Income Tax Appellate Tribunal - Bangalore
Hvac Systems Pvt. Ltd.,, Bangalore vs Assessee on 16 February, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH: 'B'
BEFORE SHRI GEORGE GEORGE K, JUDICIAL
AND
SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA No.725(Bang)/2010
(Assessment year: 2006-07)
M/s. HVAC Systems Pvt. Ltd.
No.145, II Main, 'B' Cross, II Stage
II Phase, Domlur,
Bangalore-71. ... Appellant
Vs.
Asst. Commissioner of Income-tax,
Circle 11(4),
Bangalore. ... Respondent
Appellant by: Shri Padamchand Khincha.
Respondent by : Shri Pratap Singh.
O R D E R
Per GEORGE GEORGE K, JM :
This appeal by the assessee is directed against the order of the CIT(A)-I, Bangalore, dated 16-2-2010. The relevant assessment year is 2006-07. The reliefs sought for in this appeal are as follows:
"(i) (a) bad debts written off as irrecoverable amounting to Rs.25,00,000/- be fully allowed as deduction under section 36(1)(vii) or in the alternative and without prejudice ITA 725(Bang)/2010 Page 2 of 7
(b) bad debts written off as irrecoverable amounting to Rs.25,00,000/- be considered and allowed as 'business loss'
(ii) interest levied under section 234B be deleted
2. Brief stated the facts are as follows: The assessee is a company. It is engaged in the business of servicing works contract for air-conditioners and dealers in air-conditioners. For the concerned assessment year, the assessee had written off a sum of Rs.25 lakhs as irrecoverable due from clients which related to earlier year. The assessee debited P&L Account and credited the amount to the debtor account. The AO, while completing the scrutiny assessment disallowed Rs.25 lakhs on the ground that this amount is a provision for bad debts.
3. The assessee, being aggrieved, filed an appeal before the first appellate authority. It was submitted before the CIT(A) that the AO has erred in applying the provisions of sec.36(1)(vii) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'] and the test whether the amount is provision for bad debt or bad debts written off. It was submitted that the provision for bad debt is not allowable and the debts written off in the books of account is allowable. It was argued that the AO mechanically disallowed debt as provision for bad debt without appreciating the fact that the amount was actually bad debt and the same was written off as irrecoverable during the year under consideration.
ITA 725(Bang)/2010 Page 3 of 7 3.1 The CIT(A) held that the claim of debt is not a provision for bad debt since the debt is written off and party's account has been credited. However, he concluded that the bad debt written off is allowable as a deduction only if it is communicated to the concerned debtor that there is no necessity to pay such amount to the assessee. Therefore, in absence of such communication, the CIT(A) held that the debt claimed should not be allowed as a deduction u/s 36(1)(vii) of the Act. The relevant finding of the CIT(A)'s order reads as under:
"4. The above was considered. I find the genesis is in Assessment Year 2005-06. In the Assessment Year 2005-06, the appellant in its books showed transactions of Rs.1,68,08,503/- with one M/s.Subramanya Construction and Development Ltd., in short henceforth SCDI, out of which up to 31-3-2005, only Rs.1,41,57,151/- was received keeping a balance of Rs.26,51,352/-. In this year, the appellant writes off Rs.25 lakhs as bad and irrecoverable debt. The AO is of the opinion that this debt in P & L A/c is in the nature of provision and disallowed the same. I find Schedule 17 in clear terms writes -
'Bad debts written off : Rs.37,67,254/-' which included Rs.25 lakhs pertaining to SCDL and therefore the claim deserves to be allowed if the procedure for write off is followed properly. The Act does not provide any ;such procedure but it is supported by judicial decisions. Records show that the appellant follows double entry method of Book Keeping. In other words, the debt written off must be ITA 725(Bang)/2010 Page 4 of 7 credited to the accounts of the concerned debtor. Such must also be accompanied by a communication to SCDL that there is no necessity to pay such amount to the appellant to complete the procedure and write off. No such letter has been written in this case by the appellant. Thus the action is unilateral and malafide only to reduce profit and evade tax thereon. Unless the complete procedure of write off is adopted, the appellant is not entitled for the claim u/s 36(1)(vii) r.w.s. 36(2) of IT Act vide -
(i) South India Surgicals Co. Ltd. Vs. ACIT (2006) 287 ITR 62 (Mad)
(ii) Dhall Enterprises & Engineers (P) Ltd. vs. CIT (2007 162 Taxman 114 (Guj) 4.1 In view of the foregoing, the addition is upheld because grounds of appeal are dismissed on merits and facts of the case."
4. The assessee, being aggrieved, is in second appeal before us. Learned counsel for assessee re-iterated the submissions made before the authorities below. He also relied on the latest decision of the Hon'ble Supreme Court in the case of T.R.F. Ltd. vs. CIT (323 ITR 397) and Vijaya Bank vs. CIT (323 ITR 166). It was further contended that the CIT(A) has erred in concluding that bad debts written off are allowable as deduction only if it is communicated to the concerned debtors that there is no necessity to pay such amount to the assessee.
Learned departmental representative, on the other hand, supported the findings of the Assessing Officer.
ITA 725(Bang)/2010 Page 5 of 7
5. We have heard rival submissions and perused material on record. Section 36(1)(vii) and 36(2)(i) as it stood during the relevant period is reproduced herewith:
"36(1)(vii) Subject to the provisions of sub-section (2), the amount of [any bad debt or part thereof which is written as irrecoverable in the accounts of the assessee for the previous year]:
Provided that in the case of an assessee to which clause (viiia) 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 the clause.
Explanation. - 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 debts made in the accounts of the assessee;"
"36(2)(i) In making any deduction for a bad debt or part thereof, the following provisions shall apply -
(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such bad debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;"
From the plain reading of the section after its amendment w.e.f. 1.4.1989, it is very clear that once the assessee writes off an amount as bad debt, it is an allowable allowance chargeable to the profits of the company. It is not necessary for the assessee to prove that the debt is bad. However, if such bad debts are recovered in any subsequent year, the same is treated as ITA 725(Bang)/2010 Page 6 of 7 income for that year and charged to tax. Thus, as per law, when the assessee claims that a debt has gone bad, prima facie the Revenue has to accept the debt to be bad. In the case of T.R.F. Ltd. (supra), the Hon'ble Supreme Court held as under:
"This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the AO has not examined whether the debt has, in fact, been written off in accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the AO. Hence, the matter is remitted to the AO for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off."
In the instant case, it is not in dispute that bad debts are written off in the books of account of the assessee and the debtor's account is credited. Therefore, following the decision of the Hon'ble Apex Court in the case of T.R.F. Ltd. (supra) we are of the opinion that the authorities below erred in disallowing the sum of Rs.25 lakhs as bad debt. We hereby direct the AO to ITA 725(Bang)/2010 Page 7 of 7 accept the claim of the assessee and allow the bad debt written off and compute tax accordingly.
6. As against the levy of interest u/s 234B, the levy of interest is mandatory and consequential in nature.
7. In the result, the appeal is allowed.
Order pronounced in the open court on 29th October, 2010 Sd/- sd/-
(A. Mohan Alankamony) (George George K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Place : Bangalore
Dated: 29th October, 2010
Eks
Copy to :
1. Appellant
2. Respondent
3. CIT(A) concerned
4. CIT
5. DR, ITAT, Bangalore
6. Guard file
By Order
Assistant Registrar, ITAT, Bangalore