Sting Debt Perverse? v. The Appellant Filed An Appeal Before Thecommissionerof Income.tax(Appeals).Thecommissioner Of Income Tax (Appeals) By An Orderdated 20.09.2017 Inter Alia Held T

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 19 DAY OF JUNE 2020. PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE M.NAGAPRASANNA_ LT.A. NO.555 OF ZO18 BETWEEN: M/S. HAJEE A.P. BAVA AND COMPANY|CONSTRUCTIONS PVT. LTD.HAPBCO TOWER, #32, 9 MAIN ROADRPC LAYOUT, HAMPINAGARVIJAYANAGAR, BENGALURU-560104|PAN: AACCH 1218 C (REPRESENTED BY ITS VICE PRESIDENT|FINANCE, MR. SUNDARAM VENKATARAMANAGED ABOUT 49 YEARS.S/O M. VENKATARAMAN) ... APPELLAN[. (BY SRI. CHYTHANYA K.K. ADV.,) AND: THE ASSISTANT COMMISSIONER OF INCOME TAXCIRCLE — 3(1)(2), ROOM NO.2282 FLOOR, BMTC BUILDING80 FI. ROAD, 6 BLOCK|.KORAMANGALA, BANGALORE-560095. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.,) THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,1961, ARISING OUT OF ORDER DATED 20/04/2018 PASSED IN ITA| NO.2153/BANG/2017, FOR THE ASSESSMENT YEAR 2014-15,|PRAYING TO: (1) FORMULATE THE SUBSTANTIAL QUESTION OF LAW.STATED ABOVE. (II) ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED-ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU|‘AY BENCH, BEARING IN ITA NO.2153/BANG/2017 FOR THE AY|2014-15, AS ENCLOSED IN ANNEXURE-A & EITC. THIS ITA COMING ON FOR ORDERS, THIS DAY, ALOKARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax) Act, 1961 (hereinafter referred to as the Act for short) Nas been preferred by the assessee. Tne subject matter of the appeal pertains to the Assessment year 2014-15. The appeal was admitted by a bench of this Court vide order dated 20.11.2018 on the following substantialquestions of law:| (I)Whether In the facts and circumstances of the case, the tribunal is right in lawin upholding disallowance of the baddebtswritten off.underSection-36(1)(vil) of IT Act read with Section-36(2)?|in upholding disallowance of the baddebtswritten off.underSection-36(1)(vil) of IT Act read with Section-36(2)?| (iI)Whether, in the facts and circumstances|of the case, is not the finding of theof the case, is not the finding of the Tribunal that the relevant [ncome was.not offered to tax and there was no.subsisting debt perverse? 2 |Facts leading to filing of the appeal brieflystated are that the assessee is a private limitedCOM padNywhichISengagedIn|thebusinessoffabrication, erection, commissioning, maintenance of.mechanical plants and machineries. The assessee filedits return of income for the Assessment year 2014-15 bydeclaringtotalincomeofRs.7,/1,/76,/00/-ON|30.11.7014. The assessee filed the revised return ofincome on 28.11.2015 by declaring total income ofRs.20,83,75,020/-. The original return of the assesseewas processed under Section 143(1) of the Act and thecase of tne appellant was selected for scrutiny. Noticesunder Section 143(2) of the Act dated 28.08.2015 andunder Section 142(1) of the Act were issued. Theassessing officer by an order dated 29.11.2016 passedunder Section 143(2) of the Act inter alia held that from perusal of the ledger extracts, it is evident that no credit.entry on the account of bad debts has been made in thedebtors account during or at the end of financial year2013-14. It was further held that account has not beenSquared off and closed at the year end and the assesseecontinued to have transactions with the debtor In the'subsequent financial year also. It was also held thatamount claimed in the profit and loss account as baddebts had not actually been written off from the debtorsaccount and has merely been transferred to accountmaking provision for doubtful debts. By placing relianceon decision of the Supreme Court in|"SOUTHERN|TECHNOLOGIES LTD., VS. JCIT’, (2010) 320 ITR577 (SC)and by taking into account explanation to|36(1)(vil) it was held that mere provision for doubtfuldebts cannot be allowed as deduction and in the tnstant|case tne assessee nas failed to credit tne account otindividual debtor and has merely reduced the grossSundry debtor account in the balance sheet which does not amount to writing off the debt in the assessee’s.books of account. The assessing officer further held thatdecision rendered by Supreme Court in case of.