By TIOL News Service

CHENNAI, JAN 11, 2017: THE ISSUE IS - Whether creation of a provision for bad debts in the corporate accounts, would impact the claim of bad debt u/s 36(1)(vii) in the regular computation of income. NO IS THE VERDICT.

Facts of the case:

The assessee, a NBFC, maintains books of accounts in accordance with the provisions of Companies Act and the mandate of the Reserve Bank of India as applicable to an NBFC. Parallelly, it maintains books in accordance with the provisions of the Act for the purpose of computation of income there under. Assessee, in finalizing its corporate accounts made a provision in respect of debts advanced by it that were not realizable. For the purpose of Income Tax, the bad debts were written off in the Profit and Loss Account and claimed as a deduction in the computation of income in terms of section 36(1)(vii). The claim was disallowed by AO, but allowed by CIT(A) and the Tribunal.

On appeal, the HC held that,

++ the maintenance of two separate sets of books, one for purposes of the Companies Act and the other for Income Tax, is perfectly in order and there is no embargo against the same. The error in the order of assessment is the juxtaposition of the two books by the assessing officer. The creation of a provision for bad debts in the corporate accounts thus does not, in any way, impact the claim of bad debt u/s 36(1)(vii) in the regular computation of income. It is a settled principle of law that having accepted an issue for several years, the Department, if it wishes to later agitate the same, should provide proper justification for the change in view;

++ the fact that the Assessee maintains two sets of books, one for the purpose of Companies Act and other for the purpose of the Act and the differing treatment of bad debts in both was well within the knowledge of AO from 1994 when the issue was first raised as would be apparent from the orders of the Tribunal for earlier years. To say that these facts were unearthed only in the course of assessment in 2006-07 is thus factually incorrect. As would be apparent from the orders of the Tribunal, the Assessee has been consistent in the methodology followed both in respect of maintenance of books as well as the treatment of bad debts.

(See 2017-TIOL-66-HC-MAD-IT)