DCIT Vs ICICI Bank Limited (ITAT Mumbai)
ITAT Mumbai held that post amendment to provisions of section 36(1)(vii) of the Income Tax Act as effective from 1st April 1989, the Act does not require the assessee to establish that the debts have in fact become bad before writing off. Accordingly, addition with regard to disallowance of claim of write off of bad debts duly deleted by CIT(A).
Facts- The assessee has claimed bad debts written off to the tune of Rs.15,03,06,07,093/- u/s. 36(1)(vii) of Income Tax Act, 1961. During assessment proceedings the Assessing Officer disallowed assessee’s claim of write off of bad debts to the extent of Rs.769,75,10,766/-. CIT(A) deleted the said addition. Being aggrieved, revenue has preferred the appeal.
Conclusion- Under the old provisions of section 36(1)(vii) of the Act as were applicable prior to 1st April, 1989, it was mandatory to establish before writing off that the debts have become bad. After amendment (effective from 1st April, 1989) the requirement of section 36(1)(vii) as explained by Hon’ble Apex Court in the case of TRF Ltd.(supra) is, it is sufficient if the bad debt is written off as irrecoverable in accounts of the assessee. The Act does not require the assessee to establish that the debts have in fact become bad before writing off.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These cross appeals by the Revenue and the assessee are directed against the order of Commissioner of Income Tax (Appeals)-7, Mumbai [ in short ‘the CIT(A)’] dated 29/09/2010, for the assessment year 2003-04.
2. The Revenue has assailed the order of CIT(A) by raising following grounds of appeal:
1. “On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing bad debts written off amounting Rs.769,75,10,766/-.”
2. “On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in allowing business/capital losses in respect of ICICI Information Technology Incubator Fund amounting to Rs.141,18,96,708/-“.
3. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the additions of non cash write back amounting to Rs.19,35,46,838/-“.
4. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by the AO relating to interest expenses directly attributable to earning the income u/s. 10(23G) of the I.T. Act”.
5. “On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the AO to re-compute the exemption claimed on tax free interest u/s.10(15) of the I.T. Act”.
6. “On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the additions of depreciation on leased assets amounting to Rs.232,25,76,303/-
7. “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing the deduction u/s.80M of the I.T. Act amounting to Rs.156,34f12,743/-
8. “On the facts and in the circumstances of the case and in law, the “Ld. CIT(A) erred in deleting the notional interest taken for the purpose of determining the annual value u/s.23(l)(a) of the I.T. Act amounting to Rs.1,14,90,085/-“.
9. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowances of deduction u/s.36(l) (vii) of the IT. Act amounting to Rs.99,50,38,623/-“.
3. The appeal of Revenue is decided in seriatim of grounds raised.
Bad Debts Written Off:
4. Both sides made exhaustive submissions in respect of ground No.1 of appeal. The assessee has claimed bad debts written off to the tune of Rs.15,03,06,07,093/- u/s. 36(1)(vii) of Income Tax Act, 1961 [in short ‘the Act’]. During assessment proceedings the Assessing Officer disallowed assessee’s claim of write off of bad debts to the extent of Rs.769,75,10,766/-. During the period relevant to assessment year under appeal, the assessee purportedly has written off bad debts of nearly 9740 entities including companies, firms, individuals, etc. This includes bad debts of erstwhile Anagram Finance Ltd. (AFL), merged with the assessee. The assessee furnished the details of parties where bad debts written off were over Rs.1.00 crore. The Assessing Officer categorized the cases of bad debts written off. In the first category he selected the companies where the bad debts written off were substantial and after making detailed observations in each of the case, rejected assessee’s claim of bad debts written off. Thereafter, the Assessing Officer selected another bunch of parties, where the bad debts written off exceeded Rs.1.00 crore. The Assessing Officer after dealing with each of the companies, rejected assessee’s claim of bad debts written off aggregating to Rs.30,87,11,788/-. The Assessing Officer further bunched the entities into a category where the assessee had claimed bad debts written off but documents/evidences were allegedly not furnished to the satisfaction of Assessing Officer to come to a conclusion that debts had indeed become bad. Such number of cases include 18 entities and the aggregate of the bad debts written off in respect of such cases was Rs.46,89,50,366/-. The next bunch of bad debts written off was in respect to erstwhile AFL. The Assessing Officer rejected the assessee’s claim of bad debts written off in respect of debtors of AFL for the reason that the assessee failed to prove that the debts have become bad, no material or evidences were allegedly furnished to substantiate bad debts. According to the Assessing Officer debts could not be written off in accounts of the assessee as the claim is made after accounts of the assessee are audited and finalized. He further observed that the action of the assessee Bank appears to be an after thought exercise to reduce tax liability. Thus, the Assessing Officer disallowed assessee’s claim of bad debts written off of erstwhile AFL to the tune of Rs.49,62,08,864/-. The Assessing Officer has also disallowed assessee’s claim of write off of fees amounting to Rs.62,09,66,661/-. Thus, the Assessing Officer made addition made in respect of bad debts written off aggregating to Rs.769,57,10,766/-. Aggrieved by the addition made in assessment order dated 28/02/2006, the assessee carried the issue in appeal before CIT(A). The CIT(A) following the order of his predecessor in assessment years 2000-01, 2002-03 and 2004-05 deleted the addition, summarily.
5. Shri P.C. Chhotaray representing the Department made exhaustive submissions assailing the findings of CIT(A) in respect of bad debts written off . The Ld. Departmental Representative submitted that the assessee has failed to substantiate that the bad debts written off had indeed become “Bad”. The ld. Departmental Representative in a manner similar to detailed discussion made by the Assessing Officer in the assessment order divided the parties into different categories in respect of which the assessee had written off bad debts. He pointed that claim of bad debts in respect of nine big companies aggregating to Rs.498.98 crores constitute approximately 65% of bad debts disallowed by the Assessing Officer. The nine parties in respect of which bad debts have been written off by the assessee and rejected by the Assessing Officer are:
