Commissioner of Income Tax - 2 vs Bobcards Ltd.

Having heard both sides and perusing the order passed by the Tribunal, we are of the view that the Appeal deserves to be admitted on the following questions of law as they are substantial:

Para 4.2 Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in allowing the service charges on non-performing assets accounted by the assessee on cash basis, without considering the fact that the assessee is consistently following the mercantile system of accounting and that section 145 of IT Act does not permit hybrid method of accounting?

Para 4.3 Whether on the facts and in the circumstances of the case and in law, the Hon''ble Tribunal was correct in allowing the tax deducted on the service charges for the services provided by Visa/ MasterCard International ignoring that the payment was not an expenditure of the assessee and was not incurred for the assessee''s business and deduction is not allowed in respect of TDS?

The Respondent waives service. 3) The Registrar (Judicial)/Registrar, High Court, Original Side, Bombay to ensure that the original record in relation to this Appeal is summoned from the Tribunal and offered for inspection of the parties. This paper book is treated sufficient for the purpose of admission of this Appeal. However, the Registry must further ensure preparation of complete paper book in accordance with the Rules. The Registry in the first instance must send intimation of admission of this Appeal enclosing therewith a copy of this order so as to enable the Tribunal to act accordingly. 3) In relation to question No. 4.1, which is with regard to deduction on account of bad debts, the Tribunal has rendered a finding in favour of the Assessee. That finding is rendered concurrently with that of the Commissioner. In para 8 of the order under challenge, the Tribunal held that after amendment in section 36(1)(viia), the assessee is not required to demonstrate that the debt is bad. In that regard, we have perused section 36(1)(viia). We have also perused the relevant part of the order passed by the Commissioner. Section 36(1)(viia) of the Income Tax Act reads as under:

S. 36. (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 Page..... (viia) in respect of any provision for bad and doubtful debts made by-(a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income computed before making any deduction under this clause and Chapter VIA and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner: Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year: Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003, and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent", the words "ten percent" had been substituted: Provided also that a scheduled bank or a nonscheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession". Explanation - For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000, and ending before the 1st day of April, 2005;(b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA); (c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA): Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003, and ending before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year. Explanation - For the purposes of this clause,- (i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank; (ia) "rural branch" means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; (ii) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934); (iii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (iv) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (v) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of this subsection;

(vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to subsection (4) of section 80P;

A bare reading of the same would indicate as to how a provision for bad and doubtful debts made by banks have been invoked and applied in this case. Prior thereto, even section 36(1)(vii) also enables treating of any bad debt or part thereof as irrevocable in the account of the Assessee for the previous year. A treatment in this manner is enough and the Assessee does not have to demonstrate that the debt was indeed bad. 4) In these circumstances, question No. 1 cannot be said to be a substantial question of law. The finding rendered by the Commissioner of Income Tax (Appeals) and the Tribunal cannot be termed as perverse. The Appeal is dismissed to that extent.