2025 (11) TMI 914 - AT - Income Tax

First-time claim under s.36(1)(viia) allowed for provision for bad and doubtful debts despite post-year ledger entries

ITAT Mumbai allowed the assessee's appeal and directed the AO to delete the disallowance under s.36(1)(viia) for provision for bad and doubtful debts. The ... Denying deduction u/s 36(1)(viia) - provision for bad and doubtful debts - AO denied the said claim based on the verification of the ledger accounts stating that the entries against which the assessee has made the claim are passed in the subsequent AY and therefore the assessee cannot be allowed the deduction during the year under consideration HELD THAT:- Since the transfer entry was based on the memorandum of changes recommended by the auditors dated 13.07.2007, in the books of accounts the entries were passed on the said dates though the audited financial statements were adjusted as on 31.03.2007. Accordingly, the ground on which the AO denied the deduction u/s. 36(1)(viia) cannot be sustained. We notice that the ld. CIT(A) has confirmed the disallowance stating that the deduction u/s. 36(1)(viia) can be allowed only when the provision is routed through the P&L a/c. Finance Act 2007, amended the provisions of section 36(1)(viia) whereby cooperative banks became eligible for deduction under the said section from AY 2007-08. The said amendments correspond to the amendment brought in section 80P removing the cooperative banks from the benefit of claiming deduction u/s. 80P. Since the assessee has claimed the deduction for the first time u/s. 36(1)(viia), there is merit in the submission that the requirement to route the claim through P&L account though not met in the present case, the assessee is entitled to claim deduction u/s. 36(1)(viia). Assessee's claim cannot be denied, and therefore we direct the AO delete the disallowance made u/s. 36(1)(viia) - Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a deduction under Section 36(1)(viia) is allowable in the relevant assessment year for amounts transferred from 'Provision for Interest on Standard Assets' to 'Provision for Bad and Doubtful Debts' where the ledger entry is dated after the year-end but the audited financial statements reflect the effect as at the year-end. 2. Whether the statutory requirement for claiming deduction under Section 36(1)(viia) mandates that the provision must have been debited to the Profit & Loss account in the same year, and if failure to route through P&L precludes the claim. 3. Whether reliance on ledger date entries (post year-end) can be preferred over adjustments recorded in audited financial statements prepared in accordance with auditor recommendations, for denying the deduction. 4. Whether the delay in filing the appeal before the Tribunal (147 days) is condonable on the facts and constitutes reasonable cause. ISSUE-WISE DETAILED ANALYSIS Issue 1: Allowability of Section 36(1)(viia) deduction where transfer entry is recorded after year-end but audited financial statements reflect adjustment as at year-end Legal framework: Section 36(1)(viia) permits specified provisions for bad and doubtful debts to be allowed as a deduction subject to the statutory conditions. Accounting entries and audited financial statements are material for determining the year of claim; adjustments recorded in audited accounts as at balance sheet date indicate recognition in that financial year. Precedent Treatment: The assessing officer relied on prior judicial decisions cited by the assessee but found the facts distinguishable; the Tribunal considered the lower authorities' reliance on such precedents and treated them as distinguishable rather than dispositive. Interpretation and reasoning: The Tribunal examined the ledger entries, the memorandum of changes issued by the statutory auditor (advice dated post year-end), and the audited financial statements. Although the physical ledger entry showed a transfer dated 13.07.2007 (i.e., after 31.03.2007), the audited financial statements for the year ended 31.03.2007 reflected the provision as increased as at that balance sheet date. The Tribunal accepted the explanation that the transfer entry was effected in the books on the auditor's recommendation on 13.07.2007 but the audited financial statements were adjusted to show the effect as at 31.03.2007. The Tribunal held that the AO's mechanical reliance on ledger dates without appreciating the audited accounts and the memorandum of changes was unsustainable. Ratio vs. Obiter: Ratio - where audited financial statements and auditor-recommended adjustments properly reflect a provision as at the balance sheet date, a post-closing ledger entry dated after year-end does not automatically prevent the claim of deduction in the relevant year. Obiter - the discussion distinguishing the assessee's facts from other decisions cited by parties. Conclusion: The deduction under Section 36(1)(viia) cannot be denied merely because the ledger entry bears a post-year-end date when the audited financial statements reflect the adjustment as at the year-end pursuant to auditor recommendations; the AO's ground for denial based solely on ledger date is unsustainable. Issue 2: Requirement of routing the provision through Profit & Loss account to claim Section 36(1)(viia) Legal framework: Section 36(1)(viia) permits deduction for provisions for bad and doubtful debts subject to compliance with the statutory scheme; accounting treatment (whether routed through P&L) is relevant to ascertain