Madras High Court
Commissioner Of Income Tax I vs M/S The India Cements Ltd on 9 April, 2026
Author: G.Jayachandran
Bench: G. Jayachandran
Tax Case (Appeal).Nos.53 & 54 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved On: 30.03.2026 Delivered On: 09.04.2026
CORAM
THE HONOURABLE DR JUSTICE G. JAYACHANDRAN
AND
THE HONOURABLE MR.JUSTICE SHAMIM AHMED
Tax Case (Appeal).Nos.53 & 54 of 2010
Commissioner of Income Tax I,
Chennai. … Appellant in both appeals
vs.
M/s.The India Cements Ltd.,
827, Anna Salai,
Chennai … Respondent in both appeals
Prayer in T.C.A.No.53 of 2010: Tax Case Appeal filed under Section
260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate
Tribunal, Chennai ‘D’ Bench, dated 15.07.2009 ITA No.778/Mds/2008 Assessment
Year 2003-2004.
Prayer in T.C.A.No.54 of 2010: Tax Case Appeal filed under Section
260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate
Tribunal, Chennai ‘D’ Bench, dated 15.07.2009 ITA No.779/Mds/2008 Assessment
Year 2004-2005.
For Appellant : Mr.T.Ravi Kumar,
in both appeals Senior Standing Counsel.
For Respondent : Mr.R.Vijayaraghavan,
in both appeals for M/s.Subbaraya Aiyar Padmanabhan
Ramamani
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Tax Case (Appeal).Nos.53 & 54 of 2010
COMMON JUDGMENT
The respondent herein is a company primarily involved in the
manufacturing of cements. The assessment of tax for the Assessment Years 2003-04
and 2004-05 were challenged by the respondent and the same was partly allowed by
the Appellate authority. The appeal by the Revenue before the Tribunal was
dismissed through a common order. These two Tax Case Appeals filed under
Section 260 A of the Income Tax Act by the Revenue against the common order
dated 15.07.2009 passed by the ITAT in ITA No:778/Mds/08 and ITA
No:779/Mds/08, confirming the order of the Appellate Authority.
2. Brief facts leading to the appeals:
M/s.India Cements Ltd, filed return of income for the Assessment Year
2003-2004, admitting a loss of Rs.174,21,40,971/-. The return was processed under
Section 143(1) of the Act. Later, it was taken up for scrutiny after causing notice
under Section 143(2). On hearing the assessee, the Assessing Officer passed order on
31.03.2006 computing the income as below:-
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Tax Case (Appeal).Nos.53 & 54 of 2010Computation of Income
Income returned (-)
Rs.174,21,40,971/-
Add: Disallowances (as discussed above)
1. Deduction under Section 35D Rs.2,63,54,045/-
2. Interest not recognised:
(a) M/s.Industrial Chemicals Rs.1,62,01,890/-
Monomers Ltd
(b) ICL International Ltd Rs.1,50,68,835/-
(c) ICL Sugars Ltd Rs.5,56,91,955/-
(d) ICL Shipping Ltd Rs.4,69,19,385/-
Total Rs.13,38,82,065/-
3. Bad Debt Rs.8,18,65,744/-
4. Entertainment Rs.5,52,306/-
5. Guest House Rs.12,44,760/-
6. Provident Fund Rs.3,44,49,930/-
7. ESI Rs.46,332/- Rs.27,83,95,182/-
Assessed Loss (-) Rs.146,37,45,789/-
3. Against the above Assessment, the assessee went on appeal before the
Commissioner of Income Tax (Appeals), challenging:
(a) The addition of interest accrued on the advances to the
subsidiary/associates and charging it to the Profit and Loss Account to an extent of
Rs.25,854.20 Lakhs.
(b) The disallowance of the assessee’s claim towards bad debts to an extent
of Rs.8,18,65,744/- and;
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Tax Case (Appeal).Nos.53 & 54 of 2010
(c) The disallowance of deduction under Section 35D of a sum of
Rs.2,63,54,045/- as debt incurred in respect of debt restructuring exercise.
