The Assessee Is Involved In Banking Business. For The v. State Bank Of Hyd

HON’BLESRIJUSTICE G. CHANDRAIAH & HON’BLESRIJUSTICE CHALLA KODANDA RAM RC No.37 OF 1999 JUDGMENT :: ( per Hon’ble Sri Justice Challa Kodanda Ram ) The following three questions of law have been referred to the opinion of this Court which arise from the order of theTribunal in R.A.No.242/HYD/1994 in I.T.A.No.1440/HYD/1988for the assessment year 1984-85. “1. Whether, on the facts and in the circumstances of thecase, the Income-tax Appellate Tribunal is correct in allowing theassessee’s claim of bad debt to the extent of Rs.2,37,96,029 forthe assessment year 1984-85 in the absence of necessaryrecovery steps having been taken by the assessee as requiredunder Section 36 (2) (i) of the Act prior to its amendment witheffect from 1-4-1989 ?” “2. Whether, on the facts and in the circumstances of thecase, the Income-tax Appellate Tribunal is correct in allowing theclaim of bad debt by the assessee without having fulfilled the onusof proving that the debt had become irrecoverable during theprevious year relevant for the assessment year 1984-85 ?” “3. Whether, on the facts and in the circumstances of thecase, the Income-tax Appellate Tribunal is correct in allowing the bad debt claim of the assessee for the assessment year 1984-85while observing that if any recovery was made in the subsequentyears the same might be brought to tax by invoking the provisionsof Section 41 (1) of the Act, since the observation of the ITATmakes it clear that the debt had not become actually irrecoverableand in the absence of any recovery steps having been taken bythe assessee ?” 2. The assessee is involved in banking business. For the assessment year 1984-85, the assessee has made a provisionfor bad and doubtful debts. The Assessing Officer as well asthe Appellate authority disallowed the assessee’s claim on theground that unless the amounts are written off as irrecoverable,they cannot be allowed as bad debt. The Tribunal followingthe decision of Madras High Court in the case of CIT vs.SRINIVAYAGA PICTURES (1986) 161 ITR 65) wherein theCourt has held that a debt may be either written off asirrecoverable in the individual accounts of the debtor in theassessee’s books or by making appropriate entries in the profitand loss account, in either case the requirement of Section 36(2) is satisfied. Similar view was taken by the Gujarat HighCourt in VITHALDAS H. DHANJIBHAI BARDANWALA vs. CIT(1981) 130 ITR 95 (Gujarat). The view taken by the GujaratHigh Court in Vithaldas’s case as well as the view inSrinivayaga’s case taken by the Madras High Court standapproved by the Supreme Court in the case of SOUTHERNTECHNOLOGIES LIMITED vs. JOINT COMMISSIONER OFINCOME TAX (2010) 320 ITR 577) wherein the Supreme Courtafter elaborately considering statutory provisions and also theamendment which was brought into effect from April 1, 1989held as under:- “Prior to 1.4.1989, the law, as it then stood,took the view that even in cases in which theassessee (s) makes only a provision in its accountsfor bad debts and interest thereon and even thoughthe amount is not actually written off by debiting theprofit and loss account of the assessee andcrediting the amount to the account of the debtor,assessee was still entitled to deduction underSection 36(1)(vii). [See Commissioner of IncomeTax v. Jwala Prasad Tiwari (1953) 24 ITR 537(Bom) and Vithaldas H. Dhanjibhai Bardanwala v.CIT (1981) 130 ITR 95 (Guj). Such state of lawprevailed upto and including the assessment year1988-89. However, by insertion (w.e.f. 1.4.1989) of anew Explanation in Section 36(1)(vii), it has beenclarified that any bad debt written off asirrecoverable in the account of the assessee will notinclude any provision for bad and doubtful debtmade in the accounts of the assessee. The saidamendment indicates that before 1.4.1989, even aprovision could be treated as a write off. However,after 1.4.1989, a distinct dichotomy is brought in byway of the said Explanation to Section 36(1)(vii).Consequently, after 1.4.1989, a mere provision forbad debt would not be entitled to deduction underSection 36(1)(vii). To understand the abovedichotomy, one must understand “how to write off”. Ifan assessee debits an amount of doubtful debt tothe profit and loss account and credits the assetaccount like sundry debtor's account, it wouldconstitute a write off of an actual debt. However, ifan assessee debits “provision for doubtful debt” tothe profit and loss account and makes acorresponding credit to the “current liabilities andprovisions” on the liabilities side of the balancesheet, then it would constitute a provision for doubtful debt. In the latter case, assessee would notbe entitled to deduction after 1.4.1989.” 3. This judgment was further followed in VIJAYA BANK vs. COMMISSIONER OF INCOME TAX (2010) 323 ITR 0166). Inview of the law laid down by the Supreme Court, the questionsraised in the present case are answered in favour of theassessee and against the revenue. The Reference Case isanswered accordingly. Miscellaneous petitions, if any pendingin this case shall stand disposed of. There shall be no order asto costs. _______________________ G. CHANDRAIAH, J ____________________________ CHALLA KODANDA RAM,J Dated: 06-02-2014NRG HON’BLESRIJUSTICE G. CHANDRAIAH & HON’BLESRIJUSTICE CHALLA KODANDA RAM RC No.37 OF 1999 ( per CKR,J ) Dated: 06-02-2014 NRG