2012 (8) TMI 193 - HC - Income Tax

High Court Upholds Disallowance of Deduction for Doubtful Debts: Only Actual Write-Offs Qualify

M/s. Nicco Uco Alliance Credit Limited Versus The Deputy Commissioner of Income Tax

The High Court upheld the Assessing Officer's decision to disallow the deduction claimed by a non-banking finance company for provision of doubtful debts, ... Disallowance of provision for doubtful debts - Held that:- When the assessee had debited the profit and loss account, the doubtful debts are simultaneously taken to the balance sheet, bringing the reduction on the assets side - Looking the total provision at the end of 31.03.1993 of Rs.79,73,725/- (Rs.43,51,034/- + Rs.36,22,691/-), effectively, the assessee seems to have written off the bad debts only to the extent of Rs.21,80,278/-. Since these are the figures culled out from the papers given by the assessee in respect of the assessment year 1993-94, the question of how much of an amount had actually been written off has to be seen only by the Assessing Authority by looking into the accounts of the assessee - issue is remanded back to the files of the Assessing Officer for passing a fresh order of assessment Issues:1. Disallowance of deduction for irrecoverable receivables in business.2. Interpretation of provisions for doubtful debts.3. Application of legal precedents on bad debts deduction.4. Assessment of actual write-off for deduction eligibility.Issue 1: Disallowance of deduction for irrecoverable receivables in businessThe assessee, a non-banking finance company, claimed a deduction of Rs.36,22,691 as a provision for doubtful debts in its profit and loss account. However, the Assessing Officer disallowed the deduction, stating that relief is only applicable for debts actually written off. The Commissioner of Income Tax (Appeals) allowed the claim, but the Tribunal overturned this decision, restoring the Assessing Officer's order. The key contention was whether the provision made by the assessee for irrecoverable debts should be eligible for deduction under Section 36(1)(vii).Issue 2: Interpretation of provisions for doubtful debtsThe Tribunal held that only amounts actually written off as bad debts qualify for deduction, contrary to the assessee's claim based on provisions made in the profit and loss account. The Revenue argued that the provision made by the assessee did not result in a corresponding reduction on the assets side of the balance sheet, as required by law. The debate centered on whether the mere provision for bad debts without actual write-off meets the criteria for deduction under the law.Issue 3: Application of legal precedents on bad debts deductionThe assessee relied on legal precedents, including decisions from the Gujarat High Court and the Madras High Court, to support its claim for deduction of irrecoverable debts. The counsel for the assessee emphasized that the treatment of doubtful debts in the balance sheet and profit and loss account aligned with established legal principles. Conversely, the Standing Counsel for the Revenue argued that the assessee's provision for bad debts did not meet the standards set by the Apex Court's decision, emphasizing the need for a simultaneous reduction in assets to claim deduction.Issue 4: Assessment of actual write-off for deduction eligibilityThe Court analyzed the provisions made by the assessee for doubtful debts over different assessment years to determine the actual amount of bad debts written off. It was observed that the figures presented by the assessee indicated a partial write-off, raising the question of the extent to which the debts were genuinely irrecoverable. The Court decided to remand the matter back to the Assessing Officer for a fresh assessment to ascertain the actual write-off and apply the legal principles established by previous court decisions.In conclusion, the High Court's judgment emphasized the importance of actual write-off of bad debts for claiming deductions under Section 36(1)(vii). The Court directed a reevaluation by the Assessing Officer to determine the extent of irrecoverable debts written off, in line with legal precedents and the requirements for deduction eligibility.