M/S. VAASAUTOMATION PRIVATE LIMITED, KANCHIPURM V. ACIT, Coprporate circle-3(2), CHENNAI

ITA 140/CHNY/2024

• Counselvise Citation: [2024] 100 COUNSELVISE.COM (IT) 0555 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2024
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 03-07-2024
• Assessment Year: 2015-2016
• Appeal Filed On: 18-01-2024
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Retrospective amendment; Bad and doubtful debts; Set aside
• Section: 32; 145; 28; 143(3); 92B; 250; 72; 13; 22; 20

Judgement Text

आयकर अपीलीय अधिकरण, ‘ए’ न्यायपीठ, चेन्नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH: CHENNAI श्री एबी टी. वर्की, न्याययर्क सदस्य एवं श्री अमिताभ श ु क्ला, लेखा सदस्य के समक्ष BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.140/Chny/2024 निर्धारण वर्ा /Assessment Years: - 2015-16 M/s.Vaasautomation India Pvt Ltd., Plot No.H18 & H19, SIPCOT Industrial Park, Vallam vadagal, Echoor Post, Sriperumbudur Taluk, Kancheepuram Dist, Kanchipuram-631604. [PAN: AAACH2759N] The Asst.Commissioner of Income Tax(OSD), Corporate Circle-3(2), Chennai (अपीलार्थी/Assesse) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Assesse by : Shri N.Venkatasubramanian, C.A, प्रत्यर्थी की ओर से /Respondent by : Shri P.Sajit Kumar, JCIT स ु नवाई की तारीख/Date of Hearing : 04.07.2024 घोषणा की तारीख /Date of Pronouncement : 31.07.2024 आदेश / O R D E R PER AMITABH SHUKLA, A.M : This appeal is filed against the order bearing DIN & Order No.ITBA/NFAC/S/250/2023-24/1058073451(1) dated 20.11.2023 of the Learned Commissioner of Income Tax [herein after “CIT(A), National Faceless Appeal Center[NFAC], Delhi, for the assessment year 2015-16. Through the aforesaid appeal the assesse has challenged order u/s 250 dated 20.11.2023 passed by NFAC, Delhi. ITA No.140/Chny/2024 :- 2 -: 1.0 Aggrieved by the aforesaid order the assesse has raised the following grounds of appeal:- 1. a. The Ld' Commissioner of Income Tax (Appeals), NFAC – Delhi (hereinafter "CIT(A)") had erred in dismissing the appeal filed by the Appellant stating that it has made only a provision for doubtful debts in the books and there was no actual write-off to the party account. The CIT(A) also erred in denying the stand taken by the Hon'ble Supreme Court in the case of Vijaya Bank ([2010] 323 ITR 166 (SC) stating it is not applicable to the appellant as it is not a financial institution. The CIT(A) failed to appreciate that the judgement in the case of Vijaya Bank pertains to the deduction under section 36(1)(vii) and not under section 36(1)(viia). b. The above stand is also confirmed in the Ahmedabad |TAT's decision in the case of Vidras Ceramics (P) Ltd vs DCIT ([2021] 129 taxmann.com 320), in which the difference between a "provision" and a "write-off was clarified. It was stated that after creating a provision for bad and doubtful debt by debiting the Profit and Loss account, also simultaneously remove the same from its account by reducing the corresponding amount from the total receivables - will be considered as a write-off. ITA No.140/Chny/2024 :- 3 -: 2. The Ld' CIT(A) also erred in stating that the Appellant did not provide proof for the debt turning bad to the Assistant Commissioner of Income Tax (OSD) - Corporate Circle 3(2)- (hereinafter the "Assessing Officer") at the time of scrutiny assessment despite the appellant has submitted the proof of insolvency, correspondences to the Authorized Dealer for seeking RBl permission to write-off this overseas receivable and also evidence of surrender of export benefit received in the form of Duty drawback, in TR-6 Challans, in spite of the legal provision not warranting the appellant to establish the debt. 3. The Ld' CIT(A) has also erred in stating that the facts of the case in T.R.F Ltd ([2010] 323 ITR 397 (SC)) is different from the appellant's case and denied the stand taken by the Hon'ble Apex court that it is not necessary for the assesse to establish the debt as long as the conditions laid down section 36(1)(vii) read with sec.36(2) are satisfied. The Ld.CIT(A) has also erred in insisting that the appellant has not produced additional evidence for the dissolution of the receivable party, despite the appellant producing the proof of dissolution both during the assessment proceedings and also during appeal proceeding before the Ld.CIT(A). ITA No.140/Chny/2024 :- 4 -: 4. That the appellant prays that the addition of Rs.1,78,11,798 made in respect of disallowance of bad debts claimed, may be deleted. 5. The appellant craves, leave to add, alter, amend or vary and / or withdraw any or all of the aforesaid grounds of appeal or at time of hearing of the above appeal. 2.0 The assesse has raised grounds of appeal 1 to 4 which all are contesting the action of the Ld.CIT(A) in confirming the order of the Ld.AO qua denial of write off of bad debts claimed by the assesse by way of a provision entry. All the grounds centering around this principle controversy are therefore adjudicated together. 