Write back of provision of bad debts, not previously allowed as deduction, is not taxable

The taxpayer was a banking company. In the current appeal, the Revenue’s grievance was that the CIT(A) had erred in directing  that the written back ”provision of bad-debts” was not taxable  as ”business income” especially when a deduction of a sum was already allowed under Section 36(1) (vi a). The AO in the assessment order held that such write off of the provision for  bad and doubtful debts was al owed as deduction in the previous years and therefore the current write back should be taxable. The CIT(A), while deciding the case before him, held that in the  absence of any specific provision in the Act, an amount of liability  written back cannot be taxed as income.

The Tribunal concurred with the view of the CIT(A) and held that no deduction under Section 36(1)(viia) of the Act had  been allowed to the assessee in the earlier years, wherein the  provision amount exceeded the 5% cap on the advances as per Income Tax Act. Therefore, the amount actual y written back was out of such provision not al owed in the earlier years. Moreover, so as to bring to tax the amount written back in the accounts, the department nowhere brought on record anything to show that an allowance or deduction regarding any particular amount written back had been allowed in the earlier years.

Deduction under Section 36(1) (vi a) of the Act, is a statutory deduction, which is allowed on certain percentage of advances or total income assessed, on an adhoc basis. This cannot be linked with any specific amount of provision of bad and doubtful debts written back. The Tribunal further observed that it is trite that unilateral entries in the books of account concerning write back of provisions of bad and doubtful debts cannot amount to recovery of any due or any part thereof. Accordingly, the Tribunal held that written back provision for bad debts is not taxable.

Decided by: ITAT – Delhi, In the case of Bank of Tokyo

S. 36(1)(viia); in favor of taxpayer

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