VIJAYA BANK Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) Leave granted.

(2.) Whether it is imperative for the assessee-Bank to close the individual account of each of it's debtors in it's books or a mere reduction in the Loans and Advances or Debtors on the asset side of it's Balance Sheet to the extent of the provision for bad debt would be sufficient to constitute a write off is the question which we are required to answer in these civil appeals

(3.) In these civil appeals, we are concerned with Assessment Years 1993-1994 and 1994-1995. For the Assessment Year 1994-1995, the Assessing Officer disallowed a sum of Rs. 7,10,47,161/- which the assessee-Bank had reduced from Loans and Advances or Debtors on the ground that the impugned bad debt had not been written off in an appropriate manner as required under the Accounting principles. According to him, the impugned bad debt supposedly written off by the assessee-Bank was a mere provision and the same could not be equated with the actual write off of the bad debt, as per the requirement of Section 36(1)(vii) of the Income Tax Act, 1961 ['1961 Act', for short] read with Explanation thereto which Explanation stood inserted in 1961 Act by Finance Act, 2001 with effect from 1st April, 1989. The assessee carried the matter in appeal before the Commissioner of Income Tax (A) ['CIT(A)', for short], who opined that it was not necessary for the purpose of writing off of bad debts to pass corresponding entries in the individual account of each and every debtor and that it would be sufficient if the debit entries are made in the Profit and Loss Account and corresponding credit is made in the "Bad Debt Reserve Account". Against the decision of CIT (A) on this point, the Department preferred an appeal to the Income Tax Appellate Tribunal ['Tribunal', for short]. Before the Tribunal, it was argued on behalf of the Department that write off of each and every individual account under the Head 'Loans and Advances' or Debtors was a condition precedent for claiming deduction under Section 36(1)(vii) of 1961 Act. According to the Department, the claim of actual write off of bad debts in relation to Banks stood on a footing different from the accounts of the Non-Banking assessee(s), though it was not disputed before us that Section 36(1)(vii) of 1961 Act covers Banking as well as Non-Banking assessees. According to the assessee, once a provision stood created and, ultimately, carried to the Balance Sheet wherein Loans and Advances or Debtors depicted stood reduced by the amount of such provision, then, there was actual write off because, in the final analysis, at the year-end, the so-called provision does not remain and the Balance Sheet at the year-end only carries the amount of loans and advances or debtors, net of such provision made by the assessee for the impugned bad debt. The Tribunal, accordingly, upheld the above contention of the assessee on three grounds. Firstly, according to the Tribunal, the assessee had rightly made a provision for bad and doubtful debt by debiting the amount of bad debt to the Profit and Loss Account so as to reduce the profits of the year. Secondly, the provision account so created was debited and simultaneously the amount of loans and advances or debtors stood reduced and, consequently, the provision account stood obliterated. Lastly, according to the Tribunal, loans and advances or the sundry debtors of the assessee as at the end of the year lying in the Balance Sheet was shown as net of "provisions for doubtful debt" created by way of debit to the Profit and Loss Account of the year. Consequently, the Tribunal, on this point, came to the conclusion that deduction under Section 36(1)(vii) of 1961 Act was allowable.