COMMISSIONER OF INCOME TAX V. M/S SWARAJ MAZDA LTD.

ITA/324/2004

AI Insights

The case involves an appeal by the Commissioner of Income-Tax, Chandigarh-II against M/s Swaraj Mazda Ltd. concerning the disallowance of a provision for bad and doubtful debts amounting to Rs.36,76,974. The initial assessment by the Assessing Officer disallowed this provision, which was later upheld by the CIT(A). However, the Tribunal reversed this decision, allowing the provision. The revenue challenged this decision in the High Court, arguing that the Tribunal misinterpreted the provisions of Section 36(1)(vii) of the Income Tax Act, 1961, especially in light of the retrospective amendment by the Finance Act, 2001.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 719047 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 28-03-2011
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: PANKAJ JAIN
• Assessee Lawyers: URVASHI DHUGGA
• Keywords: Bad debts; Disallowance; Finance Act, 2001; Income tax appellate tribunal; Provision for Bad and Doubtful Debts
• Section: 143(3); 260A; 36(1)(vii)

Judgement Text

"Income-tax Appeal No.324 of 2004 -1- *** IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income-tax Appeal No.324 of 2004 Date of decision: 28.3.2011 The Commissioner of Income-Tax, Chandigarh-II ...Appellant Versus M/s Swaraj Mazda Ltd. ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant. Mr. Pankaj Jain, Advocate for the respondent. **** AJAY KUMAR MITTAL, J. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) against order dated 28.2.2003 passed by the Income Tax Appellate Tribunal, Chandgiarh Bench 'B', Chandigarh in ITA No.1321/Chandi/95, relating to the assessment year 1992-93, claiming the following substantial question of law:- “Whether on the facts and in the circumstances of the case, the ITAT was right in law in deleting the addition of Rs.36,76,974/- made on account of disallowance of bad debts keeping in view the facts conditions laid down under Section 36(I)(vii) of the Act are not fulfilled?” 2. The facts as narrated in the appeal necessary for adjudication for the present appeal may be noticed. The assessee Income-tax Appeal No.324 of 2004 -2- *** had filed return declaring loss of Rs.5,12,29,870/- on 29.12.1992. However, the assessment was framed under Section 143(3) of the Act on 28.2.1995 at nil income. The Assessing Officer amongst other disallowances had made a disallowance regarding claim for provision for bad and doubtful debts amounting to Rs.36,76,974/-. The assessee filed appeal before the Commissioner of Income-Tax (Appeals) (for short “the CIT(A)”) which was partly allowed on 4.9.1995. However, the disallowance for provision for bad and doubtful debts was upheld. On further appeal filed by the assessee, the Tribunal accepted the claim of the assessee relating to provision for bad and doubtful debts vide order dated 28.2.2003. The Revenue feeling dissatisfied with the order of the Tribunal has approached this Court. 3. We have heard learned counsel for the parties and have perused the record. 4. Learned counsel for the Revenue submitted that the Tribunal was in error in allowing the provision for bad and doubtful debts as claimed by the assessee. According to the learned counsel, Explanation to Section 36(1)(vii) inserted by Finance Act, 2001 retrospectively with effect from 1.4.1989 provided that provision for bad and doubtful debts was inadmissible as expense and the debt which had become bad and doubtful alone could be claimed as deduction. It was further urged that such bad and doubtful debt had to be written off with relation to the account of the debtor. Learned counsel for the assessee on the other hand supported the order passed by the Tribunal. Income-tax Appeal No.324 of 2004 -3- *** 5. It would be advantageous to refer to Explanation to Section 36(1)(vii) inserted by Finance Act, 2001 with effect from 1.4.1989 which reads as under:- “Explanation:- For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.” 6. A perusal of the said explanation clearly spells out that provision for bad and doubtful debt is not to be included in any bad debt or part thereof written off as irrecoverable in the accounts of the assessee. In other words, it is only actual debt whose recovery has become bad which is written off is admissible and no provision for bad and doubtful debt is admissible as expenditure under Section 36 (1)(vii) of the Act. The Tribunal had thus erred in reversing the order of CIT(A) and allowing the provision for bad and doubtful debt as expense under Section 36(1)(vii) of the Act. 7. In view of the above, the appeal is allowed and substantial question of law is answered in favour of the revenue. ( Ajay Kumar Mittal) Judge March 28, 2011 (Adarsh Kumar Goel) Pka Judge "