2022 (3) TMI 1188 - AT - Income Tax

ITAT grants deductions for doubtful debts, citing Supreme Court ruling.

The ITAT allowed the assessee's appeals for AY 2010-11 and 2011-12, directing the AO to delete the disallowed provisions for doubtful debts and advances. ... Bad debts - Provision for doubtful debts and doubtful advances - CIT-A disallowed claim as assessee has not written off the amount of bad debts in the ledger account of individual parties and the same cannot be allowed as a deduction merely on the basis of the provision for doubtful debts and doubtful advances - HELD THAT:- There is no dispute to the fact that the assessee has claimed deduction under the head provision for doubtful debts and doubtful advances by debiting the profit and loss account and simultaneously making adjustments in the sundry debtors account and advances account as reflected in the balance sheet as on 31/03/2010 Whether the assessee can claim a deduction for the provision of doubtful debts without giving adjustment in the individual ledger account of the sundry debtors? - This issue has been decided in favour of the assessee by this Tribunal in the case of Vidras India Ceramics (Pvt.) Ltd.[2019 (5) TMI 1884 - ITAT AHMEDABAD] wherein granted relief to the assessee for the provision made with respect to doubtful debts. Respectfully following the same we hold that assessee is eligible for deduction on account of provision for doubtful debts in the given facts and circumstances. It is for this reason that the assessee in the present case has written off the provision of doubtful debts in the profits and loss account and also has given effect in the balance sheet of the assessee. Thus to our understanding the principle laid down by the Hon’ble S.C in the case Vijay Bank [2010 (4) TMI 46 - SUPREME COURT] cannot be denied for its application merely on the reasoning that the word provision for doubtful debts has been used by the assessee in its Financial Statements. Assessee has not written off the provision for doubtful debts in the individual ledger account of the sundry debtors for the reason that it will lose it right in the Civil proceedings for recovery of its dues from the sundry debtors. This argument of the Ld. A.R was not controverted by the Ld. DR for the assessee at the time of hearing. Accordingly, we hold that the assessee is entitled to the deduction for the provision of doubtful debts in the given facts and circumstances. - Decided in favour of assessee. Issues Involved:1. Disallowance of provision for doubtful debts.2. Disallowance of provision for doubtful advances.Detailed Analysis:1. Disallowance of Provision for Doubtful Debts:The assessee, a limited company engaged in the business of selling, erection, installation, and repairs & maintenance of elevators, claimed deductions for provisions for doubtful debts amounting to Rs. 24,31,091/- for the Assessment Year (AY) 2010-11 and 2011-12. The Assessing Officer (AO) disallowed these claims, arguing that mere provisions for doubtful debts do not qualify for deductions under Section 36(1)(vii) of the Income Tax Act, 1961, as per the precedent set by the Supreme Court in the case of Vijaya Bank Vs. CIT (323 ITR 166). The AO noted that the conditions specified under Section 36(2) were not met, as the amounts were not written off in the individual ledger accounts of the sundry debtors.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the amounts were not written off in the ledger accounts of individual parties, and thus, could not be allowed as deductions based on mere provisions. The CIT(A) also distinguished the case from the Supreme Court's ruling in Vijaya Bank, noting that in Vijaya Bank, the bad debts were actually written off in the books of accounts without creating a provision.Upon appeal, the Income Tax Appellate Tribunal (ITAT) examined whether the assessee could claim deductions for provisions for doubtful debts without adjusting individual ledger accounts. The ITAT referenced its own decision in Vidras India Ceramics (Pvt.) Ltd. Vs D.C.I.T. (ITA No. 2412/Ahd/2018 for AY 2014-15), which allowed such deductions if the provision was debited in the profit and loss account and adjusted against sundry debtors in the balance sheet. The ITAT cited the Supreme Court's ruling in Vijaya Bank, which clarified that actual write-offs require debiting the profit and loss account and reducing the loans and advances or debtors in the balance sheet.The ITAT found that the assessee had indeed debited the provision for doubtful debts in the profit and loss account and adjusted it against trade receivables in the balance sheet. The Tribunal concluded that this method constituted an actual write-off, making the assessee eligible for the deduction under Section 36(1)(vii). The ITAT also noted that not writing off the amounts in individual debtor accounts was justified to preserve the assessee's rights in civil recovery proceedings.2. Disallowance of Provision for Doubtful Advances:The assessee also claimed deductions for provisions for doubtful advances amounting to Rs. 2,15,496/-. The AO disallowed this claim, and the CIT(A) confirmed the disallowance, stating that the conditions under Section 36(2) were not met.The ITAT held that provisions for doubtful advances, given in the course of business, stand on the same footing as provisions for doubtful debts. The Tribunal applied the same reasoning and principles from the Vijaya Bank case and the ITAT's own precedents to conclude that the assessee was entitled to the deduction for provisions for doubtful advances under Section 37 of the Income Tax Act.Conclusion:The ITAT allowed the assessee's appeals for both AY 2010-11 and 2011-12, directing the AO to delete the additions made for the disallowed provisions for doubtful debts and advances. The Tribunal's decision was based on the principles laid down by the Supreme Court in Vijaya Bank and its own precedents, confirming that the assessee's method of debiting provisions in the profit and loss account and adjusting them in the balance sheet constituted an actual write-off, thus qualifying for deductions.