‘VIJAYABANK VS. CIT’, (2010) 323 ITR 166 (SC)IS not.applicable to the in the fact situation of the case as theassessee is a non-banking and non-finance companyand the main issue involved in the case otfVIJAYABANKSupra was the apprehension that if the assesseefailed to close each and every individual account of itsdebtors it might result in assessee claiming deductiontwice over whereas, the case of the assessee in theinstant case is deferment of tax liability to subsequentyears. Accordingly, the bad debts written of to theextent of Rs.11,45,33,140/- were disallowed. 3.The appellant filed an appeal before theCommissionerOf Income.Tax(Appeals).The|Commissioner of Income Tax (Appeals) by an orderdated 20.09.2017 inter alia held that assessee has onlycreated a provision for doubtful entry in the books of accounts and since it is following a double entry systemof accounting, corresponding entries have been made inthe profit and loss and the balance sheet, withoutactually writing off the bad debts. Thus, it was held thatthe claim of assessee for allowing the bad debts is notsustainable. In the result, the appeal was dismissed. 4Being aggrieved, the assessee filed an appealbefore the Income Tax Appellate Tribunal. The tribunalby an order dated 20.04.2018 inter alia held that onmere perusal of the ledger account of the company inbooks of account extracted in the order of assessment it.is clear that opening balance of Rs.8,91,12,550.61/- was.shown as due from the debtor and during the course ofyear under consideration the debtor had debited theaccount of recoveries made towards statutory leviessuch as cess, sales tax and TDS recoveries. It wasfurther held that as on the end of the accounting yearending on 31.03.2014 a sum of Rs.3,/79,64,917.38/-was debited by passing a journal entry and therefore, it is not clear whether the aforesaid amount was offered to.tax. It was also held that mere wrong entry in the booksof account does not constitute debt which can be writtenoff. The aforesaid amounts are not due from the partyand are not in the nature of subsisting debt and therequisite condition for allowance as bad debts that thedebt should have been offered to tax In the earlierAssessment year is also not satisfied. In the result, theappeal was dismissed. The assessee thereafter filed amiscellaneous petition against the order of the tribunal,which is pending consideration before the tribunal. Inthe aforesaid factual background, this appeal has beenfiled. 5.|Learned counsel for the assessee submittedthat the sole issue which arises for consideration in this|appeal is whether the assessee has written off the debtas bad debt as required under Section 36(1)(vii) readwith Section 36(2) of the Act. It is further submittedthat assessee has debited the aqmount of doubtful debt to the profit and loss account and has credited the assetaccount like sundry debtors account and therefore, hascomplied with the provisions in Section 36(1)(vii) of theAct. It is further submitted that the assessee has made§a provision for bad debt and the debtor is underliquidation and a claim has been made before the officialliquidator by the assessee. It is further submitted that itis not necessary for the assessee to demonstrate that ithas taken action for recovery of the debt and Section36(1)(vil) of the Act applies to banking as well as nonbanking companies. It is also urged that merely on thebasis of apprehension that if the assessee failed to closeeach and every individual account of its debtor, it might.result in assessee claiming deduction twice over, thebenefit of writing off the debt under Section 36(1)(vil) ofthe Act cannot be denied to the assessee. It is pointedout that Section 41(4) is incorporated in the statutebook to deal with an assessee who may claim thededuction twice over as under the aforesaid provision, an action for recovery of the amount can be initiated. Itis also urged that the finding recorded by the authoritiesthat the assessee has failed to actually write off the debtin the books of accounts is perverse. It is also urged.that the revenue has not referred to any material onrecord to prove that the assessee has abused theprovision of law. Alternatively it is submitted that thematter be remitted to the assessing officer fordetermining the question whether the debt written offduring the year in question was offered to income inPrevious year. In support of aforesaid submissions,reference has been made only to decisions in caseshereinafterreferred even)though.thecompilationcontains the list of aS many as 36 judgments, viz., |/VIJAYA BANK VS. CIT’, (2010) 323 ITR 166 (SC),|‘T.R.F. LTD. VS. CIT’, (2010) 323 ITR 397 (SC),‘CIT VS. YOKOGAWA INDIA LTD.,’, (2012) 17TAXMANN.COM 15 (KAR), © CIT VS. KIRLOSKARSYSTEMS LTD.,’, (2013) 220 TAXMAN 1 (KAR), ‘CIT VS. VODAFONE ESSAR GUJARAT LTD.,", (2017) 397ITR 55 (GUJ), ‘CIT VS. TAINWALA CHEMICALS &PLASTICS INDIA LTD.,’, (2013) 215 TAXMAN 153°(BOM.), CIRCULAR NO.516 DATED 15.06.1988.6.