TaxTMI 
TaxTMI 
2022 (3) TMI 712
X X X X Extracts X X X X
X X X X Extracts X X X X
....fixed percentage of dues from consumers shall be maintained as a provision from meeting debts which turn bad. 2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that as per the above statutory rule, the provision for bad and doubtful debts shall at the closure of the financial year be at the rate of 2.5% of the sundry debtors on sale of power at the end of the year. Every year, the difference in the provision for Bad and Doubtful debts alone has been charged to profit and Loss and not afresh provision of 2.5%. 2.3 The Commissioner of Income tax (Appeals) ought to have appreciated that the provision for doubtful debts have been netted off against the Debtors in the balance and hence would amount to write off. Hence the provision for Debts doubtful of recovery should be allowed as a deduction. 2.4 The Appellant relies on the decision of the Apex Court in the case of Vijaya Bank Limited Vs. CIT - 323 ITR 166 (SC)" 3. The brief facts of the case are that the assessee is a Public Sector Undertaking of State Government of Tamil Nadu and is engaged in the business of generation, transmission and distribution of electricity in the State of Tamil Nadu. The assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the sundry debtors on sale of power during the year. This is not accumulated or carried over but reversed and provided afresh every year. It is also submitted that the actual dues from customers which would turn bad will be much more than that of the provision and eventually all these get written off. A copy of the relevant rule prescribed is enclosed for reference. Therefore it is submitted that provision made in the accounts is statutory and in addition whatever the actual bad debts over and above the provision also gets written off". I have considered the arguments of the assessee. But the contention of the assessee cannot be accepted. After careful reading of the above said rules referred by the assessee, it is clear that there is a clause for making provision for the bad and doubtful debts at the prescribed percentage. But at the same time there is no material to show, that it can be claimed as a revenue expenditure in the profit and loss account. Further, since it is only a provision it cannot be claimed as an expenditure. Moreover according to the provisions of the Income Tax Act, any provision made by assessee cannot be claimed as an eligible expenditure for deduction ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....II, Chennai has made the following observation while setting aside the AO's order directing it as erroneous and prejudicial to the interest of revenue and the relevant portion of the same is reproduced below: "It is understood that the assessee is bound by the rule for its regulatory authority and is required to create provision for bad debts @ 2.5% of the sundry debtors. However, the issue at hand is whether such provision is allowable as deduction in computing the total income under the Income tax Act. Provision for bad debts is allowable only in the case of banking companies under Sec. 36(1)(viia) of the Act, subject to the specified conditions. The assessee is not a banking company. The issue is now clarified and settled by the decision of Hon'ble Supreme Court in the case of Southern Technologies Ltd. v. JCJT (2010) 320 ITR 577. The Hon'ble Apex Court while dealing with allowability of such provision for bad debts in the case of Non-banking Finance Companies (NBFCs), held that the directions of RBI to NBFCs to create provision for bad and doubtful debts constitute a code by themselves. However, these directions and the Income-tax Act operate in different area....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a debt in praesenti or in futuro till the contingency happens. But, if it is a debt; the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount. 5.3.4 I have perused the decisions relied on by the appellant as mentioned above under para 5.2. The decision in the case of CIT v. Ahmedabad Electricity Co. Ltd. cited supra is not on the provision for bad and doubtful debts. The same is the position with respect to other case laws relied on by the appellant. The issue involved in the appellant's case is provision for bad and doubtful debts, and not write off of bad debts per se. Therefore, the case laws relied on by the appellant did not support the appellant's point of view. 5.3.5 In view of the above remarks, the AO's disallowance of provision for bad and doubtful debts in the assessment year 2005-06 and 2006-07 is upheld and the appellant's ground on this issue is dismissed." 