3.0 Before proceeding further, it is necessary to examine the brief factual matrix of the case. The assesse, M/s VAAS Automation Private Limited, holding PAN AAACH2759N, is a Private Limited Company registered under the Companies Act and is in the business of manufacture of Industrial Valves and actuators .The assesse had field its return of income for the A.Y. 2015-16 on 27.11.2015 admitting a loss of Rs. 1,16,74,105. The return of income was selected for scrutiny and assessment proceedings under the section 143(3) were initiated. During the relevant financial year, the Assesse had written off bad debts to the tune of Rs. 1,78,11,798/-due from its overseas customer, M/s. VAAS Europe ITA No.140/Chny/2024 :- 5 -: (this happens to be a fellow subsidiary of the same holding company as that of the assesse), on the premise that the debtor company was liquidated and the amount could not be recovered. The assesse had made a provision for the said bad debts on the strength of confirmation from the customer that the amount will not be settled and has become irrecoverable. 3.1 As the sum was a foreign currency receivable, the assesse submitted a formal application to the Authorized Dealer being State Bank of India seeking approval for the write-off of the amount in the books. During the course of assessment proceedings, the Ld. Assessing Officer questioned the validity of the bad debt written off in the books of accounts and asked the assesse to submit evidence for efforts taken by the company in recovering the amount from the customer as well as RBI approval for write off the amount from the books. In response to the queries, the assesse had submitted a confirmation from UK Company House, the regulator for companies in UK, confirming the dissolution of the Customer Company. Also, the assesse had submitted the last audited financial statements of the Customer Company for year ending 31st Mar 2014, with their regulators in which it was stated in the Accounting Policies' section that the inter- company balances with VAAS Automation Pvt Ltd ITA No.140/Chny/2024 :- 6 -: would not be repaid in full. This uncertainty of going concern was also qualified as an 'Emphasis of matter" in the Audit report. 3.2 The assesse had also submitted various correspondences towards its application and follow-ups made to the Authorized Dealer (SBI, SME Branch, Guindy, Chennai) and the foreign exchange department of the RBI seeking approval of the write-off. 3.3 The Assesse has also indicated efforts taken in fulfilling the requirements of RBI for the write-off. 3.4 Before the Assessing Officer the Assesse placed reliance upon a plethora of judicial pronouncements in support of its bad debts claim made u/s 36(1)(vii) based upon provisions created. Before the Ld.CIT(A) the assesse made identical submissions who after considering the same concluded as under .. “.....510 The appellant has brought to my attention the decisions of the Hon'ble Supreme Court in the case of TRE Limited in which it has held that it is not necessary an assesse to establish that the debt in fact has become irrecoverable. However, the facts in the appellant's case are distinguishable. It is a case where an assesse has written off an amount receivable from its related party situated outside India. The transactions between the assesse company and its related party M/s. VAAS Europe have been classified as ITA No.140/Chny/2024 :- 7 -: ‘International transactions' u/s 92B of the Act and subjected to Transfer Pricing Audit. The transactions are in the nature of export of goods by the appellant company to its associated enterprise situated outside India. The report of the Transfer Pricing Audit has also been filed for earlier years in Form 3CEB. That being the case, when the assesse has claimed that the transactions of export of goods by the appellant company to its Associated enterprise has been carried out at arm's length, subsequently writing off such receivables would defeat the entire Transfer Pricing Audit. Therefore, in the appellant's case, there is a greater degree of onus thrust upon the appellant to show whether the foreign Associate of the appellant has actually become bankrupt and is not in a position to repay its liabilities. In this connection, the appellant was asked to file details as to whether the company M/s. VAAS Europe has become bankrupt, and if so, whether all its creditors lost their entire receivables similar to that of the appellant company. The appellant was also asked to clarify whether any pro rata payments were made to creditors by M/s. VAAS Europe. However, the appellant expressed its inability to furnish its evidence. The relevant portion of the appellant's response is reproduced hereunder: ITA No.140/Chny/2024 :- 8 -: ------------------------------------- ------------------------------- --------------------------- 5.11 Except for stating that M/s. VAAS Europe was dissolved due to insolvency, the appellant could not bring in any other information or evidence. It is to be noted at this point that the appellant company and M/s. VAAS Europe were fellow subsidiaries of the same holding company during the year under consideration. That being the case, the appellant's inability to get the information is questionable.....” 4.0 Before us the Ld. Council of the assesse argued heavily relying upon the decision of the Hon’ble Co-ordinate Bench of Ahmadabad Tribunal delivered in the case of Vidras India Ceramics Pvt. Ltd. Vide ITA No.2412/Ahd/2018 for AY-2014-15 dated 09.07.2021. It was argued that the assesse’s case is fully covered by the decision delivered by the Hon’ble Co-ordinate Bench Supra. 