Case Law Details
Vidras India Ceramics Pvt. Ltd. Vs D.C.I.T. (ITAT Ahmedabad)
The controversy that needs to be addressed so as to whether the assessee is eligible for deduction with respect to the provisions made against the trade debtors in pursuance to the explanation 1 to clause (vii) of section 36(1) of the Act.
As per the explanation 1 to clause (vii) of section 36(1) of the Act there remains no ambiguity to the fact that the provisions made by the assessee with respect to the bad and doubtful debts will not be eligible for deduction. However, we find that the Hon’ble Supreme Court in the case of Vijaya bank Vs. CIT reported in 323 ITR 166 has observed that the assessee is eligible for deduction with respect to the provisions made against the debtors provided it were claimed in the profit and loss account as well as such provision was adjusted against the sundry debtors/ bad and doubtful debts as shown in the balance sheet.
In the case on hand we have seen the relevant page of profit and loss account placed on page 39 of the paper book where the assessee has claimed deduction for the provision of doubtful debts amounting to Rs. 55,69,760/- which was adjusted against the trade receivables as evident from the relevant schedule of the Balance Sheet of the assessee placed on page 34 of the paper book.
Tribunal in the own case of the assessee for the assessment year 2013-14 involving identical facts and circumstances has allowed the issue on hand in its favour in ITA No. 2521/AHD/2017 vide order dated 17.5.2019. The relevant extract is reproduced as under:
6. Heard the respective parties, perused the relevant materials available on record. It appears that the assessee has actually debited the provision of Rs.5,23,625/- to Profit and Loss account in respect of such doubtful debts and the same was also reduced in the balance sheet from sundry debtors/trade receivable.
It also appears from the records that the judgment passed by the Hon’ble Supreme Court in the case of Vijaya Bank has been distinguished by the authorities below on the ground that said judgment relates to actual write off bad debts and not provision of bad debts. However, the judgment relied upon by the Learned AR has clearly laid down the ratio that mere debit to profit and loss account is not sufficient and simultaneously obliterating of provision from accounts by reduction from loans and advances or debtors on assets side of balance sheet amounts to writing off for grant of deduction. Moreso, disallowance for failure to close individual account of each debtors in account books is not justified.
In view of the above, we hold that the assessee is entitled to claim the deduction with respect to the provisions made by it against the trade receivables in the given facts and circumstances. Accordingly, we are not convinced with the finding of the authorities below and therefore the same deserves to be reversed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-8, Ahmedabad, arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2014-2015.
2. The assessee has raised the following grounds of appeal:
1. The learned CIT(A) has erred in confirming the addition of Rs.1,73,835 under Section 36(1)(va) read with section 2(24)(x) in as much as it is paid within one month from the date of salary.
2. The learned CIT(A) has erred in confirming the provision for doubtful debts of Rs.55,69,760/-under Section 36(1) (vii) in as much as it is allowable as held by SC in case of Vijaya bank vs. CIT 323 ITR 166 is applicable to both banking and non-banking companies.
3. The first issue raised by the assessee is that the Ld.CIT(A) erred in confirming the order of the AO by sustaining the disallowance under the provision of 36(1)(va) r.w.s. 2(24)(x) of the Act.
4. The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of manufacturing and trading of Ceramics Tiles Chemicals. The AO during the assessment proceedings found that the assessee has deposited Employees Contribution to PF/ESI beyond the due date specified under the relevant Act i.e. PF/Employees State Insurance for an amount of Rs. 1,73,835/- only. As per the AO such deduction was not allowed in pursuance to the provisions of section 36(1)(va) of the Act r.w.s. 2(24)(x) of the Act. Accordingly, the AO the same and added the sum of Rs.1,73,835/- to the total income of the assessee.
5. Aggrieved assessee preferred an appeal to the Ld. CIT(A), who confirmed the order of the AO.
6. The Ld. AR before us filed a paper book running from pages 1 to 51 and left the issue on hand at the discretion of the Bench.
