The DCIT, Circle.1(1), Thrissur, Thrissur V. Dhanalakshmi Bank Ltd., Thrissur

ITA 702/COCH/2022

• Counselvise Citation: [2023] 101 COUNSELVISE.COM (IT) 9610 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2023
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 12-09-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 30-06-2022
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: HARIKRISHNAUNNI
• Keywords: Principle of natural justice; Bad and doubtful debts; Onus to prove; Set aside
• Section: 263; 48

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri Sanjay Arora, Accountant Member and Shri Manomohan Das, Judicial Member ITA No. 702/Coch/2022 (Assessment Year: 2015-16) Dy. CIT, Circle - 1(1) Aayakar Bhavan S.T. Nagar Thrissur 680001 vs. Dhanalakshmi Bank Ltd. Dhanalakshmi Building Thrissur 686575 [PAN:AABCT0019J] (Appellant) (Respondent) Appellant by: Shri Sanjit Kumar Das, CIT-DR Respondent by: Shri Harikrishnaunni, CA Date of Hearing: 13.09.2023 Date of Pronouncement: 11.12.2023 O R D E R Per: Sanjay Arora, AM This is an Appeal by Revenue arising out of the assessee’s assessment u/s. 143(3) read with section 263of the Income Tax Act, 1961 (the Act) dated 18.03.2019 for Assessment Year (AY) 2015-16since considered by the Commissioner of Income Tax (Appeals), NFAC (CIT(A) vide it’s order u/s. 250(6) of the Act dated 14.3.2022. 2. The appeal, filed on01/7/2022, is delayed by 48 days. The detailed condonation petition dated 21.7.2023, accompanied by a sworn affidavit by the incumbent Assessing Officer (AO), Shri V. Narayanan, Dy. CIT, revising that furnished earlier, lists various administrative and judicial issues attending the filing of the instant appeal, leading to the said delay therein. A third officer posted as AO after the introduction of the faceless scheme, on 09.06.2022; consequent merger of the old and the creation of new charges, administrative/judicial issues in obtaining approval, etc. Even as the same was not objected to by Shri Harikrishanunny, the learned counsel ITA No. 702/Coch/2022 (AY : 2015-16) DCIT v. Dhanalakshmi Bank Ltd. 2 for the assessee, we find the reasons stated as genuine and bona fide. The appeal was accordingly admitted, and hearing in the matter proceeded with. 3.1 The basis of the impugned order is the quashing by the Tribunal (in ITA No. 191/Coch/2019, 07.11.2019) of the section 263 order dated 18.12.2018 whereby the ld. Pr. CIT had set aside the assessment for examining the assessee’s claim for deduction qua bad and doubtful debts, claimed u/s. 36(1)(vii) of the Act at Rs.294.77 crores, even as the amount actually written off in its accounts as irrecoverable, stated, as it appears, in the ‘Notes to the Account’ at Rs.173.69 cr., found by the revisionary authority as having not been. The Tribunal’s order, however, stands since set aside by the Hon'ble High Court vide it’s Judgement dated 04.8.2023 (ITA No. 59/2023), restoring the matter back to the file of the AO to redo the assessment in terms of the directions by the ld. Pr. CIT. The relevant part of the Judgement reads as under: ‘‘8. Taking note of the said annual report as also the submissions of the learned Senior counsel in relation to the additional documents produced before us, we are of the view that the Tribunal was clearly in error in allowing the appeal preferred by the assessee through a mere application of a ratio in Vijaya Bank (Supra). In our view, the Tribunal ought to have ascertained whether the factual situation that was established in Vijaya Bank (Supra) existed in the instant case. We, therefore, find that the substantial questions of law raised by the revenue in this appeal has to be answered in favour of the revenue and against the assessee. We, therefore, answer the questions as such in favour of the revenue and against the assessee by setting aside the Annexure (C) order of the Tribunal and restoring Annexure (B) order of the Principal Commissioner of Income Tax. The Assessing Officer shall now re-do the assessment based on the directions in Annexure (B) order of the Principal Commissioner and after taking note of the documents produced by the learned Senior counsel before us to substantiate his contention that for the assessment year in question the audited balance sheet of the company did contain documents which showed that the value of the assets had been reduced by the amount of bad debts/provision written off.” 3.2 As a corollary, the impugned order, which is not on the merits of the disallowance assailed by the assessee before him by the ld. CIT(A), stands reversed. The impugned assessment is consequently a valid assessment in law. The matter is to ITA No. 702/Coch/2022 (AY : 2015-16) DCIT v. Dhanalakshmi Bank Ltd. 3 therefore travel back to the file of the ld. CIT(A) for a decision on merits. The common contention of the parties before us was however for restoration back to the file of the AO for making a fresh assessment, as directed by the Hon'ble High Court. The said direction, in our view, arose only due to the Hon'ble High Court being not informed that the s.263 order had already been given effect to by the AO as far as back in March, 2019, being duty bound to do so, and within the time statutorily provided by law. The parties were accordingly, allowing them time for the same, required to seek instructions in the matter, and who on the next date reiterated their stand for restoration to the AO in compliance with the directions of the Hon'ble Court. 