5.0 The Ld.DR argued in favour of order of the Ld. Assessing Officer and Ld.CIT(A). It was submitted that the decision in the case of Vidras India Ceramics Pvt. Ltd is purely distinguished on the facts of the case. It was submitted that while delivering the impugned judgement the Hon’ble Co-ordinate Bench had relied upon the decision of the Hon’ble Apex Court in the case of Vijaya Bank vide Civil Appeal Nos. 3286-3287 of 2010 dated ITA No.140/Chny/2024 :- 9 -: 15.10.2010. The Ld.CIT DR argued that the decision in the case of Vijaya Bank Supra is further distinguished on the facts of the present case. 6.0 We have heard rival submission in the light of facts of the case and material brought on records. It is an undisputed fact of the case that the assesse has made a claim of write off of bad debts on the basis of provisions created in its accounts. The basic controversy that has arisen in this case is as to whether ‘provisions of the write off bad debts’ are to be given the same treatment and allowed as deduction or not to an assesse. Thus a distinction is required to be made between a normal write off bad debts viz-a-viz a provisions of the write off bad debts. 6.1 Before proceeding further, it is considered necessary to examine the statutory provisions governing the write off of bad debts as contained in section- 36 of the IT Act. Section-36 of the IT Act. 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— ------------------- ------------------- (vii) Subject to the provisions of sub-section (2), the amount of 5[any bad debt or part thereof which is written off as irrecoverable in the accounts of the assesse for the previous year:] 211 1[Provided that in the case of 2[an assesse] 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:] ITA No.140/Chny/2024 :- 10 -: 1—--------------------------------------------- ---------------------------------------- [Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assesse of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub- section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.] 4[5[Explanation1].—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assesse shall not include any provision for bad and doubtful debts made in the accounts of the assesse;] 6[Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;] 7[(viia) 8[in respect of any provision for bad and doubtful debts made by— (a) a scheduled bank [not being 9*** a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank 10[or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount 11[not exceeding 12[eight and one-half per cent.]] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 13[ten per cent.] of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner: 14[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 ITA No.140/Chny/2024 :- 11 -: amount of such assets shown in the books of account of the bank on the last day of the previous year:] 212 1[Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words ―five per cent‖, the words ―ten per cent.‖ had been substituted:] 1. Ins. by Act 20 of 2002, s. 19 (w.e.f 1-4-2003). 2. Ins. by Act 32 of 2003, s. 18 (w.e.f. 1-4-2004). 3. Ins. by Act 49 of 1991, s. 14 (w.e.f. 1- 4-1992). 4. Ins. by Act 28 of 2016, s. 21 (w.e.f. 1-4-2017). 5. Ins. by Act 14 of 1982, s. 10 (w.e.f. 1-4-983). 6. Clause (i) renumbered as clause (ia) thereof by Act 14 of 1982, s. 10 (w.e.f. 1-4-1983). 7. Ins. by s. 10, ibid. (w.e.f. 1-4-1983). 2[Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head ―Profits and gains of business or profession.] Explanation.—For the purposes of this sub-clause, ―relevant assessment years‖ means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;] (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 VI-A);] 3[(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):] 1[Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, 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, of an amount not exceeding ten per cent of the amount of ITA No.140/Chny/2024 :- 12 -: such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.] 4[(d) a non-banking financial company, an amount not exceeding five per cent. of the total income (computed before making any deduction under this clause and Chapter VI-A).] Explanation.—For the purposes of this clause,— 5[(i) ―non-scheduled bank‖ means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank; 6[(ia)]―rural branch‖ means a branch of a scheduled bank 7[or a non- scheduled bank] situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; 213 1[(ii) ―scheduled bank ‖ means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) 2***;] 3[(iii) ―public financial institution‖ shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (iv) ―State financial corporation‖ means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (v) ―State industrial investment corporation‖ means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and 4[eligible for deduction under clause (viii) of this sub-section];] 5[(vi) ―co-operative bank‖, ―primary agricultural credit society‖ and ―primary co-operative agricultural and rural development bank‖ shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;] ITA No.140/Chny/2024 :- 13 -: 6[(vii) ―non-banking financial company‖ shall have the meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);] 6.2 Coming to the decision of Hon’ble Coordinate