COMMISSIONER OF INCOME TAX AP I HYD V. STATE BANK OF HYD

RC/37/1999

AI Insights

The case revolves around the assessee, a banking business, which made a provision for bad and doubtful debts for the assessment year 1984-85. The Assessing Officer and the Appellate authority disallowed this claim, stating that the amounts must be written off as irrecoverable to be allowed as bad debt. The Tribunal, referencing decisions from the Madras and Gujarat High Courts, overturned this disallowance, a decision later upheld by the Supreme Court. The Supreme Court clarified that prior to the amendment of Section 36(1)(vii) on April 1, 1989, provisions for bad debts could be treated as write-offs. This case tested the application of this legal interpretation in the context of the specific facts presented.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 728062 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 06-02-2014
• Assessment Year: misc
• Other Referred Cases: CIT vs. SRINIVAYAGA PICTURES, VITHALDAS H. DHANJIBHAI BARDANWALA vs. CIT, SOUTHERN TECHNOLOGIES LIMITED vs. JOINT COMMISSIONER OF INCOME TAX, VIJAYA BANK vs. COMMISSIONER OF INCOME TAX
• Laws Referred To: Income-tax Act
• Result in Favour of: Applicant
• Court: HIGH COURT
• Keywords: Assessment Year 1984-85; Bad debt; Income tax appellate tribunal; Provision for Bad and Doubtful Debts; Write off as irrecoverable
• Section: 41(1); 36(2)(i)

Judgement Text

" HON’BLE SRI JUSTICE G. CHANDRAIAH & HON’BLE SRI JUSTICE 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 the Tribunal in R.A.No.242/HYD/1994 in I.T.A.No.1440/HYD/1988 for the assessment year 1984-85. “1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in allowing the assessee’s claim of bad debt to the extent of Rs.2,37,96,029 for the assessment year 1984-85 in the absence of necessary recovery steps having been taken by the assessee as required under Section 36 (2) (i) of the Act prior to its amendment with effect from 1-4-1989 ?” “2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in allowing the claim of bad debt by the assessee without having fulfilled the onus of proving that the debt had become irrecoverable during the previous year relevant for the assessment year 1984-85 ?” “3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in allowing the bad debt claim of the assessee for the assessment year 1984-85 while observing that if any recovery was made in the subsequent years the same might be brought to tax by invoking the provisions of Section 41 (1) of the Act, since the observation of the ITAT makes it clear that the debt had not become actually irrecoverable and in the absence of any recovery steps having been taken by the assessee ?” 2. The assessee is involved in banking business. For the assessment year 1984-85, the assessee has made a provision for bad and doubtful debts. The Assessing Officer as well as the Appellate authority disallowed the assessee’s claim on the ground that unless the amounts are written off as irrecoverable, they cannot be allowed as bad debt. The Tribunal following the decision of Madras High Court in the case of CIT vs. SRINIVAYAGA PICTURES (1986) 161 ITR 65) wherein the Court has held that a debt may be either written off as irrecoverable in the individual accounts of the debtor in the assessee’s books or by making appropriate entries in the profit and loss account, in either case the requirement of Section 36 (2) is satisfied. Similar view was taken by the Gujarat High Court in VITHALDAS H. DHANJIBHAI BARDANWALA vs. CIT (1981) 130 ITR 95 (Gujarat). The view taken by the Gujarat High Court in Vithaldas’s case as well as the view in Srinivayaga’s case taken by the Madras High Court stand approved by the Supreme Court in the case of SOUTHERN TECHNOLOGIES LIMITED vs. JOINT COMMISSIONER OF INCOME TAX (2010) 320 ITR 577) wherein the Supreme Court after elaborately considering statutory provisions and also the amendment which was brought into effect from April 1, 1989 held as under:- “Prior to 1.4.1989, the law, as it then stood, took the view that even in cases in which the 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, assessee was still entitled to deduction under Section 36(1)(vii). [See Commissioner of Income Tax 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 upto and including the assessment year 1988-89. However, by insertion (w.e.f. 1.4.1989) 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 1.4.1989, even a provision could be treated as a write off. However, after 1.4.1989, a distinct dichotomy is brought in by way of the said Explanation to Section 36(1)(vii). Consequently, after 1.4.1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii). To understand the above dichotomy, one must understand “how to write off”. If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor's account, it would constitute a write off of an actual debt. However, if an assessee debits “provision for doubtful debt” to the profit and loss account and makes a corresponding credit to the “current liabilities and provisions” on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, assessee would not be 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). In view of the law laid down by the Supreme Court, the questions raised in the present case are answered in favour of the assessee and against the revenue. The Reference Case is answered accordingly. Miscellaneous petitions, if any pending in this case shall stand disposed of. There shall be no order as to costs. _______________________ G. CHANDRAIAH, J ____________________________ CHALLA KODANDA RAM,J Dated: 06-02-2014 NRG HON’BLE SRI JUSTICE G. CHANDRAIAH & HON’BLE SRI JUSTICE CHALLA KODANDA RAM RC No.37 OF 1999 ( per CKR,J ) Dated: 06-02-2014 NRG "