The Kerala High Court (Ernakulam Bench) clarified that the requirement to close the individual debtor’s account, with reference to the provisions of Section 36(1)(vii) of the Income Tax Act, is based simply on an apprehension of the Revenue Department that, without doing so, the taxpayer may claim the deduction twice over.
The Court referred to the decision of the Apex Court in the case of Vijaya Bank v. Commissioner of Income Tax [(2010) 323 ITR 166(SC)], to reiterate that as per the provisions of Section 41 of the Income Tax Act, if the amounts are subsequently recovered, the same would be chargeable to tax with reference to the financial year in which the recovery takes place.
The Division Bench comprising Justice A. Muhamed Mustaque and Justice Harisankar V. Menon observed that the taxpayer, apart from debiting the profit and loss account and creating a provision for bad and doubtful debts, the corresponding amount from the loans and advances/debtors on the assets side of the balance sheet was also obliterated and hence, at the end of the year, it is the net figure that was available representing the bad debt.
However, to check to the tune with the provisions of Section 36(1) (vii) of the Act, as to whether there was an actual write off or not, the Bench restored the matter to the assessing authority with reference to the principles laid down by the Apex Court in Vijaya Bank, especially with reference to the profit and loss account and the balance sheet of the appellant.
Reference was made to the decision of the Apex Court in the case of Vijaya Bank v. Commissioner of Income Tax [(2010) 323 ITR 166(SC)], where it was held that there is no requirement for the individual debtor’s account to be closed for claiming a deduction under Section 36(1)(vii) of the Income Tax Act.
Briefly, in this case, the appellant (taxpayer) had sought deductions under Section 36(1)(vii) of the Income Tax Act, representing “the provision for doubtful debts”. The assessment was, however, finalized, refusing to extend the deductions, essentially because the “individual debtors’ accounts and debts” were not written off as prescribed by the statute.
On appeal, the CIT(A) allowed the deductions referring to the balance sheet after finding that the provisions for bad and doubtful debts for the respective years had been written off. The matter then reached the ITAT, which opined that “the individual debtor account (in the separate debtor ledger) would have to be formally closed, removing it from this ledger”. Consequently, the ITAT restored the assessments, confirming the disallowances made by the AO.
Case Relied On:
Vijaya Bank v. Commissioner of Income Tax [(2010) 323 ITR 166(SC)]
Appearances:
Advocates Abraham Joseph Markos, V. Abraham Markos, Isaac Thomas, P.G. Chandapillai Abraham, and John Vithayathil, for the Appellant/ Taxpayer
Advocate Jose Joseph, for the Respondent/ Revenue