Bench, Ahmadabad, Supra the relevant part of the same is reproduced hereunder:- “.... We have heard the rival contentions of both the parties and perused the materials available on record. The facts relating to the case have already been elaborated in the preceding paragraph which are not in dispute. Therefore, we are not inclined to repeat the same for the sake of brevity and convenience. The controversy that needs to be addressed so as to whether the assesse is eligible for deduction with respect to the provisions made against the trade debtors in pursuance to the explanation 1 to clause (vii) of section 36(1) of the Act. The relevant explanation reads as under: [Explanation 1] —For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assesse shall not include any provision for bad and doubtful debts made in the accounts of the assesse] 15.1 As per the above explanation there remains no ambiguity to the fact that the provisions made by the assesse with respect to the bad and doubtful debts will not be eligible for deduction. However, we find that the Hon’ble Supreme Court in the 5 ITA no.2412/AHD/018 Asst. Year 2014-15 case of Vijaya bank Vs. CIT reported in 323 ITR 166 has observed that the assesse is eligible for deduction with respect to the provisions made against the debtors provided it were claimed in the profit and loss account as well as such provision was adjusted against the sundry debtors/ bad and doubtful debts as shown in the balance sheet. The question raised before the Hon’ble Supreme Court in the case of Vijaya Bank (supra) which reads as under: The second question which arises for determination in these civil appeals is, whether it is imperative for the assesse-bank to close the ITA No.140/Chny/2024 :- 14 -: individual account of each debtor in its books or a mere reduction in the "Loans and Advances Account" or Debtors to the extent of the provision for bad and doubtful debt is sufficient? 15.2 The above question was answered by the Hon’ble Supreme Court in the manner as detailed below: “8. Coming to the second question, we may reiterate that it is not in dispute that section 36(1)(vii) of 1961 Act applies both to Banking and Non-Banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assesse-bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year- end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance-sheet is shown as net of the provisions for impugned debt. However, what is being insisted upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assesse-bank to close each and every individual account of loans and advances or debtors as a pre-condition for claiming deduction under section 36(1)(vii) of 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assesse-bank might be taking the benefit of deduction under section 36(1)(vii) of1961 Act, twice over. [See Order of CIT (A) at pages 66, 67 and 72 of the Paper Book, which refers to the apprehensions of the Assessing Officer]. In this context, it may be noted that there is no finding of the Assessing Officer that the assesse had unauthorizedly claimed the benefit of deduction under section 36(1)(vii), twice over. The Order of the Assessing Officer is based on an apprehension that, if the assesse fails to close each and every individual account of its debtor, it may result in assesse claiming deduction twice over. In this case, we are concerned with the interpretation of section 36(1)(vii) of 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for details of individual debtor's account if the Assessing Officer has reasonable grounds to believe that assesse has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. Assesse has instituted recovery suits in Courts against its debtors. If individual accounts are to be closed, then the ITA No.140/Chny/2024 :- 15 -: debtor/defendant in each of those suits would rely upon the Bank statement and contend that no amount is due and payable in which event the suit would be dismissed.” 15.3 In the case on hand we have seen the relevant page of profit and loss account placed on page 39 of the paper book where the assesse has claimed deduction for the provision of doubtful debts amounting to Rs. 55,69,760/- which 6 ITA no.2412/AHD/018 Asstt. Year 2014-15 was adjusted against the trade receivables as evident from the relevant schedule of the Balance Sheet of the assesse placed on page 34 of the paper book. 15.4 Besides this we also note that the tribunal in the own case of the assesse for the assessment year 2013-14 involving identical facts and circumstances has allowed the issue on hand in its favour in ITA No. 2521/AHD/2017 vide order dated 17.5.2019. The relevant extract is reproduced as under: 6. Heard the respective parties, perused the relevant materials available on record. It appears that the assesse has actually debited the provision of Rs.5,23,625/- to Profit and Loss account in respect of such doubtful debts and the same was also reduced in the balance sheet from sundry debtors/trade receivable. It also appears from the records that the judgment passed by the Hon’ble Supreme Court in the case of Vijaya Bank has been distinguished by the authorities below on the ground that said judgment relates to actual write off bad debts and not provision of bad debts. However, the judgment relied upon by the Learned AR has clearly laid