4. Upon considering the grounds of appeal and hearing the assessee, the
Appellate Authority, vide order in ITA No:194/06-07/A-III dated 31.01.2008, partly
allowed the assessee’s appeal on the following terms:-
a) Directed the Assessing Officer to delete the additions made on account
of interest on the advances to subsidiary/associates, holding that these advances or
debit balances are basically the result of commercially expedient action on the part of
the assessee and hence, the interest disallowance made by the Assessing Officer are
not justified.
b) Directed the Assessing Officer to delete the addition Rs.8,18,65,744/-
claimed by the assessee as bad debt. The Appellate Authority held that what is
required under the Act is that the assessee, should write off as the bad debt in its
books of accounts. In this case, the assessee has done so in consolidated manner
during the year under consideration. The write-off is given effect in the account of
each individual debtor in subsequent year. When the assessee has debited the amount
to the Profit and Loss Account and the contra entry is passed crediting the sundry
debtors account in a consolidated manner in the books of accounts of the assessee, the
conditions of Section 36(1) (vii) is fulfilled.
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Tax Case (Appeal).Nos.53 & 54 of 2010
c) The claim of deduction of Rs.2,63,54,045/- as expenditure incurred in
respect of debt restructuring exercise under Section 35 D disallowed by the Assessing
Officer upheld.
5. The Department, being aggrieved by the above order of the Appellate
Authority, preferred an Appeal before the ITAT in ITA No:778/Mds/2008 on the
ground that, the Appellate Authority had factually erred in holding that the assessee
had not made any fresh advances and not charged interest for the reasons of
commercial expediency. In fact, the assessee had actually made fresh advances and
the subsidiaries were also performing well, as their goodwill had increased
substantially. The assessee, in the earlier years, following the Mercantile System of
Accounting and Charging Interest on advances to its subsidiaries/associates.
Therefore, the addition made on the interest on advances is correct.
6. The Tribunal, after considering the material available got satisfied that
the assessee had commercial angle in its favour behind such advances. Relying on
the dictum laid in S.A.Builders Ltd vs. Commissioner of Income-Tax (Appeals),
Chandigarh reported in [2007] 288 ITR 1 (SC), it decided in favour of the assessee
saying, financial health of a company is not proportionate to its goodwill. Therefore,
the decision not to collect interest for the advance made, when the recovery of
principle itself doubtful, no notional interest can be added.
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Tax Case (Appeal).Nos.53 & 54 of 2010
7. Regarding the issue of bad debts, the Tribunal opined that the finding of
the Appellate Authority cannot be faulted. The bad debt has been written off in the
books of account of the assessee for claiming benefit under Section 36(1)(vii). The
Assessing Officer had no doubt about the bad debt. He disputes the manner in which
the debt been written off. Mere written off is sufficient for the claim of bad debt if it
is an honest judgement. As a result, the Tribunal dismissed the appeal I.T.A.No:
778/Mds/08: AY 2003-04.
8. Against the concurrent finding, the Revenue is in appeal. The appeal
T.C.(A).No:53/2010 admitted to decide the following substantial question of law:-
1. Whether on the facts and in the circumstances of
the case, the Income Tax Appellate Tribunal was right in
holding that the assessee company was justified in not offering
for tax the interest receivable on advances to the subsidiary
companies to the tune of Rs.13,38,82.065/- departing suddenly
from the practice followed hitherto without any change in the
circumstances?
2. Whether on the facts and in the circumstances of
the case, the Income Tax Appellate Tribunal was right in
holding that the assessee was justified in not showing the
interest accrued on advances to subsidiary companies on the
basis of wrong assumptions such as no fresh advances having
been made during the year.?
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Tax Case (Appeal).Nos.53 & 54 of 2010
3. Whether on the facts and in the circumstances of
the case, the Income Tax Appellate Tribunal was right in
holding that the decision of the Supreme Court in 288 ITR 1 was
applicable to the assessee’s case without appreciating that in
each case the assessee had to establish commercial expediency
especially when the assessee was paying huge amounts of
interest on its borrowing?
4. Whether on the facts and in the circumstances of
the case, the Income Tax Appellate Tribunal was right in
holding that the assessee’s claim of bad debts to the tune of
Rs.8,18,65,744/- was allowable even though the assessee had
not furnished party-wise details of the amount and the claim
was based only on the decision of the Head Office of the
company to write off in a consolidated manner, which did not
amount to fulfillment of the conditions of Section 36 (1) (vii) of
the Income Tax Act?
