TaxTMI 
TaxTMI 
2026 (6) TMI 938
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....d by framing the following substantial question of law:- "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the bad debt claim of Rs. 12,67,121/- made by the Appellant in respect of amount due from Gannon Dunkerly and Co. Limited by writing off the said amount in the Profit and Loss Account and making corresponding entry in the bad debt reserve account was not allowable as deduction?" 3. The facts and circumstances of the case, giving rise to the filing of the Appeal, in a nutshell, are that the National Thermal Power Corporation ('NTPC' for short) was in the process of setting up two Gas based Combined Cycle Power Projects at Auraiya and Kawas. Accordingly, two separate contracts were awarded to M/s Gannon Dunkerly & Co. Limited for setting up the water treatment projects at Auraiya and Kawas. Gannon Dunkerly and Co. Limited entered into a sub-contract with the Appellant for providing chlorination system for both the projects for a consideration of Rs.26 lakhs for each project. However, certain disputes and differences arose by and in between the Appellant and Gannon Dunkerly & Co. Limited pertaining to delay i....
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.... it was held that the Assessee/Appellant would be entitled to the deduction in respect of bad debts to the tune of Rs. 12,67,121/-. 5. The AO preferred an Appeal against the order dated 29th October, 1993 on as many as four grounds where-in, the third ground was pertaining to the reversal of finding by the CIT(A) on the point of dis-allowance of the deduction of Rs. 12,67,121/-. By the impugned judgement and order dated 1st May,2003, the learned Income Tax Appellate Tribunal ('ITAT' for short) had affirmed the order of the CIT(A) as regards the first, second and fourth grounds but reversed the findings of the CIT(A) with regard to the third ground pertaining to the deduction claimed by the Appellant. The findings and observations of the learned Tribunal pertaining to the question of deduction based on provision of bad debt of Rs. 12,67,121/- are as follows:- "8. The third ground relates to addition on account of provision for bad debts of Rs. 12,67,121. The AO disallowed the claim of the assessee on the ground that the assessee did not pass proper accounting entry in the books of account. A provision has been created and respective party has not been credited. The CIT(A....
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....d as such, no further duty can be foisted upon him requiring the assessee to also close the existing ledger account of the concerned party in his books of account. 8. However, by the amendment of the Finance Act of 2001 Explanation-1 has been inserted in Section 36 (1)(vii) of the Act of 1961 with effect from 01-04-1989 which provides that any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. 9. Mr. B. M. Chatterji, learned Senior Counsel appearing for the Appellant has argued that although the bad debts of Rs. 12,67,121/- had been written off by the Appellant for all practical purpose, yet, due to the pendency of the legal proceeding for recovery of the amount, the same had to be reflected in the ledger by making provisions of bad debt as otherwise, the defendant would take advantage of the same while contesting the proceedings for recovery of the unpaid dues. Contending that, the core issue involved in the present Appeal is identical to that involved in the case of Vijaya Bank vs. Commissioner of Income-Tax and Anr. (2010) 323 ITR 166 (SC), Mr....
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....rect that the decision in the case of Vitthaldas H. Dhanjibhai Bardanwala (Supra), was rendered prior to the amendment of the Finance Act of 2001 inserting the Explanation to Section 36(1)(vii) and to that extent, the ratio laid down in the said decision may not have any relevant bearing in a post 01-04-1989 transaction like the one in hand. However, a question as to whether, the Department was entitled to treat the provision for NPA, which in terms of the RBI Directions, is debited to the P & L Account as 'income' under Section 2(24) of the Income Tax Act, while computing the profits and gains of the business under Sections 28 to 43-D of the IT Act came up for consideration in the case of Southern Technologies Limited vs. Joint Commissioner of Income-Tax, Coimbatore (2010) 2 Supreme Court Cases 548. While answering the said question, the Hon'ble Supreme Court has made certain observations on the scope of the Finance Act (No.2) of 2001 which came into effect from 1st April, 1989. The observations made in paragraph Nos. 36 and 37 are relevant for this case and therefore, are being reproduced here-in-below:- "36. Prior to 1.4.1989, the law, as it then stood, took the view th....
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....ute a valid write-off even without an express entry to that effect in the P & L Account and the Ledger, especially in view of the litigation instituted by the Appellant before the competent court of law for recovery of the same amount. 15. While dealing with a similar question in the case of Vijaya Bank (Supra), the Hon'ble Supreme Court has made the following observations in paragraph No. 8, which are reproduced hereinbelow for ready reference:- "8. Coming to the second question, we may reiterate that it is not in dispute that Section 36(1)(vii) of 1961 Act applies both to banking and non-banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-Bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance-sheet is shown as net of the provisions for the impugned debt. However, what is being insisted upon by the Assessing Officer is t....
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....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 deeper consideration, it is not so for three reasons. Firstly, the Head Office accounts clearly indicate, in the present case, that, on repayment in subsequent years, the amounts are duly offered for tax. Secondly, one has to keep in mind that, under the Accounting practice, the Accounts of the Rural Branches have to tally with the Accounts of the Head Office. If the repaid amount in subsequent years is not credited to the Profit and Loss Account of the Head Office, which is ultimately what matters, then, there would be a mis-match between the Rural Branch Accounts and the Head Office Accounts. Lastly, in any event, Section 41(4) of the 1961 Act, in....
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....ision account stood obliterated. Lastly, loans and advances or the sundry debtors of the assessee 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 and, therefore, the Tribunal was of the view that the deduction under Section 36 (1)(vii) of the Income Tax Act was allowable. The above view of the ITAT was, however, not accepted by the High Court which came to the conclusion that in view of the Explanation vide the Finance Act, 2001 with effect from April 1, 1989, the decision of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (Supra), no more held the field and hence, mere creation of a provision did not amount to actual "write off' of the bad debt. However, as would be evident from the foregoing paragraphs, the above view of the High Court was not accepted by the Supreme Court in a case of Vijaya Bank (Supra) for the reasons recorded therein. 17. That was also a case, where a litigation was pending before the Court for recovery of the amount and, therefore, the assessee-Bank had taken a plea that if the amounts are shown to have been writ....