Haryana State Industrial Developmentcorporation v. Commissioner Of Income Taxpanchkula

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income-tax Appeal No. 67 of 2004Date of decision: 23.11.2010 Haryana State Industrial DevelopmentCorporation --- Appellant Versus Commissioner of Income TaxPanchkula. --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL ---- PRESENT:Mr. Pankaj Jain, Advocatefor the appellant. Mr. Yogesh Putney, Senior Standing Counsel for the respondent. ---- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-tax Act,1961 (for short “the Act’”) has been filed by the assessee against theorder dated 20.8.2003, passed by the Income Tax Appellate Tribunal,Chandigarh Bench (B), Chandigarh (in short “the Tribunal”) in ITA No.316/CHANDI/98 relating to the assessment year 1995-96. The assessee has claimed the following questions fordetermination by this Court: a)Whether under the facts and circumstances of the caseand on the true and correct interpretation of theprovisions of Section 36(1) (vii), 36(1) (vii-a), the Tribunalis justified in upholding the disallowance of deduction ofRs.19,77,535/- whereas both the sections are separate,distinct and operate independently.and on the true and correct interpretation of theprovisions of Section 36(1) (vii), 36(1) (vii-a), the Tribunalis justified in upholding the disallowance of deduction ofRs.19,77,535/- whereas both the sections are separate,distinct and operate independently. b)Whether under the facts and circumstances of the casethe Tribunal is justified in upholding the disallowance ofdeduction of Rs. 19,77,535/- whereby when there is nojudgment against the assessee the view favouring on thebasis of true and correct interpretation of the provisions oflaw, objects of introduction of the section, circulars ofCentral Board of Direct Taxes favouring the assessing beadopted.the Tribunal is justified in upholding the disallowance ofdeduction of Rs. 19,77,535/- whereby when there is nojudgment against the assessee the view favouring on thebasis of true and correct interpretation of the provisions oflaw, objects of introduction of the section, circulars ofCentral Board of Direct Taxes favouring the assessing beadopted. The facts necessary for adjudication, as narrated in theappeal, are that the assessee is a Corporation and an undertaking ofHaryana State and is engaged in development of industrial estatesand infrastructural facilities. The assessee filed return for theassessment year 1995-96 declaring income of Rs. 3,71,78,674/- on29.11.1995. The assessee had created a provision for bad anddoubtful debts under Section 36(1) (viia) of the Act, amounting to Rs.19,77,535/-. Besides this, there was already a credit balance in theprovision for bad and doubtful debts for the assessment year 1993-94 and 1994-95, totaling Rs. 9,88,844/-. The assessing officerallowed bad debts to the extent of Rs. 1,10,53,000/- but madedisallowance of Rs.. 19,77,535/- and Rs. 9,88,844/-. The assessingofficer, thus, disallowed the deduction claimed by the assessee under Section 36(1)(viia) of the Act. The assessment was completed by theassessing authority under Section 143(3) of the Act vide order dated7.2.1997, Annexure A-3, at the income of Rs. 4,35,03,060/-. Aggrieved by the order of the assessing authority, theassessee filed appeal. This claim of the assessee in appeal wasdismissed by the Commissioner of Income Tax (Appeals), [for short“CIT(A)”] vide order dated 5.1.1998, Annexure A-2, which wasaffirmed by the Tribunal vide order dated 20.8.2003, Annexure A-1. This is how the assessee has filed the present appeal. We have heard learned counsel for the parties and haveperused the record. The claim of the assessee was that the provision which was made by the assessee during the year amounting toRs.19,77,535/-, was admissible as deduction. Section 36(1)(viia) of the Act. The assessment was completed by theassessing authority under Section 143(3) of the Act vide order dated7.2.1997, Annexure A-3, at the income of Rs. 4,35,03,060/-. Aggrieved by the order of the assessing authority, theassessee filed appeal. This claim of the assessee in appeal wasdismissed by the Commissioner of Income Tax (Appeals), [for short“CIT(A)”] vide order dated 5.1.1998, Annexure A-2, which wasaffirmed by the Tribunal vide order dated 20.8.2003, Annexure A-1. This is how the assessee has filed the present appeal. We have heard learned counsel for the parties and haveperused the record. The claim of the assessee was that the provision which was made by the assessee