2020 (10) TMI 658 - AT - Income Tax

Deduction u/s.80P - excess provision for Bad and Doubtful Debts Reserve (BDDR) of earlier years written back is taxable income - appellant claimed deduction u/s.36(1)(vii) - full amount of net profit available for the benefit u/s.80P was without the effect of BDDR - HELD THAT - As seen from the assessee s return of income for the assessment year 2006-07, being the period, when it was eligible for deduction u/s 80P that it added back BDDR and thereafter claimed deduction u/s 80P on the full amount of income. Again the net effect of this exercise is that the creation of BDDR in the books of account by means of debit to the Profit and loss account and thereafter its reversal in the computation of total income before the claim of deduction u/s.80P is that the full amount of net profit available for the benefit u/s.80P was without the effect of BDDR. To put it simply, suppose Net Profit before BDDR for the year is ₹ 300/-. Once BDDR of ₹ 100/- for the year is debited, net profit gets reduced to ₹ 200/-. Again at the time of computation of total income with the addition of ₹ 100/- back to ₹ 200/-, the total of profit again comes to ₹ 300/-, which is available for deduction u/s.80P. Thus, even without taking any deduction of BDDR, there was full deduction u/s.80P in respect of eligible income only. With the insertion of sub-section (4) to section 80P w.e.f. 01-04- 2007, the claim for deduction u/s.80P has come to be denied to the societies like the assessee but with the simultaneous onset of the benefit of deduction u/s.36(1)(viia) by the Finance Act 2007 w.e.f. 01-04-2007. Irrespective of the fact whether it is case of the period when the assessee was eligible for deduction u/s.80P or thereafter when the benefit of section 36(1)(viia) came to be conferred, the creation of BDDR and its simultaneous addition in the computation of total income has made it clear that, in fact, no deduction was claimed by the assessee in this regard. Once the assessee did not claim any deduction in respect of BDDR, there can be no question of taxing the reversal of BDDR in a subsequent year, as has been the case under consideration. We, therefore, overturn the impugned order on this score and hold that the ld. CIT(A) was not justified in upholding the addition to the total income. The same is directed to be deleted.

Summary

Issues:
1. Taxability of excess provision for Bad and Doubtful Debts Reserve (BDDR) written back as taxable income.
2. Treatment of reversal of excess provision of BDDR as taxable income.
3. Deductions claimed under section 36(1)(vii) in relation to BDDR provisions.
4. Consideration of deduction or benefit claimed while creating BDDR in relation to Section 41.

Analysis:
1. The appeal concerns the tax treatment of an excess provision for Bad and Doubtful Debts Reserve (BDDR) written back as taxable income. The Assessing Officer (AO) added the amount of excess provision back to the total loss as per the return, arguing that deductions were claimed under section 36(1)(viia) in earlier years. The AO contended that despite creating the provision and adding it back to the total income, the assessee had claimed deductions under section 36(1)(viia) and section 80P in previous years. The CIT(A) upheld the addition, leading to the appeal before the ITAT Pune.

2. The ITAT Pune analyzed the assessee's Profit and loss account and computation of total income. The assessee credited a net sum to its Profit and loss account on account of BDDR, which was created for earlier years and written back in the current year. The ITAT Pune observed that the assessee neither claimed deductions nor offered income on account of the BDDR provisions in the computation of total income. The ITAT Pune emphasized that the net effect of creating and adding back the provision was that no deduction was claimed at the time of creation, justifying the exclusion of the written back amount from taxable income.

3. The ITAT Pune reviewed the returns filed by the assessee for various assessment years, noting the consistent practice of creating BDDR as per RBI norms and adding it back in the computation of total income. The ITAT Pune highlighted that the claim of deduction under section 36(1)(viia) was separate from the provision created or reversed in the books. The ITAT Pune further explained the impact of the deduction under section 80P before and after the amendment, clarifying that the full deduction was available without considering the BDDR amounts.

4. The ITAT Pune overturned the CIT(A)'s decision, holding that the addition of the excess provision for BDDR to the total income was unjustified. The ITAT Pune emphasized that since no deduction was claimed by the assessee in relation to the BDDR provisions, the reversal of BDDR in subsequent years should not be taxed. The ITAT Pune directed the deletion of the added amount from the total income, allowing the appeal in favor of the assessee.

5. An additional ground raised by the assessee regarding interest charges under sections 234B and 234C became infructuous due to the main issue's resolution. The ITAT Pune allowed the appeal, pronouncing the order in the Open Court on 13th October 2020.