9. Insofar as the Assessment Year 2004-05, the assessee filed return
admitting loss of Rs.21,95,22,382/-. The case was processed u/s 143(1). Later
selected for scrutiny. The Assessing Officer vide order dated 26/12/2006, passed the
assessment order computing the tax payable as below:-
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Tax Case (Appeal).Nos.53 & 54 of 2010(A) Business:
Net business loss as per Rs.15,14,29,384/-
computation statement
ADD:- Additions/Disallowances:-
1. Share issue expenses disallowed as Rs.2,04,81,875/-
discussed @ Para No.1
2. Interest debited to share premium Rs.17,72,00,000/-
account, disallowed, as discussed
@ Para No.2
3. Depreciation on electrical items, Rs.53,52,147/-
restricted to 15% as discussed @
Para No.3
4. Interest not recognised by the Rs.16,73,13,00/- Rs.37,03,47,022
assessee, now assessed on accrual
as discussed @ Para No.4
Rs.21,89,17,638/-
Rounded to Rs.21,89,17,640/-
(B) Capital Gains: (-) Rs.6,80,92,998/-
Long-Term Capital Loss, as returned
Assessed Income Rs.21,89,17,640/-
Income-Tax thereon Rs.7,66,21,174/-
Add: Surcharge Rs.19,15,529/-
Rs.7,85,36,703/-
Less: TDS Rs.5,92,566/-
Rs.7,79,44,137/-
Add: Interest u/s 234B Rs.2,57,21,553/-
Demand Payable Rs.10,36,65,690/-
10. The assessee went on appeal before the Commissioner of Income Tax
(Appeals) in T.A.No.838/06-07/A-III challenging the above assessment order.
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Tax Case (Appeal).Nos.53 & 54 of 2010
The Appellate Authority, dismissed the assessee appeal in respect of
deduction of Rs.2,04,81,875/- However, allowed the assessee appeal in respect of its
challenge regarding:
(a) The disallowance of Rs.1673.13 lakhs towards non charging of Interest
on advances given by the assessee to its subsidiaries and associates.
(b) The disallowance of interest towards share premium on redemption of
deep discount bond by the company (Rs.17.72crores) and
(c) The disallowed Depreciation on electrical items extend of
Rs.53,52,147/-.
11. Unsatisfied with the reasoning for substantially allowing the assessee
appeal, the Revenue preferred appeal before the Tribunal in ITA No:779//Mds/08 and
contended that:-
(a) The assessee following the mercantile system of accounting and
claimed the income of interest accrued in all its previous years, suddenly omitted to
offer the interest accrued on advances to its subsidiaries claiming that only the real
income to be brought on account.
(b) For want of details under Section 43B, the Assessing Officer disallowed
the deduction of Rs.17.72 crores in the income computation. When Deep Discount
Bonds and Debentures are converted into premium loans, the interest remains unpaid.
Therefore charging of interest as expenditure against redemption premium again
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Tax Case (Appeal).Nos.53 & 54 of 2010
claiming it as deduction in the computation statement defeat the very purpose of
Section 43 B.
(c) Depreciation on electrical machinery is allowable only at 15%. Higher
rate of depreciation at the rate of 25% allowed in the previous year on electrical items
ipso facto cannot be extended for the subsequent years also without details. The
assessee having failed to provide details of electrical machinery for claiming
depreciation, the disallowance under this head by the Assessing Officer is to be
upheld.
12. The Tribunal confirmed the order of the Appellate Authority and
dismissed the revenue appeal.
13. The appeal against the Tribunal admitted by this Court to answer the
following substantial questions of law:-
1. Whether on the facts and in the circumstances of
the case, the Income Tax Appellate Tribunal was right in
holding that the assessee company was justified not offering for
tax the interest receivable on advances to the subsidiary
companies to the tune of Rs.16,73,13,000/- departing suddenly
from the practice followed hitherto without any change in the
circumstances?
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Tax Case (Appeal).Nos.53 & 54 of 2010
2. Whether on the facts and in the circumstances of
the case, the Income Tax Appellate Tribunal was right in
holding that the assessee was justified in not showing the
interest accrued on advances to subsidiary companies on the
basis of wrong assumptions such as no fresh advances having
been made during the year?
3. Whether on the facts and in the circumstances of
the case the Income Tax Appellate Tribunal was right in holding
that the decision of the Supreme Court in 288 ITR 1 was
applicable to the assessee’s case without appreciating that in
each case the assessee had to establish commercial expediency
especially when the assessee was paying huge amounts of
interest on its borrowings?
4. Whether on the facts and in the circumstances of
the case, the Income Tax Appellate Tribunal was right in
holding that the disallowance of Rs. 17.72 Crores being interest
debited to share premium account amounted to double
disallowance on the grounds that the assessee had not claimed
it in the profit & loss account and had claimed it only in the
statement of computation of income where it had disallowed the
same under section 43B, when the Commissioner of Income Tax
(Appeals) had not given opportunity to the Assessing Officer to
examine the claim that the assessee had actually made the
disallowance?
5. Whether on the facts and in the circumstances of
the case, the Income Tax Appellate Tribunal was right in
accepting that the assessee’s claim without noticing that in the
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Tax Case (Appeal).Nos.53 & 54 of 2010
Annexure V in the audit report the amount of Rs. 17.72 Crores
was not included in the disallowance under section 43B.?
6.Without prejudice the preceding question, whether
the Income Tax Appellate Tribunal was right in not holding that
the amount of Rs. 17.72 Crores should not be claimed as
deduction in the computation statement unless the amount
transferred from share premium account had been added back
in the computation?
14. The Learned Senior Standing Counsel representing the Income Tax
Department/the Appellant and the Learned Counsel for the assessee submitted written
notes for consideration of this Court in addition to their oral submissions.
15. The two issues in common for both the appeals taken up for
consideration first, before adverting to the other issues which are unique to the
respective appeals.
(a) Deviating the practice of following mercantile system of accounting,
not offering for tax the interest receivable on advances made to subsidiary company,
whether is justifiable on the ground of commercial expediency and on assumption no
fresh advance made to those subsidiary company during the year. Whether the
tribunal erred in following S.A.Builders case cited supra, which is not similar to the
facts of the case in hand.
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Tax Case (Appeal).Nos.53 & 54 of 2010
(b) Without actual writing off the bad debt in the books of accounts, merely
based on the decision of the assessee to write off at Head Office level in a
consolidated manner without actual write off in the branch account is allowable u/s
36(1)(vii).
16. According to the Learned Counsel for the Revenue, the Appellate
Authority as well as the Tribunal gravely erred by assuming that no fresh advances
made by the assessee to its subsidiaries. It had omitted to take into consideration the
fresh advance amounting to Rs.43,25,166/- to Industrial Chemicals and Monomers
Limited and Rs.344,000,000/- to ICL Securities Ltd. The assessee having
restructured its debts and agreed to infuse fresh funds of Rs.800 crores and Rs.40
crores to sale of non-core assets, the decision not to charge interest cannot be for any
commercial expediency. Without charging interest on accrual basis, by change of
accounting practise from mercantile system of income accrued to actual receipt to
evade tax not been considered by the Tribunal. The conclusion of the tribunal that
the subsidiaries /associate company of the assessee were not doing well is contrary to
the annual accounts which discloses the goodwill on net capital reserve arising on
account of investment in associate company at Rs.2325.73 lakhs. (Rs.2626.73 lakhs
as against Rs.611.40 lakhs as on 31.03.2002).
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Tax Case (Appeal).Nos.53 & 54 of 2010
17. The Learned Counsel for the appellant/revenue submitted that the facts
in S.A Builder’s case and the facts of the case in hand are different. Therefore, the
observations in S.A. Builders case have no relevance to the case in hand. Even
otherwise, the Hon’ble Supreme Court consisting three Judges Bench in Addl.
Commissioner of Income Tax -vs- Tulip Star Hotels Ltd., had opined the view
expressed in S.A.Builders by two judges bench needs reconsideration. Therefore, the
S.A.Builder’s case cannot be binding, though later Tulip Star Hotel’s case was
dismissed as withdraw in view of Low Tax Liability.
18. The assessee had not furnished party-wise details of the bad debts on
the ground that the list is voluminous. As per the Schedule-VII, the amount written
off is shown as Rs.775.47 lakhs. Whereas as per the Profit and Loss Accounts, the
assessee had written off Rs.41.19 lakhs only. The remaining Rs.7.7 crores actually
not written off but only a provision is made. The assessee had only adjusted it against
the debtors balance and had claimed the same in the income tax adjustment statement
which is not valid. The assessee without debiting the bad debts in the profit and loss
account or in the provision for doubtful debts claimed reduction which is not
allowable being not in accordance with the proviso of Section 36(1)(vii).
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Tax Case (Appeal).Nos.53 & 54 of 2010
19. In contra, regarding not charging interest on loans to
subsidiaries/associates, the Learned Counsel for the assessee contended that, notional
interest on interest free loans to subsidiaries and associates cannot be brought to tax
when the advances were made for commercial reasons and when the interest not
charged due to the weak financial condition of the subsidiaries. The uncertainty of
recovery from subsidiaries is not an interest actually accrued. The advances to
subsidiaries were made purely on grounds of commercial expediency. Both CIT (A)
as well as the Tribunal deleted the addition on the basis of fact and applying the ratio
laid by the Hon’ble Supreme Court in S.A.Builders wherein the Apex Court has
observed that where a holding company has a deep interest in its subsidiary, advances
made for business purposes of the subsidiary should qualify as being for commercial
expediency.
20. The assessee had not charged interest accrued on loans to its
subsidiaries taking into consideration its financial position. In view of no certainty of
recovery of interest from subsidiaries only the real income brought in the profit and
loss account as per the established principle of accounting standard. For the advances
made to its subsidiaries, the assessee had its own funds in the form of capital and
reserves in its earlier years, therefore it is to be presumed that the loans have been
made from the own funds. Hence, no disallowance on borrowings can arise.
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21. Regarding bad debts, the learned counsel for the assessee states that
write off first effected on a consolidated basis at the Head Office and reflected in the
printed financial statements. Thereafter, corresponding entries are passed in the
individual debtor accounts at various regional offices. During the particular year of
assessment at the year end i.e., 31st March, the assessee write off the receivables as
bed debts and claimed the same as deduction under Section 36(1)(vii). The
corresponding entries are passed in the individual accounts at regional office the
following year. The entries in the individual account relates back to the 31st March of
the previous year. The reasoning of the Assessing Officer to disallow the claim solely
on his misunderstanding of the accounting procedure. Whereas, the CIT(A) and the
ITAT had accepted the assessee claim. For the first time in the appeal the department
had raised the ground that the details of debtor not furnished despite the fact that the
Books of Account maintained and produced in support of the write-off to the
satisfaction of the ITAT.
22. In T.R.F Ltd vs. Commissioner of Income Tax reported in [2010] 323
ITR 397(SC) read with C.B.D.T Circular No.12/2016 dated 30.05.2016, it is clarified
that once a bad debt is written off in the books of account, same to be allowed as a
deduction. In Vijaya Bank Ltd vs. Commissioner of Income-Tax reported in [2010]
323 ITR 166 (SC), the Hon’ble Supreme Court has held that even in cases involving
provision for bad and doubtful debts, where such provision is adjusted against the
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Tax Case (Appeal).Nos.53 & 54 of 2010
debtor accounts and only the net debtor balance is reflected in the balance sheet, it
would amount to an actual write-off of the debt and would be entitled to deduction
under Section 36(1)(vii).
23. Heard the Learned Counsel for the appellant and the respondent
and records perused.
24. The essence of the substantial questions of law framed in both the
appeals are primarily centers on two points:
First, Whether the assessee following mercantile system of accounting
legally justified in not charging the interest receivable on advances to subsidiary
companies on the ground the loans were extended for commercial expediency, but the
recovery of the debt become uncertain due to the financial condition of the
subsidiaries, hence interest did not actually accrued. Whether this justification is in
tune with Section 43B of the Act and is the dictum of the Hon’ble Supreme Court
rendered in S.A.Builders Ltd vs. Commissioner of Income-Tax (Appeals),
Chandigarh reported in [2007] 288 ITR 1 (SC) still holds the field and applicable to
the facts of the assessee case.
