Tainwala Chemicals & Plastics India Ltd. v. Asstt. CIT

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The Tax Publishers2012 TaxPub(DT) 0325 (Mum-Trib) : (2011) 059 DTR 0354 INCOME TAX ACT, 1961 --Business deduction under section 36(1)(viii)--Bad debts Disclosed in earlier year and written off during the relevant year--During the assessment proceedings, assessing officer noticed that assessee has debited a sum of Rs. 1,90,51,000 as exceptional items and in response to a query, it was stated that these items pertain to the provision for doubtful debt on account of specific liability and, therefore, same was not added to the taxable income in accordance with the general accepted accounting policy. Therefore, loans given were not on account of revenue expenditures/ receipts, but were in the nature of capital expenditure and even if the same have become bad, it cannot be claimed as a bad debt. It was further observed that since loans have not been accounted for while computing the income of earlier years, the loans have not been granted in respect of the business carried on by the assessee. The same has not been established to have become bad. *Held:* When assessee-company had not received any amount for the last three years and even no interest was charged, then if assessee-company after ascertaining the amount as irrecoverable has written off the balance amount, then it cannot be said that the same is not bona fide. Therefore, there is no force in this objection. Once assessee has lent the surplus money and offered the interest income as business income, then the activity of lending the money has to be treated as business activity. In any case, if this claim cannot be allowed as bad debt, same has to be allowed as business loss because money was lent during the course of business for earning income. [Para 33] The objection is that the amount was really not reduced from the debtor on the assets side of the balance sheet and in this regard the Departmental Representative had filed a copy of the annual report. However, the portion of the report, which has been filed by the Departmental Representative, is a copy of the Schedule O which consists of 'Significant Accounting Policies and Notes forming part of the accounts for the year ended 31-3-2004', therefore, it is not the part of the balance sheet as such. Under Companies Act every company is required to file certain statistical information, e.g., production capacity, quantitative details of stock, etc. Similarly, in the case of loans extended to the companies within the same group, every company has to disclose the amount outstanding at the end of the year, maximum amount outstanding during the year, number of shares held in such companies and maximum number of shares held in such companies, so this part of the Schedule basically deals with the statistical information in compliance with the requirement of the Companies Act. Whereas actual Schedule of loans and advances is Schedule I wherein the loan amount has been shown after reducing the provision for doubtful debts. [Para 35] Once a provision of doubtful debt has been debited in the profit and loss account and the corresponding provision has been credited or reduced from the debtor's account on the assets side of the balance sheet, then this would amount to writing off. In the present case, the assessee-company has debited the provision of doubtful debt to the profit and loss account and correspondingly has reduced the assets by reducing the amount of unsecured loans outstanding and thus would amount to writing off of the loan. Accordingly, assessee would become entitled to the claim of bad debt. One more objection was raised that the debtor company has stated in its annual report that they were regular in making repayments, therefore, such write off cannot be treated as bona fide write off. However, it was clearly pointed out that this observation was also made by the debtor company whereas the fact remains that no payments were received in 2000-01 and, in fact, assessee had stopped charging interest after assessment year 1997-98 because the financial position of the debtor company had become bad. When assessee-company had not received any amount for the last three years and even no interest charged, then if assessee-company after ascertaining the amount as irrecoverable has written off the balance amount, then it cannot be said that the same is not bona fide. Therefore, we find no force in this objection. The Departmental Representative had also mentioned that in penalty proceedings assessee has taken a plea that this amount was not claimed as bad debt but was only a provision for doubtful debt. As pointed out by the counsel of the assessee, first of all it is settled that assessment proceedings are totally separate and independent from penalty proceedings and in any case, the representation regarding penalty was made on 26-12-2006, whereas the decision of the Supreme Court in the case of Vijaya Bank v. CIT was rendered on 15-4-2010 which means at that point of time, there was a doubt whether the provision for doubtful debt could also be considered as claim for bad debts because actual writing off of the debt was not there and this position got settled only in 2010 by the Supreme Court. [Para 36] Thus, it is clear that even when a part of the debt is written off, same can be allowed as claim for bad debt. In view of this detailed discussion, the order of the CIT(A) is set aside and the assessing officer is directed to allow the claim for bad debt. [Para 36] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0325 (Mum-Trib) : (2011) 059 DTR 0354

