TaxTMI 
TaxTMI 
2018 (7) TMI 2355
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....cts in brief are that the assessee being resident corporate assessee engaged as Transport contractors debited a sum of Rs.26.88 Lacs in the Profit and Loss account on account of provision for bad debts. It was noted that the aforesaid amount of provision was reduced from total debtors in the Balance Sheet. The same, in the opinion of Ld. AO, could not be allowed to the assessee in terms of Section 36(1)(viia) since the assessee was not a scheduled bank and secondly the assessee had not written-off the amount from the particular debtors account. Finally, the same was disallowed and added to the income of the assessee. 3. Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 03/10/2016 wherein the matter was concluded in the following manner:- 6.2 I have carefully perused the assessment order and the submission of the appellant. It is an undisputed fact that the appellant has not written off the debtors account and claim the deduction of provision of bad & doubtful debts in the profit and loss account. The relevant provision of the applicable section is reproduced for ready reference which is as under: 36 (vii) subject to the....
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....isions of sub-section (6) of section 155 shall apply; [(v) where such debts or part of debt relates to advance made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.] Perusal of the explanation to section, 36(vii), makes it clear that any provision made for bad & doubtful debts which is included in the amounts written off as irrecoverable in the accounts of the appellant is not an allowable deduction. Further, section 36(2)(i) also makes it clear that bad & doubtful debts is not allowable unless it is written off in the account of the assessee. It is seen that the decision of Hon'ble Bombay High Court in the case of Tainwal Chemicals & Plastics India ltd. (34 taxmann.com 159) relied on by the appellant is not applicable in the instant case. In the case of Tainwal chemicals & Plastics India Ltd the provision of doubtful debt was debited to the profit and loss account and correspondingly the assessee reduced the assets by reducing amount of unsecured loans. ....
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....ture and secondly the individual accounts of the debtors were not closed by the assessee. 6. In terms of ratio of decision of Hon'ble Supreme Court rendered in T.R.F. Ltd. Vs. CIT [2010 190 Taxman 391], it is settled position that post 01/04/1989, it is not necessary for assessee to establish that debt, in fact, has become irrecoverable. It was enough if bad debt is written off as irrecoverable in accounts of assessee. Therefore, the only condition to be fulfilled by the assessee was that the debt is claimed as irrevocable in the books of accounts and the assessee need not prove the fact that the debt has actually become bad. 7. Since the assessee is not a scheduled bank, its claim certainly do not fall under 36(1)(viia) as rightly noted by Ld. AO. However, we find that the assessee's claim fall u/s 36(1)(vii), which is evident from the submissions made by the assessee before Ld. CIT(A) wherein the matter has examined by Ld. first appellate authority within the framework of provisions of Section 36(1)(vii). 8. Now the only question that survives for our consideration is that whether the reduction of the impugned amounts on aggregate basis without closing individual accounts enti....
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....hen, there was actual write off because, in the final analysis, at the year-end, the so-called provision does not remain and the balance sheet at the year-end only carries the amount of loans and advances or debtors, net of such provision made by the assessee for the impugned bad debt. The Tribunal, accordingly, upheld the above contention of the assessee on three grounds. Firstly, according to the Tribunal, the assessee had rightly made a provision for bad and doubtful debt by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year. Secondly, the provision account so created was debited and simultaneously the amount of loans and advances or debtors stood reduced and, consequently, the provision account stood obliterated. Lastly, according to the Tribunal, loans and advances or the sundry debtors of the assessee as at the end of the year lying in the balance sheet was shown as net of "provisions for doubtful debt" created by way of debit to the profit and loss account of the year. Consequently, the Tribunal, on this point, came to the conclusion that deduction under section 36(1)(vii) of 1961 Act was allowable. 4. On the question wh....
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....assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction under section 36(1)(vii). [ See CIT v. Jwala Prasad Tiwari [1953] 24 ITR 537 (Bom.) and Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95 (Guj.)]. Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 1989) of a new Explanation in section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to section 36(1)(vii). Consequently, after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under section 36(1)(vii). To understand the above ....
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....s by reducing the corresponding amount from Loans and Advances/debtors on the asset side of the balance sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision "for impugned bad debt". In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra), 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 its impugned judgment. 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 its books, as indicated above. 8. Coming to....
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.... 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. 9. Before concluding, we may refer to an argument advanced on behalf of the Department. According to the department, it is necessary to square off each individual account failing which there is likelihood of escapement of income from assessment. According to the department, in cases where a borrower's account is written off by debiting profit and loss account and by crediting Loans and Advances or Debtors Accounts on the asset side of the Balance-sheet, then, as and when in the subsequent years if the borrower repays the loan, the assessee will credit the repaid amount to the Loans and Advances Account and not to the profit and loss account which would result in escapement of income from assessment. On the other hand, if bad debt is written off by closing the borrower's account individually, then the repaid amount in subsequent years will be credited to the profit and loss account on which the assessee-bank has to pay tax. Although, prima facie, this argument of the Department appears to be valid, on a deepe....