down the ratio that mere debit to profit and loss account is not sufficient and simultaneously obliterating of provision from accounts by reduction from loans and advances or debtors on assets side of balance sheet amounts to writing off for grant of deduction. Moreso, disallowance for failure to close individual account of each debtors in account books is not justified. Further that, we have also carefully considered the judgment passed by the Hon’ble Jurisdictional High Court in the case of CIT-vs-Vodafone Essar Gujarat Ltd. While deciding the identical issue in favour of the assesse, the Hon’ble High Court took into consideration of the judgment passed in the matter of Vijaya Bank and observed as follows: “16. We may however, appreciate the implication of the ratio laid down by the Supreme Court in case of Vijaya Bank (supra), on the true interpretation of clause(i) to the explanation 1 and the decisions of ITA No.140/Chny/2024 :- 16 -: Karnataka High Court in cases of Yokogawa India Ltd. (supra) and Kirloskar Systems Ltd. (supra). Vijaya Bank (supra) was a case arising under section 36(1)(vii) of the Act. The assesse before the Supreme Court was a bank. The issue considered by the Supreme Court was whether it was imperative for the assesse bank to close the individual account of each of its debtors in its books or a mere reduction in the loans and advances or debtors on the asset side of its balance sheet to the extent of the provision for bad debt, would be sufficient to constitute a write-off. In this context, the Supreme Court considered the issue as to the manner in which the actual write off takes place under the accounting principle. It was noticed that prior to 1.4.1989 amendment in section 36(1)(vii), even the provision for the bad debt could be treated as write off. After 1.4.1989 however, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii) of the Act. In context of such statutory change, the Supreme Court referred to the decision in case of Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577/187 Taxman 346, in which the following observations were made : "Prior to April 1, 1989, the law, as it then stood, took the view that even in cases in which the assesse(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 assesse and crediting the amount to the account of the debtor, the assesse was still entitled to deduction under section 36(1)(vii). 7 ITA no.2412/AHD/018 Asstt. Year 2014-15 [See CIT 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 up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 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 assesse will not include any provision for bad and doubtful debt made in the accounts of the assesse. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to section 36(1) (vii). Consequently, after April 1, 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 assesse 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 assesse debits `provision for doubtful debt' to the profit and loss account and makes a corresponding credit ITA No.140/Chny/2024 :- 17 -: 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, the assesse would not be entitled to deduction after April 1, 1989." 17. The Supreme Court (in Vijaya Bank) further observed as under: "7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra] was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1st April, 1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in Section 36(1)(vii) with effect from 1st April, 1989, a mere debit of the impugned amount of bad debt to the Profit and Loss Account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the Profit and Loss Account would constitute a provision for bad and doubtful debt, it would not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to Finance Act, 2001, many assesses used to take the benefit of deduction under Section 36(1)(vii) of 1961 Act by merely debiting the impugned bad debt to the Profit and Loss Account and, therefore, the Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the Profit and Loss Account per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the Profit and Loss Account and creating a provision for bad and doubtful debt, the assesse-Bank had correspondingly/simultaneously obliterated the said provision from it's accounts by reducing the corresponding amount from Loans and Advances/debtors on the asset side of the Balance Sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the Balance Sheet was shown as net of the provision "for impugned bad debt". In the judgement of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra], a mere debit to the Profit and Loss Account was sufficient to constitute actual write off whereas, after the Explanation, the assesse(s) is now required not only to debit the Profit and Loss Account but simultaneously also reduce loans and advances or the debtors from the asset side of the Balance Sheet to the extent of ITA No.140/Chny/2024 :- 18 -: the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in it's impugned judgement. In the circumstances, we hold, on the first question, that the assesse was entitled to benefit of deduction under Section 36(1)(vii) of 1961 Act as there was an actual write off by the assesse in it's Books, as indicated above." 