TaxTMI 
TaxTMI 
2005 (7) TMI 64
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....dule to the Act?" The appellant had filed a return of income for the year ended March 31, 1991, relevant to the assessment year 1991-92 declaring the income of Rs. 58,52,80,850 along with the audited report in Form No. 3CD and final accounts prepared in the manner prescribed under the Insurance Act, 1938 wherein a provision under the head "Reserve for bad and doubtful debts" as per the regular and consistent practice, of Rs. 1,01,00,000 was debited to the profit and loss account. On August 30, 1993, an assessment order was passed under section 143(3) of the Income-tax Act, 1961 whereby the claim of "Reserve for bad and doubtful debts" in the sum of Rs. 1,01,00,000 was disallowed on the ground that such a disallowance was not prohibited b....
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....on for "Reserve for bad and doubtful debts" will not be eligible for being deducted while computing the income. Mr. Irani, learned counsel for the appellant, has brought to our notice the judgment of the Supreme Court in the case of General Insurance Corporation of India v. CIT reported in [1999] 240 ITR 139, wherein the Supreme Court has observed that section 44 of the Income-tax Act is a special provision governing computation of taxable income earned from business of insurance, and it mandates the assessing authorities to compute the taxable income for business of insurance in accordance with the provisions of the First Schedule. It is relevant to note that the Controller of Insurance has accepted the above allowance for reserve for b....
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.... under rule 5, profits from business of insurance other than life insurance were required to be determined by taking into account balance of the profits disclosed by the annual accounts, subject to the adjustments, viz., any expenditure or allowance including any amount debited to the profit and loss account by way of dividend, reserve, or provision for any tax which is not admissible under sections 30 to 43B, shall be added back. He contended that, in the present case, the assessee has transferred the amount to 'reserve for doubtful debts'. Therefore, the Assessing Officer was right in adding back the aforestated amount of Rs. 1.18 crores. He contended that rule 5 was amended by the Finance (No. 2) Act, 1998, with effect from April 1, 1989....
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....rat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166. Both these judgments have laid down that if an amount is transferred to a bad debt reserve account in the books of an assessee, it would amount to writing off the bad debt and it was not necessary that the amount should be altogether taken off from the books of the assessee. Mr. Irani further invited our attention to rule 5(a) of the First Schedule to the Act. He pointed out that the said rule has no application. He contended that rule 5(a) applied to cases where an expenditure or allowance including any amount debited to the profit and loss account either by way of reserve is not admissible under the provisions of sections 30 to 43B, then, in computing ....
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....e to the debit of the profit and loss account. That, this is the only debit which can be raised as a result of writing off a bad debt. To the same effect is the judgment of the Gujarat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd. [1983] 143 ITR 166. In the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95, the Division Bench of the Gujarat High Court has held that under section 36 of the Act, before any claim for allowance for a bad debt is held established by the Assessing Officer, it must appear that the concerned bad debt was written off as irrecoverable in the account books of the assessee. This requirement is a condition for the grant of claim for bad debt allowance. To that extent, there is a departure fr....
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....ible under the provisions of section 36(1), then the amount shall be added back in computing the profits of the business. However, in the present case, as stated hereinabove, there is full compliance with section 36(1)(vii). The manner of writing off is as per the statutory requirement. The Department has not raised the relevant factual dispute as to whether the debt has not become irrecoverable. In the circumstances, question No. 2 is answered in the negative, i.e., in favour of the assessee and against the Department." In the present matter, we had even directed learned counsel for the appellant to give exact details as to the extent of the debt for which the aforesaid "Reserve for bad and doubtful debts" was made. In accordance theret....