IN THE ITAT KOLKATA BENCH ‘B’
Deputy Commissioner of Income-tax
VRB Investment (P.) Ltd
IT APPEAL NO. 654 (KOL.) OF 2012
Date of pronouncement – 25.09.2012
Sanjay Arora, Accountant Member
This is an Appeal by the Revenue directed against the Order by the Commissioner of Income-tax (Appeals)-VI. Kolkata (‘CIT(A)’ for short) dated 12-12-2011, deleting the levy of penalty by the Assessing Officer (AO) u/s. 271(1)( c) of the Income-tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2005-06 vide his order dated 30-06-2008.
2.1 The only issue, thus, arising in the instant case by the Revenue, is the exigibility in law of the levy of penalty u/s. 271(1)(c) of the Act qua the disallowance of the assessee’s claim for Rs. 8,94,706/- in respect of the provision for bad and doubtful debts. In assessment proceedings u/s. 143(3), on being called upon to explain its case; the provision against a bad debt being not allowable as a deduction u/s. 36(1)(vii) of the Act, it was submitted by the assessee that the claim is qua bad debts, i.e., which had become irrecoverable. Further, while Rs. 2,69,706/- related to debts carried over from an earlier year/s, the balance Rs. 6.25 lacs pertained to the current year. The primary condition for a valid claim u/s. 36(1)(vii), i.e., write off of the debt/s under reference by the assessee in its books of account, being not met, the AO disallowed the said claim vide assessment u/s. 143(3) dated 28-12-2007 as well as initiated penalty proceedings in its respect. No appeal against the said assessment was preferred by the assessee.
2.2 In the penalty proceedings, the assessee-company explained that the amount under reference was not recoverable from the concerned debtors. The relevant details had been submitted, and there was no intention or attempt to either conceal or to furnish inaccurate particulars of income. A mere difference of opinion, i.e., of the claim being required to be made by way of a write off of the relevant asset/s in its books, as against a provision in its respect, ought not to oust the assessee’s case as being not bona fide; all the details being on record. The AO, however, was of the clear view that a provision for bad and doubtful debt in accounts does not amount to its write off and, therefore, there is no basis for a claim u/s. 36(1)(vii) of the Act, much less a valid one. In further appeal, the assessee found favour with the ld. CIT(A), and on the same basis, i.e., that a mere technical error in claiming an irrecoverable amount, i.e. by way of a provision as against a write off of the relevant asset, would not attract penalty. It was only a case of wrong nomenclature being employed by the assessee, and which could not lead an add back of the claimed expense, much less make it liable for penalty u/s. 271(1)(c) of the Act. Reliance was placed by him on the decision in the case of CIT v. Reliance Petroproducts (P.) Ltd.  322 ITR 158.
3. Before us, like submissions were raised by either side. On the Bench enquiring of the ld. AR if the impugned provision stands deducted from the amount of the total debts in the balance-sheet as at the year-end and. thus, shown therein at a net figure, he replied in affirmative, seeking leave to place a copy thereof on record, and which, being granted, was done by him on the next date of hearing.
4. We have heard the parties, and perused the material on record.
4.1 The Revenue’s case is that the assessee has made a wrong claim, i.e., one which is not valid in law, in view of the essential condition of write off of the relevant debts as irrecoverable being admittedly not satisfied. The assessee’s case, on the other end, is that its claim was made bona fide, with the relevant details being on record, and which have not been found to be incorrect or inaccurate, so that there is no question of levy of penalty.
4.2 The law in the matter is clear, so that the only issue that we discern in the instant case is that of its applicability in the facts of the case. A claim for deduction that is unsustainable in law would yet not attract penalty u/s. 271(1)(c) of the Act if the assessee either substantiates his explanation (toward making the claim as per the return of income) or, even if not substantiated, proves his bona fides, disclosing all the facts material to the computation of income for the relevant year. This disclosure, of course, has to be per the return of income, including the accompanying documents. However, if there is no explanation or that offered is neither substantiated nor shown to be bona fide (coupled with proper disclosure), Explanation 1 to the provision would come into play and operate to make the assessee liable for penalty thereunder (section 271(1)(c)). This is trite law, as would be clear from the relevant provision read with Explanation 1 thereto, besides having been amply clarified and endorsed by the higher courts of law time and again, even as lately by the hon’ble court in CIT v. Zoom Communication (P.) Ltd.  327 ITR 510, after a review of the law in the matter, with particular reference to the decision by the apex court in the case of Reliance Petroproducts (P.) Ltd. (supra), relied upon by the assessee in the instant case.
