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Write back of amount from provision for bad and doubtful debts which was not allowed in full in assessment cannot be taxed as income of the year of write back- rules Delhi Tax Tribunal.

Facts

• Bank of Tokyo Mitsubishi UFJ Ltd (“BTM”), is a banking company incorporated in Japan and is a tax resident of Japan within the meaning of Article 4 of the India Japan Double taxation avoidance agreement. It is engaged in carrying out banking business in India through its branches in India. BTM was assessed to tax in India on the profits earned by its permanent establishment in India.

• BTM being a foreign bank was entitled to a deduction under section 36(1 )(viia)(b) of Income Tax Act, 1961 (“the Act”) on account of provision made for bad and doubtful debts. Such a deduction however was restricted to 5% of its total income (before deduction under this section and Chapter VI-A of the Act). As a result the entire provision for bad and doubtful debts made over the years had not been allowed as a deduction. Only a certain portion of the provision made was allowed in the assessments in respective years.

• During the year under consideration BTM had made a gross provision for bad and doubtful debts in its accounts and also had written back an amount recovered. The net provision made during the relevant previous year for bad and doubtful debts was added to the total income as computed in the return of income.

• The Assessing officer (AO) in the assessment order under section 143(3) of the Act, allowed the net provision only under section 36(1)(viia)(b) of the Act. However, he taxed the provision written back on the ground that no details were furnished regarding the amount recovered and if the write back was from an amount already allowed in the earlier years, then it was taxable in the year of recovery.

• BTM filed an appeal before Commissioner of Income Tax (Appeal).

• The Commissioner of Income-tax (Appeals) decided the appeal in favour of BTM. Aggrieved by the order, Department preferred an appeal before the Tribunal.

Issues before the Tribunal

• Whether write back of provision for bad and doubtful debts which was not allowed as a deduction under section 36(1 )(viia) (b) of the Act in the earlier years can be taxed as income of the year of write back?

Observation and Ruling of the Tribunal

• Deduction u/s 36(1 )(viia)(b) of the Act was allowable only to the extent of an amount not exceeding 5% of the total income, computed before making any deduction under section 36(1 )(viia) and Chapter VI-A. The amount of provision for bad and doubtful debts written back cannot be treated as income, if no deduction in respect of the same was allowed in the earlier years under section 36(1)(viia)(b).

• Huge provisions remained outstanding for which no deduction had been allowed to the assessee in the earlier years. The department had 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.

• Relying on the Tribunal order in assessee’s own case in another year, the Tribunal held that if the amount which had been written back was over and above the amount not exceeding 5% of the total income, the same cannot be taxed in the year of write back as it was not allowed as a deduction in the relevant previous years.

• The AO was directed to verify as to whether the amount now written back in the accounts is out of the amount allowed as a deduction under sec. 36(1 )(viia)(b) in earlier years or not.

Conclusion

The above decision lays down that the amount written back by a bank from provision for bad and doubtful debts which has not been allowed in the earlier years as a deduction cannot be taxed as income in the year of write back.

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