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Tax Case (Appeal).Nos.53 & 54 of 2010Secondly, whether the Tribunal view that the bad debts written off at Head
office level on consolidated manner without actual write off in the branch account
could be claimed as deduction under Section 36(1)(vii), if it is the honest judgment of
the assessee, is sustainable when same is contrary to the Accounting Standard and the
judicial pronouncements.
25. To begin, it may be necessary to understand how for taxing purpose
total income is computed and what are all the income excluded from total income.
Section 5 of Income Tax Act, 1961.
Scope of total income.
(1) Subject to the provisions of this Act, the total income of any
previous year of a person who is a resident includes all income from
whatever source derived which-
(a) is received or is deemed to be received in India in
such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to
him in India during such year; or
(c) accrues or arises to him outside India during such
year:
Provided that, in the case of a person not ordinarily
resident in India within the meaning of sub-section (6) of section 6,
the income which accrues or arises to him outside India shall not be
so included unless it is derived from a business controlled in or a
profession set up in India.
(2) Subject to the provisions of this Act, the total income of any
previous year of a person who is a non-resident includes all income
from whatever source derived which-
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Tax Case (Appeal).Nos.53 & 54 of 2010
(a) is received or is deemed to be received in India
in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise
to him in India during such year.
26. In the case in hand, the assessee, being a Company incorporated in
India, it has to follow the mercantile system of accounting, which means the income
accrued, even if not actually received, is deemed to be received and to be brought
under the head ‘Total Income.’ However, while computing the total income, certain
income such as income from agricultural do not form part of total income. The list of
exempted sources of income are mentioned in Chapter-III of the Income Tax Act,
which commences from Section 10 and end with Section 13B.
27. For the purpose of computing the profits and gains of business, certain
deductions are permissible. The Sections which are relevant for the purpose of this
case are: Section 43B of Income Tax Act, (certain deductions to be only on actual
payment) and Section 36(1)(vii) of Income Tax Act, 1961 (other deduction – Bad
debt).
Notwithstanding anything contained in any other provision of
this Act, a deduction otherwise allowable under this Act in
respect of –
a)…
b)…
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Tax Case (Appeal).Nos.53 & 54 of 2010
c)…
d) any sum payable by the assessee as interest on any loan or
borrowing from any public financial institution or a State
financial corporation or a State Industrial Investment
Corporation, in accordance with the terms and conditions of the
agreement governing such loan or borrowing or
….
..
Explanation 3 C: **(inserted by the Finance Act, 2006 w.e.f
1/04/1989) For the removal of doubts, it is hereby declared that
a deduction of any sum, being interest payable under clause (d)
of this section, shall be allowed if such interest has been
actually paid and any interest referred to in that clause which
has been converted into a loan or borrowing shall not be
deemed to have actually paid.
28. In so far as bad debts, while computation income referred to in section
28, the bad debts which is written off as irrevocable in the accounts of the assessee in
the previous year is deductible, subject to the restrictions mentioned in sub-section
(2) of Section 36.
36. Other deductions.—
“(1) The deductions provided for in the following clauses shall
be allowed in respect of the matters dealt with therein, in
computing the income referred to in Section 28—
…….
(vii) subject to the provisions of sub-section (2), the amount of
any bad debt or part thereof which is written off as
irrecoverable in the accounts of the assessee for the previous
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Tax Case (Appeal).Nos.53 & 54 of 2010
year.”
