2013 (2) TMI 900 - HC - Income Tax

Court allows deduction for doubtful debts, affirming assessee's methodology under Income Tax Act.

The court ruled in favor of the assessee regarding the deduction claimed for doubtful debts for the assessment years 1996-97 and 1998-99. It held that the ... - Issues involved: The issues involved in this case are related to the deduction claimed by the assessee for doubtful debts for the assessment years 1996-97 and 1998-99. The main contention was whether the methodology followed by the assessee to write off the debts was in accordance with the provisions of section 36(1)(vii) of the Income Tax Act, 1961.Judgment Details:Issue 1: Deduction for Doubtful DebtsThe Appellate Commissioner allowed the claim of bad debt by stating that writing off does not necessarily require crediting each debtor's account. The Commissioner held that if bad debts are debited in the profit and loss account and credited to another account like bad debt reserve account, the requirement of writing off is met. The Tribunal confirmed this order, emphasizing that the write-off should be made in the accounts, and in this case, the provision of section 36(1)(vii) was complied with. The Revenue's appeals were dismissed based on this interpretation.Issue 2: Legal PrecedentReferring to the case of Vijaya Bank vs. COMMISSIONER OF INCOME TAX, the court highlighted the evolution of the law regarding bad debts. Before April 1, 1989, even a provision for bad debts could be treated as a write-off. However, post-April 1, 1989, a distinct dichotomy was introduced, requiring a specific manner of write-off. The court clarified that debiting doubtful debts to the profit and loss account and crediting the asset account constitutes an actual write-off, while a provision for doubtful debts does not entitle deduction post-April 1, 1989.Issue 3: Interpretation of Section 36(1)(vii)The court reiterated that section 36(1)(vii) applies to both banking and non-banking businesses. It emphasized that the assessing officer's insistence on closing individual debtor accounts as a precondition for claiming deduction was not supported by the law. The court noted that the assessing officer's apprehensions about potential double claims were unfounded, as there was no evidence of unauthorized claims. The court emphasized that decisions should not be based on apprehensions but on legal interpretations. It also highlighted the practical difficulties banks may face if individual accounts are closed, affecting recovery suits against debtors.In conclusion, the court dismissed the appeals, ruling in favor of the assessee and against the Revenue, based on the interpretation of the law and legal precedents, particularly regarding the write-off of bad debts under section 36(1)(vii) of the Income Tax Act, 1961.