TMI Blog2022 (3) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision on ad-hoc basis on total sundry debtors without identifying individual bad debt accounts as irrecoverable. Therefore, in the given facts and circumstances of this case, what we understand is that provision made by the assessee at fixed percentage on sundry debtors is only a mere provision for bad doubtful debts, but not written off of actual bad debts which is irrecoverable. Therefore, from the facts of present case, it is very clear that the assessee has made ad-hoc provision for bad and doubtful debts on fixed percentage in terms of certain regulatory requirements without identifying individual consumers accounts as bad debts which is irrecoverable. Therefore, provision made by the assessee for bad and doubtful debts is only a provision, but not actual written off of bad debts which is irrecoverable. Hence, we are of the considered view that the assessee is not entitled for deduction towards provision made for bad and doubtful debts u/s. 36(1)(vii) of the Income Tax Act, 1961. CIT(A), after considering relevant facts has rightly upheld additions made by the Assessing Officer towards disallowance of provision for bad and doubtful debts. Hence, we are inclined to upho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006 declaring loss of ₹ 8,71,38,55,895/- and said return has been, subsequently revised on 27.10.2007 declaring loss at ₹ 8,96,94,34,534/-. During the financial year relevant to assessment year 2006-07, the assessee has made a provision for bad and doubtful debts @ 2.5% of sundry debtors on sale of power at ₹ 10,19,08,345/- and claimed that such provision is required to be made in terms of Electricity (Supply) Annual Account Rule, 1985. The assessee has made provision @ 2.5% of sundry debtors year on year and same has been reversed in subsequent years and fresh provision is made every year. The assessee claimed that provision is required to be made as per Electricity (Supply) Annual Account Rule, 1985, because dues from customers may become bad and to compensate loss, provision is required to be made in books of account of the assessee. 4. The Assessing Officer, however was not convinced with the explanation furnished by the assessee and according to him, provision made by the assessee for bad and doubtful debts @ 2.5% on sundry debtors is a mere provision, but not written off of actual bad debts irrecoverable. Therefore, the Assessing Officer opined that prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia). Considering the facts of the case, as the expenditure is not a statutory liability to be charged against the revenue and actually there was no payment in this regard the claim of the assessee is hereby is not accepted and a sum of ₹ 10,19,08,345/- is added to the total income. 5. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has filed detailed written submissions on the issue which has been reproduced at para 5.2 on page 3 to 7 of the learned CIT(A) order. The assessee had also taken support from certain judicial precedents. The sum and substance of arguments of the assessee before the learned CIT(A) are that provision for bad and doubtful debts @ 2.5% of sundry debtors is a bad debt, which has been reduced from debtors account in the balance sheet and therefore, even if it was shown as liability in the books of account of the assessee, but, because same was deducted from asset side in the balance sheet, it amounts to actual write off of bad debt. Therefore, argued that it had satisfied conditions prescribed u/s. 36(1)(vii) r.w.s. 36(2) of the Act, and thus, the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overrule the 'permissible deductions' or 'their exclusion' under the Income-tax Act. The inconsistency between these directions and the Companies Act is only in the matter of income recognition and presentation of financial statements. The accounting policies adopted by an NBFC cannot determine the taxable income. The above principle laid down by the Hon'ble Supreme Court equally applies to the present case. The directions issued under Electricity (Supply) Annual Account Rule 1985 cannot overrule the 'permissible deductions' or 'their exclusion' under the income tax Act. Accordingly, the provision for bad debts claimed by the assessee company, which is a non-banking company, is required to be disallowed. 5.3.3 After considering all the submissions of the appellant, the Pr.CIT-III, Chennai has decided that the aforesaid provision is not an eligible deduction. In spite of specific opportunity given, the appellant could not substantiate its aim for the provision @ 2.5%. The working of the provision @ 2.5% is not based on empirical data. As such it is a contingent and unascertained liability. In the following case laws, the Courts have hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,08,345/- without appreciating fact that as per Part IV of Electricity (Supply) Annual Account Rule, 1985, the assessee is required to make provision for bad and doubtful debts at a fixed percentage of dues from consumers to meet possible bad debts and thus, the assessee is entitled for deduction for the same, when the same has been reduced from sundry debtors account in the asset side of the balance sheet. The learned AR further referring to decision of the Hon'ble Supreme Court in the case of Vijaya Bank Vs. CIT Anr., (2010) 323 ITR 0166, submitted that the case of the assessee is covered by the Hon'ble Supreme Court decision in the above said case, where it was clearly held that when a bad debt is written off and reduced from asset in the books of account of the assessee and also in balance sheet, then it amounts to actual write off of bad debts and thus, the assessee satisfies conditions of section 36(1)(vii) r.w.s. 36(2) of the Act and further, is entitled for deduction towards provision for bad and doubtful debts. The learned CIT(A) without appreciating these facts has simply confirmed additions made by the Assessing Officer and his order should be reversed. 8. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(vii) deals with deduction for bad debts and as per which subject to provisions of sub-section (2) of section 36 of the Act, amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year shall be allowed as deduction. Sub-section (2) of Section 36 of the Act, makes it clear that to get benefit of section 36(1)(vii) of the Act, the assessee should write off debt in its books of account as irrevocable. This legal position has been very well explained by the courts, including the Hon'ble Supreme Court in the case of M/s. Southern Technologies Ltd. Vs. JCIT, (2010) 320 ITR 577 (SC), where it was clearly held that prior to 01.04.1999, the law as it then stood took view that even if in cases in which assessee makes only a provision in its accounts for bad debts and their interest thereon and even though amount is not actually written off by debiting profit loss account of the assessee and crediting amount to the account of debtor, the assessee is still entitled for deduction u/s. 36(1)(vii) of the Act. It was further held that such state of law prevailed up to and including assessment year 1988-89. However, by in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext in which such observation was made by the Hon'ble Supreme Court. 11. It is an admitted legal position that ratio decided by the Hon'ble Supreme Court, including observation is binding on all courts and the Tribunal in the country. There is no dispute on this legal position. But, nowhere the courts held that ratio decided in any case can be applied universally without understanding facts of the present case. Therefore, in order to apply ratio of any judgment, facts of the present case should be analyzed in light of relevant provisions of the Act. In this case, the issue before us is deduction towards bad and doubtful debts u/s. 36(1)(vii) of the Act. As we have noted in our earlier part of this judgment, provisions of section 36(1)(vii) of the Act, entitles the assessee for deduction for any bad debt or part of bad debt written off in its books of account as irrecoverable. Therefore, in order to get benefit of deduction, the assessee must prove before the Assessing Officer that particular debt is a bad debt and further it has been written off in its books of account as irrecoverable. Therefore, in the context of 36(1)(vii), if you examine case of the Vijaya Bank Vs. J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o fact that the assessee has made 100% provision for bad debts after considering available security and also possibility of recovery of debts. Further, bank had also written off bad debts by crediting to sundry debtors account in the books of account of the assessee and also same has been carried on to balance sheet net of provision for bad doubtful debts. In the Vijaya Bank case, the Assessing Officer has never disputed fact that deduction claimed by the assessee towards bad doubtful debts is not bad debt at all. In fact, the Assessing Officer has accepted claim of the assessee for deduction claimed towards provision for bad doubtful debts and also said debt is in fact, written off in the books of account as irrecoverable. The Assessing Officer has rejected arguments of the assessee only on the apprehension that in case, if the assessee is not square up individual debtors account in the books of account, then there is every possibility of making a double claim towards bad debts in subsequent financial year. Therefore, under those facts, the Hon'ble Supreme Court came to the conclusion that when the Assessing Officer has not disputed fact that what was claimed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution of electricity to consumers in the State of Tamil Nadu. As claimed by the assessee, it has made ad-hoc provision @ 2.5% on total sundry debtors at the end of financial year as provision for bad and doubtful debts for possible bad debts arise in the future course of business in terms of Part IV of Electricity (Supply) Annual Account Rule, 1985. As claimed by the assessee, the assessee has not examined individual consumer account and identified possible bad debt accounts to make provision. The assessee has made provision on ad-hoc basis on total sundry debtors without identifying individual bad debt accounts as irrecoverable. Therefore, in the given facts and circumstances of this case, what we understand is that provision made by the assessee at fixed percentage on sundry debtors is only a mere provision for bad doubtful debts, but not written off of actual bad debts which is irrecoverable. Therefore, from the facts of present case, it is very clear that the assessee has made ad-hoc provision for bad and doubtful debts on fixed percentage in terms of certain regulatory requirements without identifying individual consumers accounts as bad debts which is irrecoverable. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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