Case Law Details
Pr. CIT Vs Gujarat State Co-Op. Bank Ltd.(Gujarat High Court)
During the year under consideration, the assessee had returned back a sum of Rs. 10 crores towards the excess provision for liabilities. The Assessing Officer refused to accept such right back and added the said sum of Rs.10 crores to the income of the assessee. Assessee carried the matter in appeal. Commissioner of Income Tax (Appeals) confirmed the view of the Assessing Officer invoking the provision of section 41(1) of the Act. The assessee’s defense that the assessee had not claimed interest expenses in the earlier years and therefore, reversal of the unclaimed expenses cannot be taxable, was rejected on the ground that during earlier period, the assessee’s income from the banking business was exempt under section 80P of the Act and therefore, it was irrelevant whether the assessee had claimed such interest in the past or not.
The assessee carried the issue before the Tribunal. Tribunal reversed the view of the Revenue authorities making following observations:
“9. As regard the addition of Rs.10 Crores, on account of provision written back, we have noted that the learned CIT(A) has justified the same by observing that “considering these facts, reversal of interest expense is income under section 41(1) of Income Tax Act” but then section 41(1) comes into play only when “an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee.” In the case before us, the provision was never claimed as deduction as it was added back in the computation of income. Clearly, section 41(1) has no application in the matter. When provision was never claimed as deduction, there cannot be any occasion to bring to tax reversal of such a provision. The entire exercise of creating this provision, and reversing the same – partly or fully, is completely tax neutral. The fact that income was eligible for deduction under section 80P, even if that be so, is wholly irrelevant in this context. In view of these discussions, we uphold the grievance of the assessee.”
Section 41(1) of the Act in plain terms provides for adding back of an allowance or deduction which has been made by the assessee in any year in respect of loss expenditure or trading liability and subsequently during any previous year such liability ceases. The primary requirement of applicability of this provision therefore is where an allowance or reduction has been made in the assessment for any year in respect of such loss or expenditure or trading liability. When no such allowance or deduction was made, question of applicability of section 41(1) of the Act would not arise.
FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-
1. This appeal is filed by the Revenue challenging the judgment of the Income Tax Appellate Tribunal dated 19.10.2016 raising following questions for our consideration:
“[A] Whether the Appellate Tribunal was right in law and on facts in deleting the addition of bad debts claim of Rs.11,72,22,554/ made by the Assessing Officer ?
[B] Whether the Appellate Tribunal was right in law and on facts in deleting the disallowance of excess provision written back of Rs.10,00,00,000/?”
2. The first question pertains to the assessee’s claim of bad debts of Rs.11.72 crores (rounded off). The respondent assessee is a cooperative bank. For the assessment year 2008-09, the assessee had filed the return of income. The assessee had claimed bad debt of Rs.15.35 crores (rounded off) which comprised of bad debt of Rs.11.72 crores (rounded off) shown in the statement of income and Rs.3.62 crores (rounded off) outside such statement. The assessee requested the Assessing Officer to allow the net balance claim of bad debt of Rs.11.72 crores.
3. The Assessing Officer questioned the assessee with respect to such claim. In response to which, the assessee contended inter alia that;
“It is respectfully submitted that during the year the Bank, has written off baddebts of Rs.15.35 Crores by crediting the borrowers account and debiting the Bad and Doubtful Debts Reserve Account in respect of loans given to Co-operative Societies in earlier years. It is respectfully submitted that in prior years, the bank made the provisions of Bad and Doubtful Debts Reserve in accordance with the guidelines/prudential norms of the RBI and CoOperative Societies Act and the said provisions were disallowed and added in the statement of total income and not claimed as expenditures in respective years, since they were merely provisions. During A.Y.2008-09 A.Y. 2008-09 bank has further provided Rs.2 Crores for Bad and Doubtful Debts, which is already disallowed and added in the statement of total income. It is further respectfully submitted that in the case of T.R.F. Ld. V/s CIT. Hon CIT. Hon. Supreme Court has decided that it is enough if the Bad Debt is written off as irrecoverable in the accounts of the assessee. When bad debt occurs, the bad debts account is debited and the customer’s account is credited, thus closing the accounts of the customers.”
4. The Assessing Officer was not convinced. He was of the opinion that as per the judgment of the Supreme Court in case of R. F. Ltd. v. Commissioner of IncomeTax reported in [2010] 323 ITR 397 (SC), bad debt can be allowed only if the same is written off in the books of account of the assessee. In the present case, the assessee had not written off the bad debts in the books of accounts. A mere mention in the audit report would satisfy such requirement. He accordingly disallowed the claim of bad debt.
5. The assessee approached the Commissioner of Income Tax (Appeals) who while confirming the order of the Assessing Officer, raised an additional ground for rejecting the claim. In his opinion, proviso to section 36(1)(vii) of the the Income Tax Act, 1961 (‘the Act’ for short) would not allow bad debts if it does not exceed the credit balance of the bad and doubtful accounts with respect to the assessee to whom clause (viia) of the Act applies. Since assessee was a cooperative bank, such clause would apply.
