2018 (7) TMI 2355 - AT - Income Tax

Assessee wins bad debts deduction under Section 36(1)(vii) despite not closing individual debtor accounts

ITAT Mumbai allowed assessee's claim for bad debts deduction under Section 36(1)(vii) read with Section 36(2). Lower authorities had denied the claim ... Disallowance of provision for bad debts deduction u/s 36(1)(vii) r/w Section 36(2) - lower authorities have denied the claim on the premises that the impugned expenditure was mere provision in nature and secondly the individual accounts of the debtors were not closed by the assessee - whether the reduction of the impugned amounts on aggregate basis without closing individual accounts entitle the assessee to claim the aforesaid deduction or not ? - HELD THAT:- As decided in Tainwala Chemicals & Plastics India Ltd. 2013 (4) TMI 211 - BOMBAY HIGH COURT] as relying on M/S. VIJAYA BANK VERSUS COMMISSIONER OF INCOME TAX & ANR. [2010 (4) TMI 46 - SUPREME COURT] held assessee has debited the provision of doubtful debt to the profit and loss account and correspondingly reduced the assets by reducing the amount of unsecured loans. On the aforesaid facts, the Tribunal held that this would amount to writing off of the debt. Thus, on examination of facts it concluded that the respondent-assessee has written off the loan and would be entitled to the claim of bad debts. Tribunal by the impugned order also recorded a finding of fact that once the respondent-assessee has lent surplus money and offered the interest to tax as business income, then the activity of the respondent-assessee of lending money is a business activity. Therefore, the debt qualifies for deduction under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 - Decided against revenue. Issues Involved:1. Disallowance of provision for bad debts under Section 36(1)(vii) of the Income Tax Act, 1961.2. Applicability of Section 36(1)(viia) for non-banking entities.3. Requirement of writing-off individual debtor accounts for claiming bad debt deduction.Issue-wise Detailed Analysis:1. Disallowance of Provision for Bad Debts:The primary issue in this appeal was the disallowance of Rs. 26.88 Lacs claimed by the assessee as a provision for bad debts. The assessee, a corporate entity engaged in transport contracting, had debited this amount in its Profit and Loss account and reduced the same from total debtors in the Balance Sheet. The Assessing Officer (AO) disallowed the claim on the grounds that the assessee was not a scheduled bank and had not written-off the amount from the individual debtor accounts, as required by Section 36(1)(vii) of the Income Tax Act, 1961. The CIT(A) upheld this disallowance, emphasizing that the provision for bad debts was not written off as irrecoverable in the accounts, which is a prerequisite for claiming such a deduction.2. Applicability of Section 36(1)(viia):The AO noted that the assessee's claim did not fall under Section 36(1)(viia), which is applicable to scheduled banks. The Tribunal agreed, stating that the assessee, not being a scheduled bank, could not claim deductions under this section. Instead, the claim was considered under Section 36(1)(vii), which requires that bad debts be written off as irrecoverable in the accounts.3. Requirement of Writing-off Individual Debtor Accounts:The Tribunal examined whether the reduction of the impugned amounts on an aggregate basis, without closing individual debtor accounts, entitled the assessee to claim the deduction. The Tribunal referred to the Supreme Court's decision in Vijaya Bank Vs. CIT, which clarified that post-01/04/1989, it is not necessary to establish that the debt has become irrecoverable; it suffices if the bad debt is written off as irrecoverable in the accounts. The Tribunal found that the assessee had debited the amount in the Profit & Loss account and reduced the corresponding amount from the aggregate of Sundry Debtors in the Balance Sheet, aligning with the Supreme Court's interpretation. Therefore, the Tribunal concluded that the assessee was entitled to the deduction under Section 36(1)(vii), as the reduction in the Balance Sheet amounted to an actual write-off, even without closing individual debtor accounts.Conclusion:The Tribunal, following the Supreme Court's ruling in Vijaya Bank Vs. CIT and the Bombay High Court's decision in CIT Vs. Tainwala Chemicals & Plastics India Ltd., concluded that the assessee's method of writing off the bad debts was sufficient for claiming the deduction. Consequently, the Tribunal allowed the assessee's appeal, deleting the disallowance made by the AO and upheld by the CIT(A). The revenue's appeal was dismissed, and the order was pronounced in the open court on 25th July 2018. A corrigendum was later issued to rectify a typographical error in the order.