whether the provision is bona fide and pertains to the year in question. Precedent Treatment: The CIT(A) had held that deduction is allowable only when the provision is debited to the P&L account. The Tribunal examined the legislative amendments effective from the relevant year and their impact on cooperative banks claiming the deduction for the first time. Interpretation and reasoning: The Tribunal noted that Finance Act 2007 amended Section 36(1)(viia) to permit cooperative banks to claim the deduction from the relevant assessment year and corresponding changes in Section 80P removed earlier tax exemptions. Given this being the first year of claim under the amended provision, and considering the audited financials showing the provision as at the balance sheet date, the Tribunal found merit in the submission that strict requirement of routing through the P&L - though generally relevant - should not defeat the claim when the provision was created by appropriation of profit on auditor advice and reflected in audited accounts as at year-end. The Tribunal balanced form and substance: the substance being that the provision, though entered in books on a post-closing date, was intended and reflected as an adjustment to the prior year's accounts. Ratio vs. Obiter: Ratio - in the factual matrix of first-time claim by a cooperative bank under the amended Section 36(1)(viia), absence of a P&L debit entry in the year will not necessarily bar the deduction if audited accounts and auditor's memorandum clearly establish creation of provision as at the balance sheet date. Obiter - general observations on the practice of routing provisions through P&L for tax clarity. Conclusion: The requirement to debit the provision to Profit & Loss does not automatically preclude deduction where the audited financial statements and auditor's memorandum evidence that the provision was created as at the balance sheet date pursuant to appropriation/adjustment; deduction is allowable on the facts presented. Issue 3: Preferability of audited financial statements over ledger date entries for determining tax year of provision Legal framework: Tax assessment requires determination of income and deductions in the relevant year based on principles of accounting and documentary evidence including audited financial statements and auditor communications; substance over form is a guiding principle. Precedent Treatment: Lower authorities relied on ledger verification; Tribunal distinguished that approach when audited statements present a contrary picture prepared in accordance with auditor recommendations. Interpretation and reasoning: The Tribunal considered that ledger entries may be made on dates reflecting bookkeeping operations, whereas audited financial statements incorporate year-end adjustments recommended by auditors and are intended to present financial position as at the balance sheet date. Where audited statements and auditor memoranda show the adjustment as at year-end, these documents bear primacy in establishing the accounting recognition for tax purposes. The AO's reliance on ledger date without reconciling with audited accounts was held to be an inadequate basis for disallowance. Ratio vs. Obiter: Ratio - audited financial statements and auditor's memorandum that adjust balances to reflect the year-end position prevail over isolated ledger entry dates for determining the year of recognition for tax deduction purposes. Obiter - cautionary note that each case depends on facts and evidence quality. Conclusion: Audited financial statements and auditor-recommended adjustments that reflect the provision as at balance sheet date should be accepted to determine the year of claim; ledger entry dates alone cannot justify denial without holistic reconciliation. Issue 4: Condonation of delay in filing appeal (147 days) Legal framework: Principles governing condonation of delay allow courts/tribunals to admit appeals where sufficient cause for delay is shown; established doctrine requires demonstration of reasonable and sufficient cause. Precedent Treatment: The Tribunal applied recognized Supreme Court guidance on condonation standards (referenced precedent principles) to assess whether delay should be excused. Interpretation and reasoning: On consideration of submissions and material, the Tribunal found reasonable and sufficient cause to condone the 147-day delay in filing the appeal and admitted the appeal for adjudication. The decision to condone was based on the Tribunal's assessment of the explanation and applicable legal tests for delay. Ratio vs. Obiter: Ratio - delay of 147 days was condoned upon satisfaction of reasonable cause standard; procedural admission permitted substantive adjudication. Obiter - none. Conclusion: Delay in filing the appeal was condoned and the appeal was admitted for adjudication on merits. OVERALL CONCLUSION On the facts and documentary record-audited financial statements, auditor's memorandum of changes, and explanations-the Tribunal held that the deduction under Section 36(1)(viia) for the provision transferred from provision for interest on standard assets to provision for bad and doubtful debts is allowable in the assessment year in question despite ledger entries dated post year-end and absence of a distinct P&L debit in the books for that year; the AO's disallowance and the CIT(A)'s confirmation were set aside and the appeal was allowed. The Tribunal also condoned the delay in filing the appeal as having reasonable and sufficient cause.