful debts claimed under Section 36(1)(viia)(c). The Tribunal upheld this part of the CIT(A)'s order, and the assessee filed an appeal against it. The Tribunal reasoned that the assessee could not claim a separate deduction for bad debts written off under Section 36(1)(vii) while also claiming a deduction under Section 36(1)(viia). The Tribunal emphasized that the deduction under Section 36(1)(vii) should be limited to the amount by which the bad debt exceeds the credit balance in the provision for bad and doubtful loans account.Judgment Analysis:The Tribunal upheld the AO's and CIT(A)'s decision that the deduction for bad debts written off should be reduced by the amount of the provision for bad and doubtful debts. The Tribunal found that the CIT(A) erred in restricting the addition made by the AO to Rs. 570 lacs only, noting that the total provision made under Section 36(1)(viia)(c) in different assessment years amounted to Rs. 34,31,90,547. The Tribunal restored the issue to the AO for computation of disallowance after allowing the assessee an opportunity to present relevant facts.Conclusion:The High Court dismissed the assessee's appeal, agreeing with the Tribunal's interpretation of the law. The court noted that the legal position stated by the Tribunal was correct and that the assessee's plea of double taxation was not convincing. The court permitted the assessee to take credit for the amount surrendered in the Assessment Year 1998-99, thus answering the question in favor of the Revenue and against the assessee.