18. It can thus be seen that in case of Southern Technologies Ltd. (supra), the Supreme Court explained that if an assesse 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. On the other hand, if an assesse 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 and in such a case after 1.4.1989, the assesse could claim no deduction under section 36(1)(vii) of the Act. 19. This principle was further clarified in case of Vijaya Bank (supra) by observing that in case on hand, the assesse besides debiting the profit and loss account and creating a provision for bad and doubtful debt, had simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the asset side of the balance sheet and consequently, at the end of the year, the figure of loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision for the bad debt. Thereafter, the Supreme Court rejecting the Revenue's contention that for the bank to take benefit of section 36(1)(vii), must close the account of the debtors, decided the question in favour of the assesse. 20. Above decisions of Supreme Court in cases of Southern Technologies Ltd. (supra) and Vijaya Bank (supra) thus bring out a clear distinction between a case where the assesse may make a provision for doubtful debt and a case where the assesse after creating such a provision for bad and doubtful debt by debiting in Profit and Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset aside of the balance sheet. The later would be an instance of write- off and not a mere provision.” ITA No.140/Chny/2024 :- 19 -: Respectfully, relying upon the judgment cited above, we do not hesitate to conclude that the assesse is entitled to be allowed the provision for bad and doubtful debts on the identical facts and circumstances of the case since it has debited the provision of Rs.5,23,625/- to the Profit and Loss account in respect of doubtful debts and also reduced the same amount in the balance sheet from sundry debtors – trade receivable. Such reduction from sundry debtors amounts to actual write off and hence we are of the considered opinion to delete the addition made by the authorities below. We order accordingly. 15.5 At the time of hearing, the learned DAR drew our attention on the various orders of the Hon’ble Courts and the Tribunal. But in our considered view those judgments are not applicable to the facts of the present case in the given circumstances. 15.6 In view of the above, we hold that the assesse is entitled to claim the deduction with respect to the provisions made by it against the trade receivables in the given facts and circumstances. Accordingly, we are not convinced with the finding of the authorities below and therefore the same deserves to be reversed. 6.3 As discussed in preceding paragraphs the principle controversy germane to the case is as to whether an assesse’s claim made by way of a provision for write off of debts is eligible or not. Discussions made in preceding paragraphs indicate that explanation-1 to 36(1)(vii) which is available on statute with retrospective effect from 01.04.1989 prohibits an assesse to make such a claim meaning thereby that all such claims will have to be denied by the AO. It is however pertinent to note that section 36(1)(viia) available on statute w.e.f 01.04.1980 provides that an assesse being a scheduled bank a public / a state financial institution / corporation non-banking financial company etc would be eligible for claim of ITA No.140/Chny/2024 :- 20 -: provisions for any bad and full debts. It is an undisputed fact of the case that the assesse under consideration is a Pvt. Ltd. Company registered under the companies act and is in the business of manufactures of industrial valves and actuators. It is also an undisputed fact of the case that the assesse is merely created a provision for the write off of bad debts and is contesting thereof. It is pertinent to point out sub-ground 2.5 of assesse’s grounds of appeal contested in this appeal which proves this position. ITA No.140/Chny/2024 :- 21 -: On the issue of the assesse having made its claim of write off of bad debts by way of a provision the following extracts comprising part of appeal documents filed by the assesse are relevant for reproduction :- Financial Statement appended with the balance sheet / profit & loss account showing related parties disclosures ITA No.140/Chny/2024 :- 22 -: Financial Statement appended with the balance sheet / profit & loss account showing trade receivables. ITA No.140/Chny/2024 :- 23 -: Application of assesse to the Reserve Bank of India for permission to write off bad debts in the self write off category. ITA No.140/Chny/2024 :- 24 -: Now, in view of the above, it is therefore clear that the claim of assesse qua any write off of bad debts would fall squarely within the meanings of section 36(1)(vii). Consequently, the assesse’s case also falls within the mischief of explanation-1 to 36(1)(vii) thus excluding it for eligibility to claim write off of bad debts made by way of a provision. On the issue of interpretation of statute, there exist a plethora of judgements prescribing wherever law is unambiguously clear, its different interpretation is not permissible. In the instant case the clear position of law is that an assesse which is not into business of banking would not be allowed write off bad debts claimed by way of creation of a provision. It is pertinent