2006 (5) TMI 118 - AT - Income Tax

Tribunal upholds disallowance of bad debt provision claimed by assessee.

The Tribunal upheld the Assessing Officer's decision to disallow the provision for bad and doubtful debts claimed by the assessee under section 154 of the ... Rectification Of Mistakes Issues Involved:1. Whether the provision for bad and doubtful debts of Rs. 10,99,552 claimed by the assessee and allowed under section 143(3) proceedings can be disallowed by invoking section 154 of the Income-tax Act, 1961.2. The applicability of retrospective amendments to section 36(1)(vii) by the Finance Act, 2001.Issue-wise Detailed Analysis:1. Disallowance of Provision for Bad and Doubtful Debts under Section 154:The assessee claimed a provision for bad and doubtful debts amounting to Rs. 10,99,552, which was allowed by the Assessing Officer (AO) in the original assessment under section 143(3). Subsequently, the AO issued a notice under section 154 to rectify the assessment by disallowing this provision. The assessee contended that the provision for doubtful debts was an allowable deduction and that the AO's action under section 154 was not sustainable as the scope of section 154 did not encompass such an action. However, the AO rectified the assessment, disallowing the provision.The CIT(A) upheld the AO's order, stating that the provision for bad and doubtful debts was not an allowable deduction and constituted a mistake apparent on record, falling within the scope of section 154.Upon appeal to the Tribunal, it was noted that the original assessment under section 143(3) involved a comprehensive inquiry, whereas section 154 is limited to correcting mistakes apparent on the record. The Tribunal referenced the Supreme Court's interpretation in T.S. Balaram, ITO v. Volkart Bros., which defined 'mistake apparent on the record' as an obvious and patent mistake, not one requiring a long-drawn reasoning process. The Tribunal found that the issue of allowing the provision for bad and doubtful debts was debatable and not a mistake apparent on the record. Therefore, the AO's action under section 154 was deemed unsustainable.2. Applicability of Retrospective Amendments to Section 36(1)(vii):The Finance Act, 2001, inserted an Explanation to section 36(1)(vii) with retrospective effect from 1-4-1989, clarifying that any bad debt written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts. The Tribunal considered whether this retrospective amendment could be applied to the AO's rectification order under section 154.The assessee argued that the validity of the AO's order under section 154 should be judged based on the law as it existed on the date of the order (17-6-1996), when the Explanation was not yet in the statute book. The Tribunal referenced the Supreme Court's decision in CIT v. Hindustan Electro Graphites Ltd., which held that assessments should be completed in accordance with the law available on the date of filing the return.However, the Tribunal also noted the Supreme Court's decision in Asstt. CIT v. J.K. Synthetics Ltd., which emphasized that retrospective legislation is deemed to have always been part of the law from the date it is made effective. Therefore, the Tribunal concluded that the retrospective amendment to section 36(1)(vii) should be given full effect, and the AO's rectification under section 154 was valid.Conclusion:The Tribunal, after considering the retrospective amendment and the legal principles governing section 154, concluded that the provision for bad and doubtful debts was not an allowable deduction. The AO's action to rectify the original assessment by disallowing the provision under section 154 was justified. The appeal filed by the assessee was dismissed, upholding the AO's rectification order.