By TIOL News Service

MUMBAI, FEB 26, 2018: THE issue before the Bench is - Whether when a claim is made relying on the decision of a High Court or a Tribunal, the issue at best becomes debatable in view of a contrary decision given by another High Court - YES: HC

Facts of the case

The Assessee-company, engaged in the business auto finance, filed its return for the relevant AY. During the assessment proceedings, the AO noticed that the Assessee had debited in its P&L account a sum representing "provision for doubtful overdue installments under Hire Purchase Finance Agreements", which the Assessee had claimed as bad debts u/s 36(1)(vii) of the Act relying on the decision of the Gujarat High Court in the case of Vithaldas H.Dhanjibhai Bardanwala. However, the AO disallowed the claim u/s 141(1)(a) on the ground that the amount represented mere provision for doubtful debts and, as such, could not be treated as bad debts. Therefore, the Assessee filed an application u/s 154 for deletion of the adjustment. It was contended before the AO that the adjustment could not be made in respect of a provision for doubtful installments, as its allowability was a debatable issue. The AO, however, rejected the application u/s 154.

On appeal before the CIT(A), it was contended by the Assessee that since the "provision for doubtful overdue installments under Hire Purchase Agreement" had been debited to the P&L account, the Assessee should be treated to have satisfied the conditions laid down u/s 36(1)(vii) r/w/s 36(2). Therefore, according to the Assessee, since the AO was not competent to examine the claim of deduction of 'provision' without conducting further enquiries in the matter, which was permissible only after issuing a notice u/s 143(2), he was not competent to issue intimation of adjustment and reject the Assessee's prayer made for rectification u/s 154. However, the CIT(A) rejected the appeal of the Assessee. On further appeal, the Tribunal held that the claim of "provision for doubtful overdue installments under Hire Purchase Finance Agreements" was clearly distinct and separate from one of claim of bad debt and was prima facie inadmissible on its own tenor and AO was justified in issuing an intimation of adjustment and rejecting the Assessee's application u/s 154.

After hearing the parties, the High Court held that,

++ the Assessing Officer completely ignored the note made by the assessee in its computation of return, indicating that the basis of claim for bad debts is the decision in Gujarat High Court in the case of Vithaldas H.Dhanjibhai Bardanwala. In such case, even a provision debited to the profit and loss account was allowed as bad debts, where corresponding credit entires are posted in the bad debts reserve account. It held that it was not necessary to post credit entries in the ledger account of the concerned parties. It was on the basis of such decision of the Gujarat High Court that the claim in respect of the provision for bad debts was made by the assessee. Once, reliance is placed upon a decision of a Court or Tribunal to make a claim, then even if the Assessing Officer has a different view and does not accept the view, yet the claim itself becomes debatable. This is so laid down in Instruction No.1814 dated 4th April, 1989 issued by the CBDT in respect of the scope of prima facie disallowance under Section 143(1)(a) of the Act. In fact, paragraph no.9 thereof provides that where a claim for deduction has been made on the basis of a decision of a High Court or Tribunal, then, even if there is contrary view expressed by another High Court or Tribunal or an appellate Authority, the issue itself becomes debatable. In such cases, no adjustment under Section 143(1)(a) of the Act is permissible. Thus, disallowance of a claim can be made only after hearing the assessee who has made the claim;

++ it is undisputed that the decision of Gujarat High Court was referred to in the computation of income. Thus, the Assessing Officer could not have disallowed the claim on a prima facie view that the same is inadmissible. In fact, there can be no dispute that even according to the Assessing Officer, the issue was debatable. This is evident from the fact when the assessee had filed an application under section 154 of the Act for deletion of the adjustment made of provision of bad debts by intimation under Section 143(1)(a) of the Act, it was disallowed on the ground that it is a debatable issue. This itself would indicate that whether the claim of a provision for bad debts is deductible under Section 36(1)(vii) of the Act or not is debatable. Further, the above claim for deductions as made by the assessee was by following the decision of the Gujarat High Court in Vithaldas H.Dhanjibhai Bardanwala. Thus, a debatable issue. Therefore, the same could not have been disallowed by way of an intimation under section 143(1)(a) of the Act;

++ the Section 36(1)(vii) of the Act was amended by the Finance act, 2001 by insertion of Explanation to Section 36(1)(vii) of the Act w.e.f. 1st April, 1989. While disposing of a Reference under Section 256(1) of the Act, the question proposed for opinion shall be answered taking into account the subsequent amendment to the law with retrospective effect, as they are clarificatory in nature. In such background, the Court find that the insertion done by Explanation to Section 36(1)(vii) of the Act (w.e.f. 1989) would arise for consideration while answering the proposed question in respect of Assessment Year 1993-94. Such amendment by addition of Explanation to Section 36(1)(vii) of the Act was a subject matter of consideration by the Supreme Court in Vijaya Bank. In such decision, the Court while applying the amended law, held that mere debit of a provision to the profit and loss account will not by itself be sufficient to constitute bad debts (write off). This must be accompanied by simultaneously also reducing the loans and advances from the asset side of the Balance Sheet. This would ensure that the amount shown as loans and advances (debtors) is net of the provisions made for bad debts;

++ while mere making of provision for bad debts will not by itself (on application of amended law) entitle the party to deduction, yet it would be a matter where the assessee should be given an opportunity to establish its claim. This by producing its evidence of the manner in which it treated the provision of bad debts written off in accounts as well as in its Balance Sheet. Therefore, the disallowance cannot be made by intimation under section 143(1)(a) of the Act, as it requires that a party be given an opportunity to establish its claim before disallowing it. It would have been a completely different matter if the Apex Court had ruled that in no case can provision for bad debts be allowed as a bad debt under section 36(1)(vii) of the Act. The allowance of the claim of provision for bad debt is entirely dependent upon how it is reflected in the Balance Sheet and its accounts. Therefore, for such purpose it is necessary that the party to be given an opportunity to establish its claim. Therefore, in the present facts, adjustment by way of disallowing deduction by intimation under section 143(1)(a) of the Act is not proper.

(See 2018-TIOL-354-HC-MUM-IT)