7. On the other hand Ld. DR vehemently supported the order of the authorities below
8. We have heard the rival contention of both the parties and perused the materials available on record. At the outset we note that the issue on hand has already been decided against the assessee by the judgment of Hon’ble Gujarat High Court in the case of CIT v/s GSRTC reported in 366 ITR 170. The relevant extract is reproduced as under:
“as per section 2(24)(x), any sum received by the assessee from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of such employees shall be treated as an ‘Income’. Section 36 of the Act deals with the deductions in computing the income referred to in section 28 and as per section 36(1)(va) such sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 apply, the assessee shall be entitled to deduction of such amount in computing the income referred to in section 28 if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the “due date” i.e. date by which the assessee is required as an employer to credit the employee’s contribution to the employee’s account in the relevant fund, in the present case, the provident fund and ESI Fund under the Provident Fund Act and ESI Act. ”
8.1 There is no ambiguity to the fact that the assessee failed to deposit Employees Contribution to PF/ESI with in the due date specified under the relevant Act i.e. PF/Employees State Insurance. Thus the assessee is not entitled for the deduction for such amount of contribution to PF/ESI as discussed above in view of the judgment of Hon’ble Gujarat High Court. In view of the above we do not find any merit in the ground of appeal raised by the assessee. Hence the ground of appeal of the assessee is hereby dismissed.
9. The next issue raised by the assessee is that the Ld.CIT(A) erred in confirming the addition made by the AO for Rs. 55,69,760.00 being the provision for bad and doubtful debts as provided under explanation 1 of clause (vii) to section 36(1) of the Act
10. The assessee in its financial statements has claimed provision for doubtful debt under the provision of section 36(1)(vii) of the Act. However, the AO found that such provision is not eligible for deduction under the provision of Act. Therefore the same was disallowed and added back to the total income of the assesse.
11. Aggrieved assessee preferred an appeal before the Ld.CIT(A), who confirmed the order of the AO by observing as under:
As the case at hand appellant has debited the provision for doubtful debt and credited the liability side also with the provisions of doubtful debt admittedly the ratio of judgment of Hon’ble Supreme Court in the case of Vijaya bank is clearly against the appellant. Hence, I do not find any merit in the argument of appellant and the action of AO disallowing this sum of Rs.55,69,760/- is upheld. Ground no.2 of the appeal is dismissed.
12. Being aggrieved by the order of Ld. CIT(A) the assessee is in appeal before us.
13. The Ld. AR before us contended that the assesse has adjusted the provision made against the trade receivable shown in the Balance sheet as on 31/03/2014. Accordingly he contended that the provision made by the assessee with respect to the trade receivable are eligible for deduction.
14. On the other hand Ld. DR vehemently supported the order of the authorities below:
15. We have heard the rival contentions of both the parties and perused the materials available on record. The facts relating to the case have already been elaborated in the preceding paragraph which are not in dispute. Therefore, we are not inclined to repeat the same for the sake of brevity and convenience. The controversy that needs to be addressed so as to whether the assessee is eligible for deduction with respect to the provisions made against the trade debtors in pursuance to the explanation 1 to clause (vii) of section 36(1) of the Act. The relevant explanation reads as under:
[Explanation 1].—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts81 made in the accounts of the assessee;]
15.1 As per the above explanation there remains no ambiguity to the fact that the provisions made by the assessee with respect to the bad and doubtful debts will not be eligible for deduction. However, we find that the Hon’ble Supreme Court in the case of Vijaya bank Vs. CIT reported in 323 ITR 166 has observed that the assessee is eligible for deduction with respect to the provisions made against the debtors provided it were claimed in the profit and loss account as well as such provision was adjusted against the sundry debtors/ bad and doubtful debts as shown in the balance sheet. The question raised before the Hon’ble Supreme Court in the case of Vijaya Bank (supra) which reads as under:
The second question which arises for determination in these civil appeals is, whether it is 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 is sufficient?
