By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Chartered Accountants
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Section 5 – Accrual of income – Discounting charges of next year shall not accrue as income in current year. Section 36(1)(vii) – Section 36(1)(viia) – Claim of bad debts is to be restricted by amount of opening balance in ‘provision for bad and doubtful debts’ account instead of closing balance and then deduction u/s. 36(1)(viia) is to be allowed
Facts I:
The assessee, a foreign bank, following mercantile system of accounting did not offer discount received on bills discounted which were relating to period after 31-03-2000, for A.Y. 2000-01. The same was brought under tax by A.O. in A.Y. 2000-01.
Held I:
The period of bill is relevant as it requires the divesting of funds by the lender for such period entailing the incurring of interest expenditure for such period. The quantum of discounting charges has direct nexus with the due date of the bill, which, in turn, determines the period for which the bank is deprived of its funds in discounting the bill. As the interest cost, of funds invested, for the subsequent year shall not become deductible in the current year, naturally the corresponding income in the form of discounting charges for the next year shall also not accrue as income in the current year.
Facts II:
For A.Y. 2000-01, the assessee claimed deduction of Rs. 1,57,46,917/- for bad debts u/s. 36(1)(vii), being the amount of bad debts written off in current year at Rs. 1,88,87,553/- less provision allowed u/s. 36(1)(viia) of A.Y. 1999-2000 at Rs. 31,40,636/-. It also claimed separate deduction in respect of provision for bad and doubtful debts of Rs. 35,02,564/- made during the current year. The AO held that the bad debts deduction should be allowed only in excess of the balance at the end of the year and not at the beginning of the year.
Held II:
In each year ordinarily there are two types of deductions, viz., firstly on account of provision made at the end of the current year by limiting it to the adjusted total income for the year and secondly the amount of bad debts actually written off. The Commissioner (Appeals) was justified in directing the AO to restrict the claim of bad debts by the amount of opening balance in the provision for bad and doubtful debts account as at the beginning of the instead of closing balance and then allowing deduction u/s. 36(1)(viia).
