IFCI LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This appeal was listed along with seven other appeals, all of which were field by the Income Tax Department. Lead appeal of the Revenue was ITA No.1572 of 2006 and the issue raised in this appeal is linked with that. It pertains to the Assessment Year 1996-97. To put it in nutshell, during the year, the assessee created special reserve under Section 36(1)(viii) of the Act amounting to 12,906.18 lacs. The assessee had an opening balance of 26,963 lacs as on 01.04.1995. Out of these amounts, the assessee transferred a sum of 50 Crores to provision for bad and doubtful loans and thus, the assessee carried forward a sum of 34,869.18 lacs by way of special reserve under Section 36 (1) (viii) of the Act. This balance appears in the annual accounts of the assessee in Schedule II under the head "Reserve and Surplus". Thus the position of the special reserve account in the books of the assessee stood as under: <FRM>JUDGEMENT_611_LAWS(DLH)9_2011.html</FRM>

(2.) The sum of 12,906.18 lacs added by the assessee to special reserve has been debited by the assessee by way of appropriation of profit as per Profit & Loss Account. In the computation of income chargeable to tax, this amount was claimed as deduction under Section 36(1)(viii) of the Act.

(3.) As to the "provision for bad and doubtful loans" account to which the sum of 50 Crores has been transferred by the assessee from special reserve account, the assessee had an opening balance of 25,012.14 lacs. The assessee credited thereto not only the sum of 50 Crores transferred from special reserve account, but also the sum of 570 lacs provided for under the provisions of Section 36(1)(viia)(c) by way of an expenditure debited to Profit & Loss Account. The aggregate sum of 30,582.14 lacs as at the end of the year on 31.03.1996 has been reduced by the assessee from outstanding loans amounting to 11,15,921.06 lacs and only the net amount of 10,85,338.92 lacs has been shown as loans outstanding as per Schedule V of the balance-sheet. In addition to the sum of 30,582.14 lacs adjusted to loans recoverable under the caption "provision for bad and doubtful loans", the assessee has further written off outstanding loans by the sum of 18,624.61 lacs being the aggregate amount of bad debts written off in the books of accounts of the assessee. This sum of 18,624.61 lacs had been claimed as deduction by the assessee over and above the sum of 570 lacs provided under Section 36(1)(viia)(c) of the Act and the special reserve of 12,906.18 lacs created under the provisions of section 36(1)(viii) of the Act. The sum effect is that the assessee had reduced the amount of loans by a sum of 18,624.61 lacs by way of write off and by the sum of 30,582.14 lacs by way of "provision for bad and doubtful loans".