INCOME TAX ACT, 1961

--Business deduction under section 36(1)(viii)--Bad debts Disclosed in earlier year and written off during the relevant year--During the assessment proceedings, assessing officer noticed that assessee has debited a sum of Rs. 1,90,51,000 as exceptional items and in response to a query, it was stated that these items pertain to the provision for doubtful debt on account of specific liability and, therefore, same was not added to the taxable income in accordance with the general accepted accounting policy. Therefore, loans given were not on account of revenue expenditures/ receipts, but were in the nature of capital expenditure and even if the same have become bad, it cannot be claimed as a bad debt. It was further observed that since loans have not been accounted for while computing the income of earlier years, the loans have not been granted in respect of the business carried on by the assessee. The same has not been established to have become bad. Held: When assessee-company had not received any amount for the last three years and even no interest was charged, then if assessee-company after ascertaining the amount as irrecoverable has written off the balance amount, then it cannot be said that the same is not bona fide. Therefore, there is no force in this objection.

Once assessee has lent the surplus money and offered the interest income as business income, then the activity of lending the money has to be treated as business activity. In any case, if this claim cannot be allowed as bad debt, same has to be allowed as business loss because money was lent during the course of business for earning income. [Para 33] The objection is that the amount was really not reduced from the debtor on the assets side of the balance sheet and in this regard the Departmental Representative had filed a copy of the annual report. However, the portion of the report, which has been filed by the Departmental Representative, is a copy of the Schedule O which consists of 'Significant Accounting Policies and Notes forming part of the accounts for the year ended 31-3-2004', therefore, it is not the part of the balance sheet as such. Under Companies Act every company is required to file certain statistical information, e.g., production capacity, quantitative details of stock, etc. Similarly, in the case of loans extended to the companies within the same group, every company has to disclose the amount outstanding at the end of the year, maximum amount outstanding during the year, number of shares held in such companies and maximum number of shares held in such companies, so this part of the Schedule basically deals with the statistical information in compliance with the requirement of the Companies Act. Whereas actual Schedule of loans and advances is Schedule I wherein the loan amount has been shown after reducing the provision for doubtful debts. [Para 35] Once a provision of doubtful debt has been debited in the profit and loss account and the corresponding provision has been credited or reduced from the debtor's account on the assets side of the balance sheet, then this would amount to writing off. In the present case, the assessee-company has debited the provision of doubtful debt to the profit and loss account and correspondingly has reduced the assets by reducing the amount of unsecured loans outstanding and thus would amount to writing off of the loan. Accordingly, assessee would become entitled to the claim of bad debt. One more objection was raised that the debtor company has stated in its annual report that they were regular in making repayments, therefore, such write off cannot be treated as bona fide write off. However, it was clearly pointed out that this observation was also made by the debtor company whereas the fact remains that no payments were received in 2000-01 and, in fact, assessee had stopped charging interest after assessment year 1997-98 because the financial position of the debtor company had become bad. When assessee-company had not received any amount for the last three years and even no interest charged, then if assessee-company after ascertaining the amount as irrecoverable has written off the balance amount, then it cannot be said that the same is not bona fide. Therefore, we find no force in this objection. The Departmental Representative had also mentioned that in penalty proceedings assessee has taken a plea that this amount was not claimed as bad debt but was only a provision for doubtful debt. As pointed out by the counsel of the assessee, first of all it is settled that assessment proceedings are totally separate and independent from penalty proceedings and in any case, the representation regarding penalty was made on 26-12-2006, whereas the decision of the Supreme Court in the case of Vijaya Bank v. CIT was rendered on 15-4-2010 which means at that point of time, there was a doubt whether the provision for doubtful debt could also be considered as claim for bad debts because actual writing off of the debt was not there and this position got settled only in 2010 by the Supreme Court. [Para 36] Thus, it is clear that even when a part of the debt is written off, same can be allowed as claim for bad debt. In view of this detailed discussion, the order of the CIT(A) is set aside and the assessing officer is directed to allow the claim for bad debt. [Para 36]