Commissioner of Income Tax vs Producin Ltd.

This appeal is filed by the revenue challenging the order dated 15-7-2004 passed in ITA No. 95/Bang./2001 by the Income Tax Appellate Tribunal at Bangalore.

The facts of the case are that the Respondent-Assessee, which is a Company maintaining its account on mercantile basis, filed its return of income for the assessment year 1997-98 on 1-12-1997, declaring a total income of Rs. 74,92,450. The said return was processed u/s 143(1)(a) of the Income Tax Act and thereafter was taken up for scrutiny assessment. At that stage it was found that the Assessee had made provision for doubtful debts to an extent of Rs. 5,51,120. The assessing officer held that since a provision was made, the same could not be considered u/s 36(1)(vii) of the Income Tax Act. He also stated that there was no evidence produced like original minute books in support of the claim that the amount receivable from M/s. V.K. Patel and Co., was written off by the Assessee and that a similar claim was rejected for the earlier assessment year 1996-97 also. Therefore, the assessing officer rejected the claim with regard to bad debts u/s 36 by his order dated 24-12-1999. The said order was carried in appeal before the Commissioner (Appeals) but the Appellate Commissioner dismissed the appeal. Being aggrieved by the said order, the revenue filed the appeal before the Tribunal. The Tribunal confirmed the order passed by the Appellate Commissioner and hence, this appeal has been filed raising the following substantial question of law:

(1) Whether the Appellate Authorities were correct in holding that writing off the liability in the Profit and Loss account would be sufficient compliance with the provisions of Section 36(1)(vii) of the Act read with the Explanation to it even when, this liability continues to be retained as a liability in the personal account of the debtor, without being written off.

We have heard the learned Counsel for the Appellants and the learned Counsel for the Respondent-Assessee.

It is submitted on behalf of the Appellants that u/s 36(1)(vii) of the Act, if the deduction has to be claimed by way of bad debts or doubtful debt, then in such a case it has to be irrecoverable and there should be no provision made for the same in the accounts of the Assessee. However, in the instant case, the resolution passed in this regard by the Board of Directors of the Assessee-company does not indicate that the said debt which was not recoverable was written off. But in fact a provision was made in the account of the Assessee-company. Therefore, the benefit u/s 36 cannot be granted in view of the Explanation to the same.

Per contra, it is submitted by the Respondents counsel that the Resolution in fact decided that the debts was to be written off and the intention was that it was to be treated as a bad debt. He has however clarified by stating that in the accounts of the Company, it was not written off as such it was reflected and a provision was made.

Having considered the said contentions and on scrutiny of the material on record, we have perused that the Resolution of the Board of Directors of the Respondent-company dated 31-3-1997 pertaining to the question raised in this appeal. The relevant portion of which reads as follows:

Mrs. Kirit Jaith a informed the Board that an amount of Rs. 5,51,120 is due from M/s. V.K. Patel & Co. as on 31-3-1997. The company regularly followed up with the party for recovery of the dues. The company charged interest of Rs. 6,26,120 to the party during the years 1992-93 to 1994-95 against which it could recover only Rs. 7,500 as no recovery was possible. It was decided to write off this amount by making provision for bad and doubtful debts.

Resolved that an amount of Rs. 5,51,120 due from M/s. V.K. Patel be written off and necessary provision for bad and doubtful debts be made.

A reading of the said resolution states that efforts had been made to recover the said amount from M/s. V.K. Patel and Co. and it has been decided to write off the amount. However, in the actual resolution, it is stated that necessary provision would be made for bad and doubtful debts of M/s. V.K. Patel & Co. Under the circumstances, the Explanation to Section 36 which speaks about not making any provision for bad and doubtful debts in the account of the Assessee is not complied with. Therefore, the Tribunal was not right in holding against the revenue.

Accordingly, we answer the substantial questions of law in favour of the revenue. If the Assessee really is to write off the bad debts in terms of Section 36 of the Act, then it is entitled to claim the benefit of the same in the corresponding assessment years.

Accordingly, the appeal is allowed.