during the year amounting toRs.19,77,535/-, was admissible as deduction. In order to effectively adjudicate the controversy, theprovisions of Section 36(1)(vii), proviso thereto, Section 36(1)(viia)and Section 36(2)(v) have to be analysed. The provisions as theyexisted at the relevant time are reproduced as under: “36. Other deductions. (1) The deductions provided for in the followingclauses shall be allowed in respect of the matters dealtwith therein, in computing the income referred to insection 28— --- --- ------ (vii) subject to the provisions of sub-section (2), the amountof any bad debt or part thereof which is written off asirrecoverable in the accounts of the assessee for the previousyear]: Provided that in the case of an assessee to which clause(viia) applies, the amount of the deduction relating to anysuch debt or part thereof shall be limited to the amount bywhich such debt or part thereof exceeds the creditbalance in the provision for bad and doubtful debtsaccount made under that clause. (viia) in respect of any provision for bad and doubtful debtsmade by— (a) a scheduled bank not being a bank incorporated by orunder the laws of a country outside India or a non-scheduled bank, an amount not exceeding five per centof the total income (computed before making anydeduction under this clause and Chapter VIA) and anamount not exceeding ten per cent of the aggregateaverage advances made by the rural branches of suchbank computed in the prescribed manner: Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, beallowed in any of the relevant assessment years,deduction in respect of any provision made by it for anyassets classified by the Reserve Bank of India as doubtfulassets or loss assets in accordance with the guidelinesissued by it in this behalf, for an amount not exceedingfive per cent of the amount of such assets shown in thebooks of account of the bank on the last day of theprevious year. (b) a bank, being a bank incorporated by or under thelaws of a country outside India, an amount not exceedingfive per cent of the total income (computed before makingany deduction under this clause and Chapter VIA);] (c) a public financial institution or a State financialcorporation or a State industrial investment corporation,an amount not exceeding five per cent of the total income(computed before making any deduction under thisclause and Chapter VI-A). (2) In making any deduction for a bad debt or part thereof, thefollowing provisions shall apply— (i) to (iv)xxxxxxxxx (v) where such debt or part of debt relates to advancesmade by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowedunless the assessee has debited the amount of such debtor part of debt in that previous year to the provision forbad and doubtful debts account made under that clause.” (c) a public financial institution or a State financialcorporation or a State industrial investment corporation,an amount not exceeding five per cent of the total income(computed before making any deduction under thisclause and Chapter VI-A). (2) In making any deduction for a bad debt or part thereof, thefollowing provisions shall apply— (i) to (iv)xxxxxxxxx (v) where such debt or part of debt relates to advancesmade by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowedunless the assessee has debited the amount of such debtor part of debt in that previous year to the provision forbad and doubtful debts account made under that clause.” Section 36(1)(vii) provides for deduction in thecomputation of taxable profits of any debt or part thereof, which isproved to have become a bad debt in the previous year subject to thefulfillment of the conditions specified in sub-section (2) of Section 36.The proviso to Section 36(1)(vii) stipulates that the amount ofdeduction relating to any debt or part thereof which is claimed tohave become bad debt shall be limited to the amount by which suchdebt or part thereof exceeds the credit balance in the provision forbad and doubtful debts account made under that clause. Section 36(1) (viia) of the Act was introduced with a view to provide for grant ofdeduction in respect of provision for bad debt made by all the banksand financial institution. In other words, to the extent to which theprovision for bad and doubtful debts has been allowed under Section36(1)(viia), there can be no deduction under Section 36(1)(vii) in viewof provisions of Section 36(2)(v) of the Act. The Tribunal held that the assessee had createdprovision for bad and doubtful debts during the year under Section 36(1)(viia) and the