7. The learned A.R. for the assessee submitted that the learned CIT(A) has erred in confirming disallowance of provision for bad and doubtful debts written off amounting to Rs. 10,19,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee is entitled for deduction. In this case, the assessee has made mere provision on ad-hoc basis as per certain regulatory rules without identifying bad debts. Therefore, the Assessing Officer as well as learned CIT(A) has very rightly held that provision made by the assessee for bad and doubtful debts is only a provision, but not actual written off of bad debts and thus, the assessee is not entitled for deduction. Therefore, there is no merit in the arguments of the assessee in light of decision of the Hon'ble Supreme Court in the case of Vijaya Bank Vs. CIT (supra) and hence, order of the learned CIT(A) should be upheld. 9. We have heard both the parties, perused material available on record and gone through orders of the authorities below. The solitary issue that came up for our consideration from the given facts and circumstances of the case is whether the assessee is entitled for deduction towards provision for bad and doubtful debts, even though same was not written off in the books of account of the assessee, but reduced from the sundry debtors account in asset side of balance sheet at the end of the relevant financial year. The provisions of section 36(1)(vii....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entitled to deduction after 01.04.1999 u/s. 36(1)(vii) of the Act. The very same question has been considered by the Hon'ble Supreme Court in the case of Vijaya Bank Vs. CIT (2010) 323 ITR 166, where the Hon'ble Supreme Court after considering its earlier judgment in the case of M/s. Southern Technologies (supra), very categorically held that there is no dispute with regard to legal position that deduction is not available for provision for bad and doubtful debts u/s. 36(1)(vii) of the Act. In fact, the Hon'ble Supreme Court has very categorically and candidly approved its earlier judgment in the case of M/s. Southern Technologies Ltd. (supra). However, considering peculiar facts of the case in Vijaya Bank Vs. CIT (supra), the Hon'ble Apex Court went on to explain meaning of actual write off of debt in the context of banking company. The Hon'ble Apex Court had also further explained manner in which write off is to be carried out. Therefore, before applying ratio of Vijaya Bank Vs. JCIT (supra) to any other assessee, it is relevant to understand facts of the case before the Hon'ble Supreme Court in the case of Vijaya Bank Vs. JCIT (supra) and also context in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th specifically for banking companies. Therefore, it is necessary to analyze judgment of the Hon'ble Supreme Court in the context of Section 36(1)(vii) of the Income Tax Act, 1961. 13. It is an admitted fact that provision for bad & doubtful debts in case of banking companies is different from provisions for bad & doubtful debts in case of other companies. As we have stated in earlier part of this order, the banks are governed by prudential norms for asset classification and provisions. In the case of Vijaya Bank Vs. JCIT (supra), the Hon'ble Supreme Court has considered facts in light of various arguments brought out by the assessee that it has written of bad debts in books of account for all practical purposes as irrecoverable after considering necessary guidelines issued by the RBI. But, individual entries were not passed in the books of account of the assessee to square up debtors account only for simple reason that bank was continuing legal battle against borrowers for recovery of dues. Therefore, to keep a track on identity of debtors, the bank was following practice of not writing off individual loan accounts, however, there was no dispute with regard to fact that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of balance sheet is only for understanding of the readers of such balance sheet, but it cannot override provisions of the law. Therefore, on the basis of presentation of account for readers benefit, it cannot be inferred that the assessee has written off bad debt as irrecoverable in the books of account of the assessee to allow benefit of deduction u/s. 36(1)(vii) of the Income Tax Act, 1961. Therefore, in our considered view, judgment of the Hon'ble Supreme Court in the case of Vijaya Bank vs. JCIT (supra) has very well explained legal position of provisions of section 36(1)(vii) r.w.s. 36(2) of the Act, and very categorically held that in order to claim benefit of deduction u/s. 36(1)(vii) of the Act, bad debts should be written off as irrecoverable in the books of account of the assessee. Therefore, in our considered view Vijaya Bank vs. JCIT (supra) case cannot be universally applied to all assessee's, unless facts brought out by the Hon'ble Supreme Court in the said case are identical to the facts of other cases. 14. Coming back to facts of the present case on hand. In the present case, the assessee is into business of generation, transmission and distribution of....