Haryana State Industrial Development Corporation V. Commissioner of Income Tax Panchkula

ITA/67/2004

AI Insights

The case involves the Haryana State Industrial Development Corporation (the appellant) appealing against the decision of the Income Tax Appellate Tribunal, which upheld the disallowance of a deduction of Rs. 19,77,535. This deduction was claimed under Section 36(1)(viia) of the Income Tax Act, 1961, for provisions made for bad and doubtful debts. The Tribunal and the High Court both found that the deduction was not admissible as it exceeded the credit balance in the provision for bad and doubtful debts account, as stipulated by the proviso to Section 36(1)(vii) of the Act. The court's decision was based on the interpretation of the relevant sections of the Income Tax Act and the application of these provisions to the facts of the case.

• Counselvise Citation: [2010] 140 COUNSELVISE.COM (IT) 796594 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 23-11-2010
• Assessment Year: misc
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: YOGESH PUTNEY
• Assessee Lawyers: PANKAJ JAIN
• Keywords: Bad and doubtful debts; Deduction Disallowance; Provision for bad debts
• Section: 260A; 36(1)(vii); 36(1)(viia); 36(2)(v)

Judgement Text

" Income Tax Appeal No. 67 of 2004 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income-tax Appeal No. 67 of 2004 Date of decision: 23.11.2010 Haryana State Industrial Development Corporation --- Appellant Versus Commissioner of Income Tax Panchkula. --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL ---- PRESENT:Mr. Pankaj Jain, Advocate for 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 the order 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 for determination by this Court: Income Tax Appeal No. 67 of 2004 2 a) Whether under the facts and circumstances of the case and on the true and correct interpretation of the provisions of Section 36(1) (vii), 36(1) (vii-a), the Tribunal is justified in upholding the disallowance of deduction of Rs.19,77,535/- whereas both the sections are separate, distinct and operate independently. b) Whether under the facts and circumstances of the case the Tribunal is justified in upholding the disallowance of deduction of Rs. 19,77,535/- whereby when there is no judgment against the assessee the view favouring on the basis of true and correct interpretation of the provisions of law, objects of introduction of the section, circulars of Central Board of Direct Taxes favouring the assessing be adopted. The facts necessary for adjudication, as narrated in the appeal, are that the assessee is a Corporation and an undertaking of Haryana State and is engaged in development of industrial estates and infrastructural facilities. The assessee filed return for the assessment year 1995-96 declaring income of Rs. 3,71,78,674/- on 29.11.1995. The assessee had created a provision for bad and doubtful debts under Section 36(1) (viia) of the Act, amounting to Rs. 19,77,535/-. Besides this, there was already a credit balance in the provision for bad and doubtful debts for the assessment year 1993- 94 and 1994-95, totaling Rs. 9,88,844/-. The assessing officer allowed bad debts to the extent of Rs. 1,10,53,000/- but made disallowance of Rs.. 19,77,535/- and Rs. 9,88,844/-. The assessing officer, thus, disallowed the deduction claimed by the assessee under Income Tax Appeal No. 67 of 2004 3 Section 36(1)(viia) of the Act. The assessment was completed by the assessing authority under Section 143(3) of the Act vide order dated 7.2.1997, Annexure A-3, at the income of Rs. 4,35,03,060/-. Aggrieved by the order of the assessing authority, the assessee filed appeal. This claim of the assessee in appeal was dismissed by the Commissioner of Income Tax (Appeals), [for short “CIT(A)”] vide order dated 5.1.1998, Annexure A-2, which was affirmed 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 have perused the record. The claim of the assessee was that the provision which was made by the assessee during the year amounting to Rs.19,77,535/-, was admissible as deduction. In order to effectively adjudicate the controversy, the provisions of Section 36(1)(vii), proviso thereto, Section 36(1)(viia) and Section 36(2)(v) have to be analysed. The provisions as they existed at the relevant time are reproduced as under: “36. Other deductions. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— --- --- --- --- Income Tax Appeal No. 67 of 2004 4 (i) to (vi) xxx xxx xxx (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year]: Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. (viia) in respect of any provision for bad and doubtful debts made by— (a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non- scheduled bank, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner: Income Tax Appeal No. 67 of 2004 5 Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year. (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA);] (c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply— (i) to (iv) xxx xxx xxx Income Tax Appeal No. 67 of 2004 6 (v) where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub- section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.” Section 36(1)(vii) provides for deduction in the computation of taxable profits of any debt or part thereof, which is proved to have become a bad debt in the previous year subject to the fulfillment of the conditions specified in sub-section (2) of Section 36. The proviso to Section 36(1)(vii) stipulates that the amount of deduction relating to any debt or part thereof which is claimed to have become bad debt shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Section 36 (1) (viia) of the Act was introduced with a view to provide for grant of deduction in respect of provision for bad debt made by all the banks and financial institution. In other words, to the extent to which the provision for bad and doubtful debts has been allowed under Section 36(1)(viia), there can be no deduction under Section 36(1)(vii) in view of provisions of Section 36(2)(v) of the Act. The Tribunal held that the assessee had created provision for bad and doubtful debts during the year under Section 36 (1)(viia) and the said amount had to be reduced from the actual bad debts claimed under Section 36(1)(vii) in view of the proviso Income Tax Appeal No. 67 of 2004 7 appended thereto. The findings recorded by the Tribunal are as under:- “We find that the assessee has created a provision for bad and doubtful debts u/s 36(1) (viia) amounting to Rs.19,77,535/-. In addition to that there was already a credit balance in the provision for bad and doubtful debts for the assessment year 1993-94 and for assessment year 1994-95 totaling to Rs.9,88,844/-. The assessee claimed bad debts excluding a sum of Rs.9.00 lakhs already stated in the facts of the case amounting to Rs.1,10,53,000/-. The AO has allowed bad debts to the extent of Rs.1,10,53,000/- but disallowed a sum of Rs.19,77,535/- and Rs.9,88,844/- and thereby reduced the deduction of the bad debts available to the assessee u/s 36(1) (vii). From a bare reading of the provisions of section 36(1)(vii) as stipulated herein above, it is clear that the assessee is entitled to deduction in respect of amount of bad and doubtful debts written off for the previous year subject to the provisions of section 36(2). The proviso under the said section laid down that if the assessee is one to whom the provisions of clause (viia) are applicable and the deduction for bad debts shall be restricted to the amount of bad debts as exceeds the credit balance standing in the provision for bad and doubtful debts made under clause (viia). The crucial date, in our opinion, for the claim of deduction is the date when Income Tax Appeal No. 67 of 2004 8 the accounts are closed and books are finalized i.e. 31.3.95 in the case of the assessee. The assessee has written off bad debts only in the account ending on 31.3.95. The assessee had the provision for bad and doubtful debts in his books of accounts at the fag end of 31.3.95 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 previous year for bad and doubtful debts consists of not only the provision made for the year ending 31.3.93 and 31.3.94 but also the provision made for the year 1995. The proviso does not distinguish the time when the bad debt was written off or when the provision for bad and doubtful debts has been made for the previous year. The Income Tax is leviable on the income computed for a previous year. The deduction allowable to the assessee also relate to the previous year. The deduction available u/s 36(1) (vii) is also available to the assessee only for the previous year i.e. at the time when taxable income of the assessee is computed. Since the taxable income is computed for the year ended 31.3.95, therefore, only logical interpretation which could be given to the proviso relating Income Tax Appeal No. 67 of 2004 9 to section 36(1)(vii) is that the assessee is entitled to the deduction of any bad debt which is written off in its books of accounts to the extent it exceeds the credit balance in the provision for bad and doubtful debts accounts. Therefore, in our opinion, the provision created by the assessee and claimed as deduction u/s 36(1)(viia) will also be considered while computing the deduction u/s 36 (1)(vii) and we, therefore, hold that a sum of Rs.19,77,535/- has to be disallowed in view of the proviso to section 36(1)(vii) and accordingly we confirm the order of CIT(A). Thus, the first ground of appeal of the assessee is dismissed.” The aforesaid finding of the Tribunal clearly shows that the assessee was not entitled to have deduction of the sum of Rs.19,77,535/- which was the provision for bad and doubtful debt made during the current year. The said finding being in conformity with the proviso to Section 36(1)(vii) and Section 36(2)(v) of the Act has not been shown to be perverse or illegal in any manner by the counsel for the appellant, which may warrant interference by this Court. Accordingly, there is no merit in the appeal and the same is dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) Income Tax Appeal No. 67 of 2004 10 November 23, 2010 JUDGE *rkmalik* "