to briefly examine as to what constitutes a provision. A provision in normal understanding of the matter primarily denotes a contingent transaction and is hence in the nature of a contingent liability. A provision is an unascertained liability. Given its nature of being a contingent liability and not being a definite transaction, it is not allowed as a deduction (in the nature of expense) under the provisions of the Income Tax Act 6.4 Further, It is also considered necessary at this stage to briefly examine and distinguish a normal claim of a financial transaction viz-a-viz a claim made by way of a provision. A bad debt is primarily that sales of an assesse in respect of which the sale proceeds receipts become doubtful to come. As per accounting standard whenever sales is made ITA No.140/Chny/2024 :- 25 -: the sales account is debited and when the party to whom sales is made makes payment then party’s account is credited. Now in a situation when a party fails to make any payment, in part or full, then said party’s account is credited by the amount, in part of full, which was to be received by an entry “by bad debts”. Correspondingly, the amount of unrealized sale proceeds, in part or full which has been credited as by an entry “by bad debts” would be taken to the assets side of the balance sheet and reduced from the overall figure of sundry debtors. Thus the underlying principle for claim and allowance of bad debts is that the account of the party has to be credited qua claim of a genuine bad debts. Thus once party’s account is credited and bad debt claimed the assesse looses perpetually all its rights to claim any amount in respect of such bad debts which have been written off. The exception to this accounting rule however is made in the case of Banks and Financial Institutions who are allowed to create a provision and yet claim write off a bad debts. For a bank the loans advanced by it are having the nature and character of a sale. A bank is allowed to create a provision in respect of loans which become bad or to say non-performing assets so as to enable it to maintain a healthy balance sheet and at the same time retaining its rights over the defaulted loan. In this regard, it also merits examination as to why banks are not allowed or to say they do not credit borrowers account while claiming bad debts and do it by way of ITA No.140/Chny/2024 :- 26 -: a provision only. Banks are holders of public money and trust. The loans advanced by them, recovery of some of which become difficult in times to come, are sourced through deposits from public. Besides, banks have a significantly longer lien period over their claims. Thus the banks do not credit borrowers accounts while claiming write off of bad debts through a provision. The latter merely being an exercise to maintain healthy accounts / financial statements. Assuming the situation that a bank as against creating a provision for write off chose to credit the individual’s party account for formally claiming write off its bad debts, then in such a situation the bank would be permanently loosing its right in a situation, if and, when the party becomes capable returning the loan. It is because of this reason that banks are permitted to claim write off bad debts without crediting the part’s account and by merely creating a provision. This financial principle has been approved by the Hon’ble Apex Court in the case of Vijaya Bank Supra. 6.5 There is also another undisputed facts on record which comes in the way of the assesse becoming eligible for allowance of the impuged bad debts amounting to Rs. 1.78Crores app. through a “provision” entry for claiming write off of its bad debts. Provisions of section 36(1)(Vii) clearly stipulates that the bad debts are allowed to an assesse only if, it is written off by him as “irrecoverable” in its account for the previous year ITA No.140/Chny/2024 :- 27 -: under consideration. In the instant case the said amount of Rs.1.78 Crores app. pertains to an overseas party and therefore as per the extant rules covering the subject, the assesse is required to obtain prior permission of the RBI before declaring the impugned amount as irrecoverable and writing it off. As per contemporary rules of the RBI an assesse was eligible to write off its unrealizable sales proceeds under a category called “self write off” provided the amount to be written off was not exceeding 5% of the total exports volume. Details provided by the assesse indicates that it had made an initial application to the RBI for write off of the impugned amount but the approval from the RBI was not forthcoming apparently because the amount to be written off was exceeding 5% of the total exports volume. Subsequently, the assesse got merged with another company and as a sequal to the merger the amount of write off viz-a-viz total export sales fell less than 5% actually aggregating to about 1.89%. The assesse therefore made another application to the RBI requesting for allowance of write off in the self help category in subsequent financial years. The assesse has not placed on records any approval from the RBI. Thus the assesse can only write off the impugned amount as irrecoverable and claim it a bad debts only upon receipt of any valid approval from the RBI and as the same was pending, it can be safely concluded that the statutory stipulations mandated in section ITA No.140/Chny/2024 :- 28 -: 36(1)(Vii) were not fulfilled by the assesse so as to warrant any allowance of its claim of bad debts. This without prejudice that even after receipt of RBI’s approval, the assesse would not have acquired the right to write off its bad debts by way of a mere provision entry. 