5. We have heard the parties, and perused the material on record. 5.1 The impugned disallowance having not been decided by the first appellate authority on its merits, the same is to therefore travel back for its adjudication in accordance with law. That to our mind is also the purport, the sum and substance, of the judgement by the Hon'ble High Court. The decision by the Tribunal on merits could only follow where a grievance survives the order by the first appellate authority. The question therefore is the stage to which the assessment would stand to be under the circumstances restored, i.e., the assessee or the first appellate authority. The Hon'ble High Court, as we observe, has not given any direction as to the status of the impugned assessment; it being rather patent that it’s directions have been rendered oblivious of the AO having already given effect to the revision order, which it directs to, further adverting to the decision in Vijaya Bank v. CIT [2010] 323 ITR 166 (SC), clarifying that the onus to substantiate it’s claim is on the assessee. That is, in accordance with law, observing the principles of natural justice. In our considered opinion, the matter ought to travel to the file of the first appellate authority; the impugned assessment being, in consequence of the Judgement dated 04.08.2023, found to be on a firm legal basis. True, the parties before us did not share this ITA No. 702/Coch/2022 (AY : 2015-16) DCIT v. Dhanalakshmi Bank Ltd. 4 understanding, but, the, it is the correct legal position that is relevant, and not the view that the parties may take of their rights in the matter [CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 (SC); Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)]. 5.2 We, though, consider it incumbent to, before parting with our order, add that the Hon'ble Court had in Vijaya Bank (supra) had clarified in no uncertain terms that the provision for bad and doubtful debts, where it operates as a write off of the relevant debts in accounts, is to be obliterated, which aspect stands also highlighted by the AO in his order, reproducing it in its relevant part. That is, though the individual debtor accounts may not be closed, the outstanding debts, to the extent claimed as written off as irrecoverable, obtain no longer as at the end of the relevant year on the assessee’s books. The provision for bad and doubtful debts, being not qua an expense, but an asset, the disclosure norms and accounting standards would in any case require it being reflected, instead of on the credit side of the Balance Sheet, as a reduction from the relevant asset/s, being toward diminution in its value. However, this provision, being claimed u/s. 36(1)(vii), being only a manner of write off of the relevant debt accounts, does not survive the year-end. As such, it is not, as is generally the case for a provision, not reversed on the first day of the following year (with a corresponding credit to the operating statement), to be substituted for another provision, to be made likewise, on the basis of the debts outstanding at its end. In the alternative, the provision continues to outstand as such, with the incremental provision as at the end of the following year being booked, either adding thereto or, as the case may be, reducing there-from, with a corresponding adjustment to the Profit & Loss Account. That is, it survives the closure of accounts on the last day of the account period. There is no obliteration of the provision account in such a case, which, as explained in Vijaya Bank (supra), is only a manner of write off of debts in accounts, with equivalent result in terms of reduction in the debts outstanding as at the year-end. Inasmuch as the individual debtor accounts are not closed, this manner ITA No. 702/Coch/2022 (AY : 2015-16) DCIT v. Dhanalakshmi Bank Ltd. 5 has the advantage of the debtor being pursued for recovery. We may exhibit the difference between the two sets of provisions, i.e., one operating to write off the debtor account and obliterated as at the year-end and the regular provisions, through the relevant accounting entries, as under: (Amt in Rs. Lacs/say) A. Regular Provision 1. Profit & Loss A/c. Dr. 100 Provision for Bad & Doubtful Debts Cr. 100 (provision made as at the year-end) 2.1 Provision for Bad & Doubtful Debts Dr. 100 Profit & Loss A/c. Cr. 100 (as on the first day of the following year) 2.2 Profit & Loss A/c. Dr. 105 Provision for Bad & Doubtful Debts Cr. 105 (provision made as at the following year-end) (alternatively, a provision for only rs. 5 could be made, i.e., without reversing the existing provision in the following year) B. Provision obliterating the Debtor A/c. 1. Profit & Loss A/c. Dr. 100 Provision for Bad & Doubtful Debts Cr. 100 (provision created at the year-end) 2. Provision for Bad & Doubtful Debts Dr. 100 Debtors Control A/c Cr. 100 (provision written off to Debtors A/c) Clearly in case (B), the reduction in the debtor control account (representing aggregate debtor accounts), implies that the individual debtor accounts (and the corresponding provision), in contradiction to case (A), outstands no longer. The individual debtor accounts are, in effect and substance, reduced to memoranda accounts. Continuing further, this manner, unconventional as it is, is not without its added issues. Firstly, separate debtor ledger would have to be maintained for all such ITA No. 702/Coch/2022 (AY : 2015-16) DCIT v. Dhanalakshmi Bank Ltd. 6 written off accounts, being no longer live, representing only memoranda accounts, maintained for collateral purposes. Again, how, for example, a recovery in written off account is to be accounted. The individual debtor account (in the separate debtor ledger) would have to be formally closed, removing it from this ledger. Further, the account having been written off in accounts, credit on any recovery (in the bank) is to be directly to the Profit & Loss A/c. 5.3 Our second observation in the matter is that where and to the extent the provision for bad and doubtful debts does not satisfy the second condition of section 36(1)(vii), i.e., is not obliterated (written off), and represents normal provision toward diminution in the value of debtors, it would be liable to be allowed u/s. 36(1)(viia), an independent provision, which stands on its own footing, as explained in Catholic Syrian Bank v. CIT [2012] 343 ITR 270 (SC). This provision, though again liable to be reflected by way of a reduction from the debtor account in the Balance Sheet, does not have the effect of reducing the debtor/s to that extent. This provision is not obliterated (written off) as at the year-end, representing a provision in the actual sense of the term, qua a doubtful debt, i.e., toward diminution in its realizable value. As afore-stated, it may continue to outstand as such in accounts, providing for incremental provision each successive year, or, alternatively, written back in accounts in the following year for being estimated afresh at each year-end, to, of course, identical results, both in effect and substance. This provision, to be quantified in terms of section 36(1)(viia), is to be with reference to debts other than those written off and, further, w.e.f. 01.04.1999 (i.e., AY 2000-01 onwards), to include advances by both rural and urban branches of a scheduled or unscheduled bank and, further, statutorily mandated (w.e.f. 01.04.2013) to be per a single account. Without doubt, recovery in an account qua which such a provision has been made, would be accompanied by a reversal of provision to that extent (section 36(2)(v)). All the applicable provisions are to be read in harmony and consistent with each other. ITA No. 702/Coch/2022 (AY : 2015-16) DCIT v. Dhanalakshmi Bank Ltd. 7 6. We have hereby only sought to clarify the accounting aspects consistent with the decisions in Vijaya Bank (supra) and Catholic Syrian Bank (supra), also bringing to the fore the amendments to sections 36(1)(vii) and 36(1)(viia) subsequent to the years to which these decisions relate. We, accordingly, setting aside the impugned order, restore the assessment back to the file of the first appellate authority for adjudication afresh qua the assessee’s claim in respect of bad and doubtful debts in accordance with law per a speaking order after providing due opportunity of hearing the assessee, who shall be at liberty to make an alternate claim w.r.t. s.36(1)(viia), and on whom the onus to prove it’s claim/slies. We decide accordingly. 7. In the result, the Revenue’s appeal is allowed on the afore-said terms. Order pronounced on December 11, 2023 under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963 Sd/- (Manomohan Das) Sd/- (Sanjay Arora) Judicial Member Accountant Member Cochin, Dated: December 11, 2023 Copy to: 1. The Appellant 2. The Respondent 3. The Pr. CIT concerned 4. The CIT-DR, ITAT, Cochin 5. Guard File By Order Assistant Registrar n.p. ITAT, Cochin