4.3 The issue thus boils down to the assessee’s explanation. It is claimed that the ‘provision’ was made only by way of a technical mistake; the impugned amount being not recoverable, so that it may well have been by way of a write off and, therefore, ought to be considered as so; the amount having not been received subsequently. In fact, if so, i.e., where the assessee is able to exhibit what it states, no disallowance, much less a levy of penalty, even as observed by the ld. CIT(A), ought to rise; it being trite that what is the material is the substance of the transaction and not its form, which may be deficient or technically not correct. However, it is to be, firstly, noted that the difference between a write off of a debt as irrecoverable and a provision against the same on account of or for it being bad and doubtful for recovery, is not technical but factual and, further, real and not imaginary, or only one of form or name, as considered or understood by the ld. CIT(A). This is more so in view of the express provision of law by way of Explanation to section 36(1)(vii) of the Act, brought on statute by the Finance Act, 2001 w.e.f. 01-04-1989; the provision reading as under:-
“36. Other deductions.—
(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—
(vii) subject to the provisions of sub-section (2), the amount of any debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year;
Provided that …….
Explanation. – For the purpose 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 debts made in the accounts of the assessee;”
The premise of the assessee’s case is that the difference is only in the form with it choosing to pass an entry in its accounts for a ‘provision’, rather than for a ‘write off. The moot question in this regard, however, is: How would a provision against the debt which is bad and doubtful for recovery, to whatever extent, be made in accounts except by passing an accounting entry in its accounts in its respect. reflecting so? That is where an assessee/businessman actually intends to make a ‘provision’ in his accounts, he would have to pass an entry in its accounts, as has actually been done or as the assessee does in the present case. The connotation of a provision against an asset (implying a provision or a set aside – of profits – toward the anticipated diminution in the value at which it is carried in the books of an enterprise), in accounting which is the language of the business – is vastly different from a clear write off of the relevant asset. We are, however, not inclined to dwell on the same at any length in view of the clear provision of law barring deduction in respect of a ‘provision’. As such, asserting, on the strength of an accounting entry itself, of there being a mistake, and a technical one at that, and that it had intended to write off an irrecoverable amount, would not hold. It cannot, by any means, be said to be a mere difference of name or even of opinion, as held by the ld. CIT(A).
4.4 The foregoing, however, does not mean to say that this forecloses the assessee’s case, but only that a mere assertion, unsupported by facts, precludes its acceptance as such. It was nevertheless fully open to the assessee to show that the provision is in substance and in fact a write off, as where both the provision account and the corresponding debtor account/s are not carried over in its accounts to the following year, so that there has been in fact a write off. The assessee has toward this end submitted its balance-sheet. The same, however, is again not certified and, thus, cannot be accepted as such. It is only where the assessee’s accounts for the following year (i.e., the previous year relevant to the assessment year 2006-07) show that there has been no carry over of the provision as well as. and correspondingly, the relevant debtor’s account/s, that it would stand established as a fact that the provision has been written off against the relevant debt and, therefore, though stated to be a provision, the impugned amount actually represents a write off, i.e., in substance, even as held by the apex court in the case of Vijaya Bank v. CIT  323 ITR 166. Rather as aforestated, in such circumstance(s), if shown, there is no occasion for a disallowance, not to speak of the levy of penalty. The assessee’s claim before us of having not received the amounts under reference even subsequently, is, again, unsubstantiated, nor borne out by any material on record. Under the circumstances, therefore, only a remission back to the file of the AO to enable the assessee an opportunity to exhibit the facts of its case would enable a resolution of the matter.
4.5 Continuing further, even so, i.e., de hors the remission aforestated and the consequent findings, could it be said that the claim per a provision for bad and doubtful debts, i.e., considering it to be only a provision and, thus, not liable per se for deduction u/s. 36(1)(vii) of the Act, would entail levy of penalty in its respect u/s. 271(1)(c) of the Act? In our view it would not, and for the reason that the assessee has claimed the said amount unequivocally only as a ‘provision’, both in its accounts as well as per the return of income. The ‘Profit and Loss Account’ bears the entry Provision for bad debts’. Similarly, Schedule 4 to its balance-sheet contains the entry ‘Provision for doubtful debts’, and which amount is then netted from the total value of the “Loans and Advances’. Para 5 of the ‘Notes to the Accounts’ (Schedule 9 to its balance-sheet as on 31-03-2005), reads as under:-
(5) Provision for bad debts of Rs. 894706/- (P.Y. Nil) is provided against loans and advances by management after considering its recoverability.’
