[Vijaya Bank v. CIT & Anr.,
(2010) 323 ITR 166 (SC)]
For the A.Y. 1994-95, the
Assessing Officer disallowed a sum of Rs.7,10,47,161 which the assessee-bank had
reduced from loans and advances or debtors on the ground that the impugned bad
debt had not been written off in an appropriate manner as required under the
accounting principles. According to him, the impugned bad debt supposedly
written off by the assessee-bank was mere provision and the same could not be
equated with the actual write-off of the bad debt, as per the requirement of S.
36(1)(vii) of the Income-tax Act, 1961 (‘the 1961 Act’ for short) read with
explanation thereto which Explanation stood inserted in the 1961 Act by the
Finance Act, 2001, with effect from April 1, 1989. The assessee carried the
matter in appeal before the Commissioner of Income-tax (Appeals) [‘CIT(A)’, for
short], who opined that it was not necessary for the purpose of writing off of
bad debts to pass corresponding entries in the individual account of each and
every debtor and that it would be sufficient if the debit entries are made in
the profit and loss account and corresponding credit is made in the ‘bad debt
reserve account’. Against the decision of the Commissioner of Income-tax
(Appeals) on this point, the Department preferred an appeal to the Income-tax
Appellate Tribunal (‘Tribunal’, for short). Before the Tribunal, it was argued
on behalf of the Department that write-off of each and every individual account
under the head ‘Loans and advances’ or ‘debtors’ was a condition precedent for
claiming deduction u/s.36(1)(vii) of the 1961 Act. According to the Department,
the claim of actual write-off of bad debts in relation to banks stood on a
footing different from the accounts of the non-banking assessee(s), though it
was not disputed that S. 36(1)(vii) of the 1961 Act covered banking as well as
non-banking assessees. According to the assessee, once a provision stood created
and, ultimately carried to the balance sheet wherein loans and advances or
debtors depicted stood reduced by the amount of such provision, then there was
actual write-off, because, in the final analysis, at the year end, the so-called
provision did not remain and balance sheet at the year ended only carried the
amount of loans and advances or debtors, net of such provision made by the
assessee for the impugned bad debt. The Tribunal, upheld the above contention of
the assessee on three grounds. Firstly, according to the Tribunal, the assessee
had rightly made a provision for bad and doubtful debt by debiting the amount of
bad debt to the profit and loss account so as to reduce the profit of the year.
Secondly, the provision account so created was debited and simultaneously the
amount of loans and advances or debtors stood reduced and, consequently, the
provision account stood obliterated. Lastly, according to the Tribunal, loans
and advances or the sundry debtors of the assessee as at the end of the year
lying in the balance sheet was shown as net of ‘provision for doubtful debt’
created by way of debit to the profit and loss account of the year.
Consequently, the Tribunal, on this point, came to the conclusion that deduction
u/s.36(1)(vii) of the 1961 Act was allowable.
On the question whether it
was imperative for the assessee to close each and every individual account and
its debtors in its books or a mere reduction in the loans and advances to the
extent of the provision for bad and doubtful debt was sufficient, the answer
given by the Tribunal was that, in view of the decision of the Gujarat High
Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT, reported in
(1981) 130 ITR 95, the Commissioner of Income-tax (Appeals) was right in coming
to the conclusion that since the assessee had written off the impugned bad in
its books by way of a debit to the profit and loss account simultaneously
reducing the corresponding amount from loans and advances or debtors depicted on
the assets side in the balance sheet at the close of the year, the assessee was
entitled to deduction u/s.36(1)(vii) of the 1961 Act. This view was not accepted
by the High Court which came to the conclusion by placing reliance upon a
judgment in the case of CIT v. Wipro Infotech Limited that in view of the
insertion of the Explanation, vide the Finance Act, 2001, with effect from April
1, 1989, the decision of the Gujarat High Court in the case of Vithaldas H.
Dhanjibhai Bardanwala (supra) no more held the field and, consequently, mere
creation of a provision did not amount to actual write-off of bad debts.