6.6 Coming to the reliance of the assesse upon the decision of Hon’ble Coordinate Bench of the Ahmadabad Tribunal in the case of the Vidras India Ceramics Pvt Ltd Supra it is seen that the same is not Pari Materia to the present case. The principle of Pari Materia stipulates that statutes or legal provisions relating to the same subject should be interpreted together to ensure consistency and harmony in the law. It is seen that Hon’ble Coordinate Bench of the Ahmadabad Tribunal Supra has relied upon the ratio laid down by the Hon’ble Apex Court in the case of Vijaya Bank Supra. It is pertinent to point out that the decision of the Hon’ble Apex Court therein was with reference to an assesse in the capacity of Bank. In this regard, the following opening observations of the Hon’ble Apex Court in the impugned order are extracted as under: “Whether it is imperative for the assesse-Bank to close the individual account of each of it’s debtors in it’s books or a mere reduction in the Loans and Advances or Debtors on the asset side of it’s Balance Sheet to the extent of the provision for bad debt would be sufficient to constitute a write off is the question which we are required to answer in ITA No.140/Chny/2024 :- 29 -: these civil appeal?”. Thus it is abundantly clear that the decision of the Hon’ble Apex Court is with respect to assesse’s who are banks and not to Non-banking assesse’s. The issue which the Hon‘ble Supreme Court decided was as to whether the explanation-1 of section 36(1)(vii) was adversely impacting claims of provision of write off of full debts particularly in the light of decision of Hon’ble Gujarat Higher Court in the case of Vithal Dass H D Bardanwala. Analyzing its own decision in the case of Southern Technologies Ltd 320 ITR 577, the Hon’ble court held that prior to 1.4.1989 a provision was admissible for claim of deduction under section 36(1)(vii) but not post 01.04.1989. There is nothing in the order of Hon’ble Supreme Court to allude that is prescribed in the case of Vijaya Bank Supra would be applicable to case of non-banking assesses also. As the decision of Hon’ble Apex Court is only with the reference to treatment of write off bad debts by way of provisions in respect of banks, Accordingly in above view of the matter, it is difficult to place any reliance upon the impugned decision of Hon’ble Coordinate Bench of Ahmadabad. It is not out of place to mention here, as pointed out by the Ld.DR that the present case is fully covered by the ratio laid down by the Hon’ble Supreme Court in the case of Southern Technologies Ltd. 320 ITR 577 clearly mandating that post 01.04.1989 “if an assesse debits an amount of doubtful debts ITA No.140/Chny/2024 :- 30 -: to the profit & loss account and credits the asset account like Sundry Creditors account, it would constitute a write off of an actual debt. However, if an assesse debits 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 debts. In the latter case the assesse would not be entitled to deduction after April 1, 1989..”. 6.7 At the cost of repetition it is emphasized that the assesse has merely claimed a write off bad debts on the basis of a mere provision created by its financial statements. The assesse has not provided any evidence to allude that it had credited the exports sales account of the party namely VAAS Europe while claiming the write off of bad debts amounting to Rs.1.78 Crores app. apparently because the assesse was not permitted to do so till it received an approval from the RBI. The assesse is a private limited company dealing in automobile accessories and not a bank to be eligible to claim write off bad debts an account of provisions as mandated by Hon’ble Supreme Court in the case of Vijaya Bank Supra. The case of the Revenue is covered by the decision of the Hon’ble Apex Court in the case of Southern Technologies 320 ITR 577 which mandates that after ITA No.140/Chny/2024 :- 31 -: 01.04.1989 an assesse is not allowed to claim write off of its bad debts through a provision entry. 7.0 Accordingly, we are of the view that the assesse is not entitled for its claim of deduction of Rs.1,78,11,798/- on account of provisions created for bad debts written off. We do not find any infirmity with the decision of Ld.CIT(A) sustaining the order of the AO. We therefore, confirm the order of the Ld.CIT(A) holding that the assesse is not entitled for its claim of deduction of Rs.1,78,11,798/- on account of provisions created for bad debts written off. 8.0 In the result, all the grounds of appeal raised by the assesse are dismissed. Order pronounced on 31 st July, 2024 at Chennai. Sd/- (एबी टी. वर्की) (ABY T VARKEY) न्याययक सदस्य / Judicial Member Sd/- (अमिताभ श ु क्ला) (AMITABH SHUKLA) लेखा सदस्य /Accountant Member चेन्नई/Chennai, ददनांक/Dated: 31 st July, 2024. KB/- आदेश की प्रयतललपप अग्रेपषत/Copy to: 1. अपीलधर्थी/Assesse 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai 4. नवभधगीय प्रनिनिनर्/DR 5. गधर्ा फधईल/GF