There is as such, no doubt that the assessee’s claim, as made, is only for and in respect of a ‘provision for bad and doubtful debts’. Accordingly, though the assessee’s claim is not legally valid, and it has not shown the same to represent an actual write off, in view of the abundant and explicit depiction thereof per its audited final accounts, forming part of its return of income, including the reduction of the provision amount from the asset value in the balance-sheet – even if for presentation purposes, it cannot be said that the assessee has no explanation at all, or that its claim is not bona fide, i.e., suffers from mala fides. It is, in fact, only on account of such unabashed depiction of the provision that the same stood noticed and, consequently, disallowed by the AO. It is apparent that in view of the uncertainty as to its realizability, the assessee made a provision against its dues under the bona fide belief that the same was allowable, and there was no attempt to conceal this fact. Put differently, the inference as to the assessee’s bona fides flow from its conduct of full disclosure. It is not necessary that the same, i.e., the bona fides of its explanation, which no doubt are to be shown by an assessee, is to be so only on the basis of some materials.
4.6 The only rider, however, would be where the condition(s) of section 36(2) are not satisfied. We say so as would be presently seen, for more than one reason. There was. firstly, no examination of this aspect at any stage, and which is vital to the assessee’s claim, whose only explanation has been the irrecoverability of the impugned amount, and on which basis in fact we have held its claim to be bona fide, so that it (explanation) was prima facie valid. The assessee, while divulging the primary facts during the course of assessment proceedings, submitted the details of its claim as under:-
|1.||Cheque in transit||Rs. 54,333/-|
|2.||Suspense A/c||Rs. 1,15,373/-|
|3.||Tata Iron & Steel Ltd.||Rs. 7,25,000/-|
Further, that while the amount of Rs. 2,69,706/- lacs pertains to earlier year (s), that for Rs. 6.25 lacs relates to the current year. The assessee’s only income (Rs. 2.40 lacs, P.Y. Rs. 3.60 lacs) is by way of rent received, besides a negligible amount as interest on FDR/s. A few questions spring immediately in the mind, and which would require being answered: How could be the amount of ‘suspense’ and ‘cheque in transit’ qualify for inclusion as income, as required u/s, 36(2)(i) of the Act? How could Rs. 6.25 lacs pertain to the current year when its’ gross income for the year is at Rs. 2.40 lacs only? The entire amount of provision forms part of the assessee’s loans and advances portfolio and, thus, it is not clear as to how the same forms part of its income for any year, a prerequisite in terms of s. 36(2). The premise of a claim for a bad debt, it may be appreciated, is that the same having already offered as income (for any year), its subsequent non-recovery would warrant a reduction in income (for the year of write off). Further, it could also be that the same (loan and advances) represent a part of the assessee’s money lending business, to which the law draws an exception as the same represents a part of the stock-in-trade of such business (s. 36(1)(vii) r/w s. 36(2)(i)). However, there is nothing on record which indicates so, or even if the assessee is in money lending business. That is, there is an apparent non-satisfaction of the essential condition of sec. 36(2), and which clearly impacts not only the assessee’s claim u/s. 36(1)(vii), which in any case stands disallowed, but also, concomitantly, the merits of its claim and, thus, that of its explanation in the penalty proceedings. The same of course cannot operate to the assessee’s prejudice, as, though there is no explanation toward satisfaction of section 36(2) of the Act, it was not specifically queried in its respect; the case all through centering around the determination as to whether or not its claim constitutes a write off, or whether its explanation for it being so is under the circumstances, a plausible one. The same, i.e., a positive satisfaction of the conditions of section 36(2), however, is vital. This is as if the primary conditions of the said provision are not satisfied, to which a claim u/s. 36(1)(vii) is subject, the same would not hold even if the assessee’s claim satisfies the condition of write off. How could then, i.e., under such circumstances, one may ask, the assessee’s claim be, or considered to be, bona fide, or an explanation in its respect be so’?
4.7 In view of the foregoing, we only deemed fit and proper that the matter is restored back to the file of the AO to adjudicate the same afresh per a speaking order in accordance with law, allowing the assessee a proper opportunity to present its case on all aspects thereof, i.e., to show as to how, despite an uncontested disallowance in its respect, the deduction claimed u/s. 36(1)(vii) of the Act does not suffer from lack of any bona fides or does not fall within either Explanation 1(A) or 1(B) of section 271(1)(c) of the Act. We decide accordingly.
4.8 It may appear that we have, in deciding this appeal, and in the manner done, travelled outside its scope. The claim, if levelled, would be misplaced. The scope of the issue arising for our adjudication in the instant case has been as set out at the beginning of this order (refer para 2.1). In so delineating the issue, we have acted well within our powers; the province of the Tribunal being to determine and decide the issue arising by applying the law as explained and expounded by the higher courts of law. If in doing so it finds that the relevant facts require determination, it is rather duty-bound to cause the same. Though the law in the matter is trite, we may, to this end, refer to the decision by the hon’ble apex court in the case of Kapurchand Shrimal v. CIT  131 ITR 451, quoting from the same as under:-
“It is well-known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute.
5. In the result, the Revenue’s appeal is allowed for statistical purposes.
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