In the civil appeals filed
against the order of the High Court, the Supreme Court observed that broadly,
two questions arose for its determination. The first question that arose for
determination concerned the manner in which actual write-off takes place under
the accounting principles. The second question that arose for determination was,
whether it was imperative for the assessee-bank to close the 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 was
sufficient.
According to the Supreme
Court, the first question was considered by it in Southern Technologies Ltd. v.
Joint CIT, (2010) 320 ITR 577, in which it had an occasion to deal with the
first question and in that case it had been held that after 1st April, 1989, if
an assessee debits an amount of doubtful debt to the profit and loss account and
credits the asset account like sundry debtors’ account, it would constitute a
write-off of an actual debt. However, if an assessee 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. In the
latter case, the assessee would not be entitled to deduction.
In regards to view expressed by the Gujarat High Court in Vithaldas H. Dhanjibhai Bardanwala (supra) and sequent insertion of Explanation in S. 36(1)(vii) w.e.f. April 1, 1989 the Supreme Court clarified that in the aforesaid judgment of the Gujarat High Court, a mere debit to the profit and loss account was sufficient to constitute actual write-off, whereas after the Explanation, the assessee is now required not only to debit the profit and loss account, but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that at the end of the year, the amounts of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. According to the Supreme Court, the High Court had lost sight of this aspect in its impugned judgment. The Supreme Court, on the first question, therefore, held that the assessee was entitled to the benefit of deduction u/s.36(1)(vii) of the 1961 Act as there was actual write-off by the assessee in its books.
Coming to the second question, the Supreme Court noted that 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 end would not suffice and, in the interest of transparency, it would be desirable for the assessee-bank to close each and every individual account of loans and advances or debtors as a pre-condition for claiming deduction u/s.36(1)(vii) of the 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-bank might be taking the benefit of deduction u/s.36(1)(vii) of the 1961 Act, twice over. The Supreme Court held that it cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for the details of individual debtor’s account if the Assessing Officer has reasonable grounds to believe that the assessee has claimed deduction, twice over. The Supreme Court observed that the assessee had instituted recovery suits in courts against its debtors. If individual accounts were to be closed, then the 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.
The Supreme Court further observed that according to the Department, it was necessary to square off each individual account, failing which there was likelihood of escapement of income from assessment. According to the Department, in cases where a borrower’s account is written off by debiting the profit and loss account and by crediting loans and advances or debtors accounts on the assets side of the balance sheet, then as and when in the subsequent years if the borrower repays the loan, the assessee will credit the repaid amount to the loans and advances account not to the profit and loss account, which would result in escapement of income from assessment. On the other hand, if bad debt is written off by closing the borrower’s account individually, then the repaid amount in subsequent years will be credited to the profit and loss account on which the assessee-bank has to pay tax. The Supreme Court held that although, prima facie, this argument of the Department appeared to be valid, on a deeper consideration, it is not so for three reasons. Firstly, the head office accounts clearly indicated, in the present case, that on repayment in subsequent years, the amounts were duly offered for tax. Secondly, one had to keep in mind that under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the profit and loss account of the head office, which is ultimately what matters, then there would be a mismatch between the rural branch accounts and the head office accounts. Lastly, in any event, S. 41(4) of the 1961 Act, inter alia, lays down that where a deduction has been allowed in respect of a bad debt or a part thereof u/s.36(1)(vii) of the 1961 Act, then if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess shall be deemed to the profit and gains of business and, accordingly, chargeable to income-tax as the income of the previous year in which it is recovered. In the circumstances, the Supreme Court was of the view that the Assessing Officer was sufficiently empowered to tax such subsequent repayments u/s.41(4) of the 1961 Act and, consequently, there was no merit in the contention that if the assessee succeeded, then it would result in escapement of income from assessment.
The Supreme Court, therefore, upheld the judgment of the Tribunal and set aside the impugned judgment of the High Court.