6. The assessee approached the Tribunal. The Tribunal by impugned judgment, reversed the decision of the Revenue authorities and allowed the claim making following observations:
“7. We find that so far as the action of declining deduction of Rs.11,72,22,554/ is concerned, it is based on an erroneous reading of Hon’ble Supreme Court’s judgment in the case of TRF Limited vs. CIT [(2010) 323 ITR 397 (SC)]. What this decision holds is that it is not necessary for the assessee to establish that the debt, in fact, has become had and that “it is enough if the bad debt is written off as irrecoverable in the books of the assessee”. The requirement for write off by debit to profit and loss account in the year of claim does not exist. In the present case, the debt has been written off in the sense that account of the debtor is squared up by crediting the debtor and debiting the bad debt reserve account. This accounting treatment, in our considered view, does amount to actual write off of the debit. However since this entry does not touch upon the profit and loss account at this stage directly, the authorities below have declined to treat it as a write off of the debts. What is overlooked in the process is that provision, which is partially squared up in this year to the credit of the debtor, was created in earlier years to the debit of profit and loss account but added back as provision is not tax deductible. As regards the learned CIT(A)’s reference to proviso to section 36(1)(vii), which, in turns, refers to section 36(1)(viia), to provisions made under section 36(1)(viia) which admittedly is not the case here. In view of these discussions, as also bearing in mind entirety of the case, the grievance of the assessee must be upheld. Accordingly, disallowance of deduction for bad debts, amounting to Rs.11,72,22,554/, is deleted.”
7. Having heard learned counsel for the parties and having perused the documents on record, it emerges that the assessee had actually written off the debt by squaring up the accounts of the debtors and crediting the debtor. Simultaneously, the assessee also debited the bad and doubtful debt reserve account by the corresponding sum. The Tribunal correctly held that this amounts to actual right off. The decision of the Supreme Court in case of T. R. F. Ltd. (supra) does not lay down any proposition contrary to the above view of the Tribunal. In case of T. R. F. Ltd. (supra), the Supreme Court noted that after 01.04.1989, it is not necessary for the assessee to establish that the debt income had became irrecoverable. It is enough that the bad debt is recorded as irrecoverable in the accounts of the assessee. The focus before the Supreme Court was the amendment with effect from 01.04.1989 in section 36(1) of the Act which prior to the amendment provided that deductions provided for in the following clauses shall be allowed to the extent of amount of any debt or any part thereof, which is established to have become a bad debt in the previous year. The language used in clause(vii) of sub section (1) of section 36 was changed to “the amount of bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee from the previous year with effect from 01.04.1989.”
8. As noted, the Commissioner of Income Tax (Appeals) however has added slightly different angle of the matter, with respect to applicability of the proviso to clause(vii) of sub section (1) of section 36. This proviso reads as under:
36. This proviso reads as under:
(vii) subject to the provisions of sub-section (2), 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]:
[Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.]
Under this proviso, the claim of bad or doubtful debt would be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made in clause (viia) in case of an assessee to which such clause applies. The fact that clause (viia) applies to the assessee is not in dispute. However, Mr.Soparkar for the assessee submitted that the assessee had not claimed any part of the provision made for bad or doubtful debts in its account and that therefore the first proviso to clause (vii) in any case had no applicability. He submitted that the Assessing Officer therefore advisedly did not proceed on such basis and that the Commissioner of Income Tax (Appeals) erred in invoking the said provision. He would draw our attention to the observations of the Tribunal in the impugned judgment, in which, in this context, it was stated that proviso to section 36(1) (vii) refers to section 36(1)(viia) and the provisions made under such subclause which admittedly is not the case here. In our opinion if that is the case, reliance of the Commissioner of Income Tax (Appeals) on the proviso to section 36(1)(vii) also would be redundant. However, by way of abundant caution, it is clarified that while granting the deduction on the said sum of Rs.11.72 crores it may be verified that the assessee is not in any manner, getting table deduction.
9. The second question pertains to the disallowance made by the Assessing Officer of Rs.10 crores of the excess provision returned back. Brief facts are that during the year under consideration, the assessee had returned back a sum of Rs. 10 crores towards the excess provision for liabilities. The Assessing Officer refused to accept such right back and added the said sum of Rs.10 crores to the income of the assessee. Assessee carried the matter in appeal. Commissioner of Income Tax (Appeals) confirmed the view of the Assessing Officer invoking the provision of section 41(1) of the Act. The assessee’s defense that the assessee had not claimed interest expenses in the earlier years and therefore, reversal of the unclaimed expenses cannot be taxable, was rejected on the ground that during earlier period, the assessee’s income from the banking business was exempt under section 80P of the Act and therefore, it was irrelevant whether the assessee had claimed such interest in the past or not.
10. The assessee carried the issue before the Tribunal. Tribunal reversed the view of the Revenue authorities making following observations:
“9. As regard the addition of Rs.10 Crores, on account of provision written back, we have noted that the learned CIT(A) has justified the same by observing that “considering these facts, reversal of interest expense is income under section 41(1) of Income Tax Act” but then section 41(1) comes into play only when “an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee.” In the case before us, the provision was never claimed as deduction as it was added back in the computation of income. Clearly, section 41(1) has no application in the matter. When provision was never claimed as deduction, there cannot be any occasion to bring to tax reversal of such a provision. The entire exercise of creating this provision, and reversing the same – partly or fully, is completely tax neutral. The fact that income was eligible for deduction under section 80P, even if that be so, is wholly irrelevant in this context. In view of these discussions, we uphold the grievance of the assessee.”
11. Section 41(1) of the Act in plain terms provides for adding back of an allowance or deduction which has been made by the assessee in any year in respect of loss expenditure or trading liability and subsequently during any previous year such liability ceases. The primary requirement of applicability of this provision therefore is where an allowance or reduction has been made in the assessment for any year in respect of such loss or expenditure or trading liability. When no such allowance or deduction was made, question of applicability of section 41(1) of the Act would not arise.
12. In the result, Tax Appeal is dismissed.