said amount had to be reduced from the actual baddebts claimed under Section 36(1)(vii) in view of the proviso appended thereto. The findings recorded by the Tribunal are asunder:- “We find that the assessee has created a provision forbad and doubtful debts u/s 36(1) (viia) amounting toRs.19,77,535/-. In addition to that there was already acredit balance in the provision for bad and doubtful debtsfor the assessment year 1993-94 and for assessmentyear 1994-95 totaling to Rs.9,88,844/-. The assesseeclaimed bad debts excluding a sum of Rs.9.00 lakhsalready stated in the facts of the case amounting toRs.1,10,53,000/-. The AO has allowed bad debts to theextent of Rs.1,10,53,000/- but disallowed a sum ofRs.19,77,535/- and Rs.9,88,844/- and thereby reducedthe deduction of the bad debts available to the assesseeu/s 36(1) (vii). From a bare reading of the provisions ofsection 36(1)(vii) as stipulated herein above, it is clearthat the assessee is entitled to deduction in respect ofamount of bad and doubtful debts written off for theprevious year subject to the provisions of section 36(2).The proviso under the said section laid down that if theassessee is one to whom the provisions of clause (viia)are applicable and the deduction for bad debts shall berestricted to the amount of bad debts as exceeds thecredit balance standing in the provision for bad anddoubtful debts made under clause (viia). The crucial date,in our opinion, for the claim of deduction is the date when the accounts are closed and books are finalized i.e.31.3.95 in the case of the assessee. The assessee haswritten off bad debts only in the account ending on31.3.95. The assessee had the provision for bad anddoubtful debts in his books of accounts at the fag end of31.3.95 detailed as under:- Provision made during the year ending 31.3.93 :Rs.397594/- Provision made during the year ending 31.3.94 : Rs.591250/- Provision made during the year ending 31.3.95 :Rs.1977535/- Total Rs.29,66,379/- the accounts are closed and books are finalized i.e.31.3.95 in the case of the assessee. The assessee haswritten off bad debts only in the account ending on31.3.95. The assessee had the provision for bad anddoubtful debts in his books of accounts at the fag end of31.3.95 detailed as under:- Provision made during the year ending 31.3.93 :Rs.397594/- Provision made during the year ending 31.3.94 : Rs.591250/- Provision made during the year ending 31.3.95 :Rs.1977535/- Total Rs.29,66,379/- Thus, as on 31.3.95 the credit balance in the previousyear for bad and doubtful debts consists of not only theprovision made for the year ending 31.3.93 and 31.3.94but also the provision made for the year 1995. Theproviso does not distinguish the time when the bad debtwas written off or when the provision for bad and doubtfuldebts has been made for the previous year. The IncomeTax is leviable on the income computed for a previousyear. The deduction allowable to the assessee also relateto the previous year. The deduction available u/s 36(1)(vii) is also available to the assessee only for the previousyear i.e. at the time when taxable income of the assesseeis computed. Since the taxable income is computed forthe year ended 31.3.95, therefore, only logicalinterpretation which could be given to the proviso relating to section 36(1)(vii) is that the assessee is entitled to thededuction of any bad debt which is written off in its booksof accounts to the extent it exceeds the credit balance inthe provision for bad and doubtful debts accounts.Therefore, in our opinion, the provision created by theassessee and claimed as deduction u/s 36(1)(viia) willalso be considered while computing the deduction u/s 36(1)(vii) and we, therefore, hold that a sum ofRs.19,77,535/- has to be disallowed in view of the provisoto section 36(1)(vii) and accordingly we confirm the orderof CIT(A). Thus, the first ground of appeal of theassessee is dismissed.” The aforesaid finding of the Tribunal clearly shows that the assessee was not entitled to have deduction of the sum ofRs.19,77,535/- which was the provision for bad and doubtful debtmade during the current year. The said finding being in conformitywith the proviso to Section 36(1)(vii) and Section 36(2)(v) of the Acthas not been shown to be perverse or illegal in any manner by thecounsel for the appellant, which may warrant interference by thisCourt. Accordingly, there is no merit in the appeal and the same isdismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) Income Tax Appeal No. 67 of 2004 10 November 23, 2010 JUDGE*rkmalik*