15.2 The above question was answered by the Hon’ble Supreme Court in the manner as detailed below:
“8. Coming to the second question, we may reiterate that it is not in dispute that section 36(1)(vii) of 1961 Act applies both to Banking and Non-Banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance-sheet is shown as net of the provisions for impugned debt. However, 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 year-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 under section 36(1)(vii) of 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 under section 36(1)(vii) of1961 Act, twice over. [See Order of CIT (A) at pages 66, 67 and 72 of the Paper Book, which refers to the apprehensions of the Assessing Officer]. In this context, it may be noted that there is no finding of the Assessing Officer that the assessee had unauthorisedly claimed the benefit of deduction under section 36(1)(vii), twice over. The Order of the Assessing Officer is based on an apprehension that, if the assessee fails to close each and every individual account o f its debtor, it may result in assessee claiming deduction twice over. In this case, we are concerned with the interpretation of section 36(1)(vii) of 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for details of individual debtor’s account if the Assessing Officer has reasonable grounds to believe that assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. Assessee has instituted recovery suits in Courts against its debtors. If individua l accounts are 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. ”
15.3 In the case on hand we have seen the relevant page of profit and loss account placed on page 39 of the paper book where the assessee has claimed deduction for the provision of doubtful debts amounting to Rs. 55,69,760/- which was adjusted against the trade receivables as evident from the relevant schedule of the Balance Sheet of the assessee placed on page 34 of the paper book.
15.4 Besides this we also note that the tribunal in the own case of the assessee for the assessment year 2013-14 involving identical facts and circumstances has allowed the issue on hand in its favour in ITA No. 2521/AHD/2017 vide order dated 17.5.2019. The relevant extract is reproduced as under:
6. Heard the respective parties, perused the relevant materials available on record. It appears that the assessee has actually debited the provision of Rs.5,23,625/- to Profit and Loss account in respect of such doubtful debts and the same was also reduced in the balance sheet from sundry debtors/trade receivable.
It also appears from the records that the judgment passed by the Hon’ble Supreme Court in the case of Vijaya Bank has been distinguished by the authorities below on the ground that said judgment relates to actual write off bad debts and not provision of bad debts. However, the judgment relied upon by the Learned AR has clearly laid down the ratio that mere debit to profit and loss account is not sufficient and simultaneously obliterating of provision from accounts by reduction from loans and advances or debtors on assets side of balance sheet amounts to writing off for grant of deduction. Moreso, disallowance for failure to close individual account of each debtors in account books is not justified.
Further that, we have also carefully considered the judgment passed by the Hon’ble Jurisdictional High Court in the case of CIT-vs-Vodafone Essar Gujarat Ltd. While deciding the identical issue in favour of the assessee, the Hon’ble High Court took into consideration of the judgment passed in the matter of Vijaya Bank and observed as follows:
“16. We may however, appreciate the implication of the ratio laid down by the Supreme Court in case of Vijaya Bank (supra), on the true interpretation of clause(i) to the explanation 1 and the decisions of Karnataka High Court in cases of Yokogawa India Ltd. (supra) and Kirloskar Systems Ltd. (supra). Vijaya Bank (supra) was a case arising under section 36(1)(vii) of the Act. The assessee before the Supreme Court was a bank. The issue considered by the Supreme Court was whether it was imperative for the assessee bank to close the individual account of each of its debtors in its books or a mere reduction in the loans and advances or debtors on the asset side of its balance sheet to the extent of the provision for bad debt, would be sufficient to constitute a write-off. In this context, the Supreme Court considered the issue as to the manner in which the actual write off takes place under the accounting principle. It was noticed that prior to 1.4.1989 amendment in section 36(1)(vii), even the provision for the bad debt could be treated as write off. After 1.4.1989 however, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii) of the Act. In context of such statutory change, the Supreme Court referred to the decision in case of Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577/187 Taxman 346, in which the following observations were made :
“Prior to April 1, 1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction under section 36(1)(vii).