…
…
(2) In making any deduction for bad debt or part thereof, the
following provisions shall apply –
(i) no such deduction shall be allowed unless such debt or part
thereof has been taken into account in computing the income of
the assessee of the previous year in which the amount of such
debt or part thereof is written off or of an earlier previous year,
or represents money lent in the ordinary course of the business
of banking or money-lending which is carried on by the
assessee;
(ii) if the amount ultimately recovered on any such debt or part
of debt is less than the difference between the debt or part and
the amount so deducted, the deficiency shall be deductible in the
previous year in which the ultimate recovery is made;
(iii) any such debt or part of debt may be deducted if it has
already been written off as irrecoverable in the accounts of an
earlier previous year, (being a previous year relevant to the
assessment year commencing on the 1st day of April, 1988, or
any earlier assessment year) but the [Assessing Officer] had not
allowed it to be deducted on the ground that it had not been
established to have become a bad debt in that year;
(iv)where any such debt or part of debt is written off as
irrecoverable in the accounts of the previous year [(being a
previous year relevant to the assessment year commencing on
the 1st day of April, 1988, or any earlier assessment year) and
the [Assessing Officer] is satisfied that such debt or part
became a bad debt in any earlier previous year not falling
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Tax Case (Appeal).Nos.53 & 54 of 2010
beyond a period of four previous years immediately preceding
the previous year in which such debt or part is written off, the
provisions of sub-section (6) of section 155 shall apply;
(iv) where such debt or part of debt relates to advances made by
an assessee to which clause (viia) of sub-section (1) applies, no
such deduction shall be allowed unless the assessee has debited
the amount of such debt or part of debt in that previous year to
the provision for bad and doubtful debts account made under
that clause.”
29. On reading the above provisions regarding deduction of bad debt, we
can safely conclude that from 1st April 1989, a deduction for a bad debt can be
claimed in the year it is written off as irrecoverable in the books of account, and
cannot include any provision for bad or doubtful debts made in the accounts. Merely
stating that a bad and doubtful debt is an irrecoverable is not sufficient to claim
deduction. Appropriate treatment in the accounts, together with compliance of the
conditions in sections 36(1)(vii), 36(2), and the explanation to section 36(1)(vii), are
mandatory. Write off without following the mandate would not entitle the taxpayer to
claim a deduction.
(i) S.A.Builders Ltd vs. Commissioner of Income-Tax (Appeals),
Chandigarh reported in [2007] 288 ITR 1 (SC), held as below:
“30. In the present case, neither the High Court nor
the Tribunal nor other authorities have examined whether thePage Nos.22/41
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Tax Case (Appeal).Nos.53 & 54 of 2010amount advanced to the sister concern was by way of
commercial expediency.
32. The High Court and the other authorities should
have examined the purpose for which the assessee advanced the
money to its sister concern, and what the sister concern did with
this money, in order to decide whether it was for commercial
expediency, but that has not been done.
36. We agree with the view taken by the Delhi High
Court in CIT v. Dalmia Cement (B) Ltd. [(2002) 254 ITR 377
(Del)] that once it is established that there was nexus between
the expenditure and the purpose of the business (which need not
necessarily be the business of the assessee itself), the Revenue
cannot justifiably claim to put itself in the armchair of the
businessman or in the position of the Board of Directors and
assume the role to decide how much is reasonable expenditure
having regard to the circumstances of the case. No businessman
can be compelled to maximise its profit. The Income Tax
Authorities must put themselves in the shoes of the assessee and
see how a prudent businessman would act. The authorities must
not look at the matter from their own viewpoint but that of a
prudent businessman. As already stated above, we have to see
the transfer of the borrowed funds to a sister concern from the
point of view of commercial expediency and not from the point
of view whether the amount was advanced for earning profits.
37. We wish to make it clear that it is not our opinion
that in every case interest on borrowed loan has to be allowed if
the assessee advances it to a sister concern. It all depends on
the facts and circumstances of the respective case. For instance,Page Nos.23/41
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Tax Case (Appeal).Nos.53 & 54 of 2010if the Directors of the sister concern utilise the amount
advanced to it by the assessee for their personal benefit,
obviously it cannot be said that such money was advanced as a
measure of commercial expediency. However, money can be
said to be advanced to a sister concern for commercial
expediency in many other circumstances (which need not be
enumerated here). However, it is obvious that a holding
company has a deep interest in its subsidiary, and hence if the
holding company advances borrowed money to a subsidiary and
the same is used by the subsidiary for some business purposes,
the assessee would, in our opinion, ordinarily be entitled to
deduction of interest on its borrowed loans.”
30. Later, in Commissioner of Income Tax vs. Tulip Star Hotels Ltd., the
Delhi High Court, following the ruling in S.A.Builder’s case, dismissed the appeal by
the Revenue by observing that for the effective control of new hotel acquired by the
assessee under its management, it had invested in a wholly owned subsidiary.