|On the other hand, learned counsel for therevenue submitted that assessee is required to make aprovision for debiting the amount from the profit andloss account and same has to be reduced from the asset.side of the balance sheet. It is also urged that the.assessee in the instant case has not complied with therequirement under Section 36(1)(vii) of the Act and thefacts that whether or not the debt which was written offduring the relevant year was offered to income inprevious years and whnetner the assessee has compliedwith the requirement of writing off the debt asprescribed in|VIJAYA BANK~ supra need to beexamined. J |We have considered the submissions made on both the sides and Nave perused the record. Section 36(1)(vil) of the Act was amended with effect from01.04.1989 which is reproduced below for the facility ofreference: 36.Otherdeductions(1)thedeductions provided for in the followingclauses. shall be allowed in respect of thematters dealt with therein, in computingthe Income referred to in S.78-| (vil) subject to the provisions of sub-S,(2), the amount of any bad debt or partthereof which is written off as irrecoverablein the accounts of the assessee for theprevious year. 8.)Tnus, it is evident that after 01.04.1989 it Isnot necessary for the assessee to establish the fact thatthe debt in fact nad become irrecoverable and it Issufficient if the bad debt Is written off as Irrecoverable Inthe books of accounts of the assessee. 9 |In the facts of the case, twin issues viz., (i)whether debt which was written off during the relevantyear was offered to income in Previous year or earlier.years, (ii) whether the assessee has debited the amountof doubtful debt to profit and loss account and hasreduced the same from the asset side of the balance|sheet require determination to decide the claim of theassessee with regard to writing off the bad debt. TheSupreme Court dealt with Section 36(1)(vii) of the Act,which was amended with effect from 01.04.1989 In/SOUTHERN TECHNOLOGIES LTD. VS. JT. CIT’,|(2010) 320 ITR 577. It was inter alia held that after.01.04.1989, a mere provision for bad debt would not beentitled to deduction under Section 36(1)(vii) of the Act. ©It was further held that if an assessee debits an amountof doubtful debt to profit and loss account and creditsthe asset account like sundry debtors account, it wouldconstitute a right of an actual debt. However, if anassessee debits ‘provision for doubtful debit’ to profit and loss account and makes a corresponding credit tocurrent liabilities and provisions on the liabilities side ofthe balance sheet then it would constitute a provisionfor doubtful debt. It was thus held that in the latter casethe assessee would not be entitled to deduction after01.04.1989. The aforesaid decision was referred to withapproval in.VIJAYA BANKSUDPFd. and loss account and makes a corresponding credit tocurrent liabilities and provisions on the liabilities side ofthe balance sheet then it would constitute a provisionfor doubtful debt. It was thus held that in the latter casethe assessee would not be entitled to deduction after01.04.1989. The aforesaid decision was referred to withapproval in.VIJAYA BANKSUDPFd. 10. However, from the close scrutiny of theorders passed by the assessing officer, Commissioner ofIncome Tax (Appeals) as well as Income Tax AppellateTribunal, we find that aforesaid aspect of the matter hasnot been examined. Therefore, the impugned ordersare quashed and the matter is remitted to the assessingofficer to ascertain twin questions viz., (i) whether debtwhich was written off during the relevant year wasoffered to income in Previous year or earlier years, (il)whether the assessee has debited the amount ofdoubtful debt to profit and loss account and has reducedthe same from the asset side of the balance sheet. The matter is remitted to the assessing officer for|de novo consideration of the aforementioned aspect. In view of the preceding analysis, it is not)necessary to answer the substantial questions of law framed by this court. In the result, the appeal isdisposed of. Sd/-JUDGE.Sd/-JUDGE.