[See CIT v. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom.) and Vithaldas H. Dhanjibhai Bardanwala v. CIT (1981) 130 ITR 95 (Guj.)] Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 1989) of a new Explanation in section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to section 36(1) (vii). Consequently, after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii). To understand the above dichotomy, one must understand `how to write off’. If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor’s 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 after April 1, 1989.“
17. The Supreme Court (in Vijaya Bank) further observed as under :
“7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra] was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1st April, 1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in Section 36(1)(vii) with effect from 1st April, 1989, a mere debit of the impugned amount of bad debt to the Profit and Loss Account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the Profit and Loss Account would constitute a provision for bad and doubtful debt, it would not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to Finance Act, 2001, many assessees used to take the benefit of deduction under Section 36(1)(vii) o f 1961 Act by merely debiting the impugned bad debt to the Profit and Loss Account and, therefore, the Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the Profit and Loss Account per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the Profit and Loss Account and creating a provision for bad and doubtfu l debt, the assessee-Bank had correspondingly/simultaneously obliterated the said provision from it’s accounts by reducing the corresponding amount from Loans and Advances/debtors on the asset side of the Balance Sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the Balance Sheet was shown as net of the provision “for impugned bad debt”. In the judgement of the Gujarat High Court in the case of Vithaldas H. Dhanjibha i Bardanwala [supra], a mere debit to the Profit and Loss Account was sufficient to constitute actual write off whereas, after the Explanation, the assessee(s) is now required not only to debit the Profit and Loss Account but simultaneously also reduce loans and advances or the debtors from the asset side of the Balance Sheet to the extent of the corresponding amount so that, at the end of the year, the amount o f loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in it’s impugned judgement. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under Section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in it’s Books, as indicated above. “
18. It can thus be seen that in case of Southern Technologies Ltd. (supra), the Supreme Court explained that if an assessee debits an amount of doubtful debt to the Profit and Loss account and credits the asset account like sundry debtor’s account, it would constitute a write-off of an actual debt. On the other hand, 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 and in such a case after 1.4.1989, the assessee could claim no deduction under section 36(1)(vii) of the Act.
19. This principle was further clarified in case of Vijaya Bank (supra) by observing that in case on hand, the assessee besides debiting the profit and loss account and creating a provision for bad and doubtful debt, had simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the asset side of the balance sheet and consequently, at the end of the year, the figure of loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision for the bad debt. Thereafter, the Supreme Court rejecting the Revenue’s contention that for the bank to take benefit of section 36(1)(vii), must close the account of the debtors, decided the question in favour of the assessee.
20. Above decisions of Supreme Court in cases of Southern Technologies Ltd. (supra) and Vijaya Bank (supra) thus bring out a clear distinction between a case where the assessee may make a provision for doubtful debt and a case where the assessee after creating such a provision for bad and doubtful debt by debiting in Profit and Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset aside of the balance sheet. The later would be an instance of write- off and not a mere provision. ”
Respectfully, relying upon the judgment cited above, we do not hesitate to conclude that the assessee is entitled to be allowed the provision for bad and doubtful debts on the identical facts and circumstances of the case since it has debited the provision of Rs.5,23,625/- to the Profit and Loss account in respect of doubtful debts and also reduced the same amount in the balance sheet from sundry debtors – trade receivable. Such reduction from sundry debtors amounts to actual write off and hence we are of the considered opinion to delete the addition made by the authorities below. We order accordingly.
15.5 At the time of hearing, the learned DAR drew our attention on the various orders of the Hon’ble Courts and the Tribunal. But in our considered view those judgments are not applicable to the facts of the present case in the given circumstances.
15.6 In view of the above, we hold that the assessee is entitled to claim the deduction with respect to the provisions made by it against the trade receivables in the given facts and circumstances. Accordingly, we are not convinced with the finding of the authorities below and therefore the same deserves to be reversed.
Thus we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
16. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 09/07/2021 at Ahmedabad.
