Case Law Details
Advocate Akhilesh Kumar Sah
The allowance of the claim of provision for bad debt is dependent upon how it is reflected in the Balance Sheet and its accounts , disallowing deduction by intimation under section 143(1)(a) of claim of bad debts is not proper: Rules Bombay High Court in Bajaj Auto Finance case
According to provisions contained in section 36(1)(vii) of the Income Tax Act, 1961 (for short ‘the Act’), subject to the provisions of sub-section (2) of section 36, the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year is allowed as deduction in computing the income referred in section 28 of the Act.
Recently, in Bajaj Auto Finance Ltd vs. The CIT, Pune [Income Tax Reference No. 25 of 2000, decided on 23.02.2018], the question of law raised was whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the Assessing Officer(AO) was justified in making an adjustment under section 143(1)(a) relating to disallowance of the claim for bad debts under section 36(1)(viii) in respect of a sum of Rs.1,69,37,818/- representing “provision for doubtful overdue installments under hire purchase finance agreements”.
In the above-mentioned appeal, briefly, the assessee company had debited in its profit and loss account a sum of Rs.1,69,37,818/- representing “provision for doubtful overdue installments under Hire Purchase Finance Agreements”. In its return of income, the assessee claimed the said provision as bad debts under section 36(1)(vii) of the Act. In the Notes on computation of total income submitted with the return, it was clarified that the said amount was claimed as a deduction, relying on the decision of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala vs. CIT ({1981}130 ITR 95). The AO disallowed the claim under section 143(1)(a) on the ground that the amount represented mere provision for doubtful debts and, as such, could not be treated as bad debts. The assessee filed an application under section 154 of the Act for deletion of the adjustment. It was contended before the AO that the adjustment could not be made in respect of a provision for doubtful installments, as its allowability was a debatable issue. The AO rejected the application under section 154.
The ITAT, after consideration of all the relevant facts and circumstances and the relevant provisions of law and the case law cited before it, came to be conclusion that on the basis of the return of income itself and the accounts and documents accompanying it, the claim of “provision for doubtful overdue installments under Hire Purchase Finance Agreements” was clearly distinct and separate from one of claim of bad debt and was prima facie inadmissible on its own tenor. The AO was, therefore, justified in issuing an intimation of adjustment and rejecting the assessee’s application under section 154. For the same reason, the learned CIT(A) was justified in dismissing the assessee’s appeal. The assessee’s appeal before the Tribunal was dismissed.
The learned Judges of the Bombay High Court observed that in the present facts, while mere making of provision for bad debts will not by itself (on application of amended law) entitle the party to deduction, yet it would be a matter where the assessee should be given an opportunity to establish its claim. This by producing its evidence of the manner in which it treated the provision of bad debts written off in accounts as well as in its Balance Sheet. Therefore, the disallowance cannot be made by intimation under section 143(1)(a) of the Act, as it requires that a party be given an opportunity to establish its claim before disallowing it. The allowance of the claim of provision for bad debt is entirely dependent upon how it is reflected in the Balance Sheet and its accounts. Therefore, for the above purpose it is necessary that the party to be given an opportunity to establish its claim. The Bombay High Court held that adjustment by way of disallowing deduction by intimation under section 143(1)(a) of the Act was not proper.
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