2010 (4) TMI 46 - SC - Income Tax

Bank allowed deduction under s.36(1)(vii) for actual write-offs; assessing officer cannot deny based on mere apprehension

SC held that the bank was entitled to deduction under s.36(1)(vii) because it effected an actual write-off in its books by debiting Profit & Loss and ... Entitlement to the benefit of deduction u/s 36(1)(vii) - Bad debts - written off - deemed income u/s 41 - manner in which actual write off takes place under the Accounting principles - whether it is imperative for the assessee-Bank to close the individual account of each debtor in it’s Books or a mere reduction in the “Loans and Advances Account” or Debtors to the extent of the provision for bad and doubtful debt is sufficient? Held that:- In the judgement of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [1980 (8) TMI 40 - GUJARAT HIGH COURT], a mere debit to the Profit and Loss Account was sufficient to constitute actual write off whereas, after the Explanation, the assessee(s) is now required not only to debit the Profit and Loss Account but simultaneously also reduce loans and advances or the debtors from the asset side of the Balance Sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in it's impugned judgement. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under Section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in it's Books, as indicated above. The Order of the Assessing Officer is based on an apprehension that, if the assessee fails to close each and every individual account of it's debtor, it may result in assessee claiming deduction twice over. In this case, we are concerned with the interpretation of Section 36(1)(vii) of 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for details of individual debtor's account if the Assessing Officer has reasonable grounds to believe that assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. Assessee has instituted recovery suits in Courts against it's debtors. If individual accounts are to be closed, then the Debtor/Defendant in each of those suits would rely upon the Bank statement and contend that no amount is due and payable in which event the suit would be dismissed. Issues Involved:1. Requirement for the assessee-Bank to close individual debtor accounts for bad debt write-off.2. Sufficiency of reducing Loans and Advances or Debtors on the Balance Sheet for bad debt write-off.Issue-wise Detailed Analysis:1. Requirement for the assessee-Bank to close individual debtor accounts for bad debt write-off:The primary question was whether the assessee-Bank needed to close each debtor's individual account in its books to write off bad debts or if reducing the Loans and Advances or Debtors on the Balance Sheet was sufficient. The Assessing Officer disallowed a significant sum, arguing that the bad debt was not written off correctly per accounting principles. The CIT(A) opined that it was unnecessary to pass entries in each debtor's individual account and that debiting the Profit and Loss Account and crediting the 'Bad Debt Reserve Account' sufficed. The Tribunal upheld this view, stating that the write-off was valid as the provision was debited to the Profit and Loss Account, reducing the Loans and Advances or Debtors in the Balance Sheet.The High Court, however, disagreed, relying on a previous judgment (Commissioner of Income Tax & Anr. vs. M/s. Wipro Infotech Limited), concluding that mere provision creation did not equate to an actual write-off post the insertion of the Explanation by the Finance Act, 2001. The Supreme Court, referencing Southern Technologies Limited vs. Joint Commissioner of Income Tax, clarified that post-April 1, 1989, a mere provision for bad debt does not qualify for deduction under Section 36(1)(vii). The Court emphasized that actual write-off requires debiting the Profit and Loss Account and reducing the corresponding amount from Loans and Advances or Debtors in the Balance Sheet.2. Sufficiency of reducing Loans and Advances or Debtors on the Balance Sheet for bad debt write-off:The Tribunal held that the assessee-Bank's method of debiting the Profit and Loss Account and reducing the Loans and Advances or Debtors on the Balance Sheet was sufficient for an actual write-off. The Supreme Court agreed, noting that the Bank had obliterated the provision from its accounts, showing the net amount of Loans and Advances or Debtors at the year-end. The Court highlighted that the Assessing Officer's insistence on closing each debtor's account was based on an apprehension of potential double deduction, which was not substantiated by any findings. The Court stated that the Assessing Officer could request details if there were reasonable grounds to suspect double deduction.The Court also addressed the Department's argument that not closing individual accounts might lead to income escapement if repaid amounts were not credited to the Profit and Loss Account. The Court dismissed this concern, noting that the Head Office Accounts would reflect such repayments, ensuring no mis-match. Additionally, Section 41(4) of the Income Tax Act empowers the Assessing Officer to tax recovered amounts in subsequent years, mitigating the risk of income escapement.Conclusion:The Supreme Court upheld the Tribunal's judgment, allowing the assessee's appeals and setting aside the High Court's judgment. The Court confirmed that the assessee-Bank's method of write-off was valid under Section 36(1)(vii) of the Income Tax Act, 1961, and there was no requirement to close individual debtor accounts. The appeals were allowed with no order as to costs.