Therefore, the assessee is entitled to claim deduction of interest on the borrowed
funds.
31. Being aggrieved, the Revenue filed an SLP before the Supreme Court.
Though a Bench of Three Hon’ble Judges expressed the dictum in S.A.Builders
requires reconsideration. No order on merits was passed, but later dismissed as
withdrawn in view of circular issued by CBDT, being a case of Low Tax Liability.
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Tax Case (Appeal).Nos.53 & 54 of 2010
32. In Vijaya Bank Ltd vs. Commissioner of Income-Tax reported in
[2010] 323 ITR 166 (SC), the following two questions arose for consideration:-
1) The manner in which actual write off takes place under the Accounting
principles.
2) Whether it is imperative for the assessee-bank to close the individual
account of each debtor in its books or a mere reduction in the “Loan and Advances
Account” or debtors to the extent of the provision for bad and doubtful debt is
sufficient.
33. The Hon’ble Supreme Court, answered those two questions as
under:-
“6. The first question is no more res integra. Recently, a
Division Bench of this Court in Southern Technologies Ltd. v.CIT
[(2010) 2 SCC 548: (2010) 320 ITR 577] [in which one of us (S.H.
Kapadia, J.) was a party] had an occasion to deal with the first
question and it has been answered, accordingly, in favour of the
assessee vide ITR para 25, which reads as under:
“Prior to 1-4-1989, the law, as it then stood, took the
view that even in cases in which the assessee(s) makes only a
provision in its accounts for bad debts and interest thereon and even
though the amount is not actually written off by debiting the P&L
account of the assessee and crediting the amount to the account of the
debtor, the assessee was still entitled to deduction under Section
36(1)(vii). (See CIT v.Jwala Prasad Tiwari [(1953) 24 ITR 537Page Nos.25/41
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Tax Case (Appeal).Nos.53 & 54 of 2010(Bom)] and Vithaldas H. Dhanjibhai Bardanwala v.CIT [(1981) 130
ITR 95 (Guj)]) Such state of law prevailed up to and including
Assessment Year 1988-1989. However, by insertion (w.e.f. 1-4-1989)
of a new Explanation to Section 36(1)(vii), it has been clarified that
any bad debt written off as irrecoverable in the account of the
assessee will not include any provision for bad and doubtful debt
made in the accounts of the assessee. The said amendment indicates
that before 1-4-1989, even a provision could be treated as a write-off.
However, after 1-4-1989, a distinct dichotomy is brought in by way of
the said Explanation to Section 36(1)(vii). Consequently, after 1-4-
1989, a mere provision for bad debt would not be entitled to
deduction under Section 36(1)(vii). To understand the above
dichotomy, one must understand ‘how to write-off’. If an assessee
debits an amount of doubtful debt to the P&L account and credits the
asset account like sundry debtor’s account, it would constitute a
write-off of an actual debt. However, if an assessee debits ‘provision
for doubtful debt’ to the P&L account and makes a corresponding
credit to the ‘current liabilities and provisions’ on the liabilities side
of the balance sheet, then it would constitute a provision for doubtful
debt. In the latter case, the assessee would not be entitled to
deduction after 1-4-1989.”
…..
8. Coming to the second question, we may reiterate that it
is not in dispute that Section 36(1)(vii) of the 1961 Act applies both to
banking and non-banking businesses. The manner in which the write-
off is to be carried out has been explained hereinabove. It is
important to note that the assessee Bank has not only been debiting
the profit and loss account to the extent of the impugned bad debt, it
is simultaneously reducing the amount of loans and advances or the
debtors at the year end, as stated hereinabove. In other words, the
amount of loans and advances or the debtors at the year end in the
balance sheet is shown as net of the provisions for impugned debt.
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Tax Case (Appeal).Nos.53 & 54 of 2010
However, what is being insisted upon by the assessing officer is that
mere reduction of the amount of loans and advances or the debtors at
the year end would not suffice and, in the interest of transparency, it
would be desirable for the assessee Bank to close each and every
individual account of loans and advances or debtors as a
precondition for claiming deduction under Section 36(1)(vii) of the
1961 Act. This view has been taken by the assessing officer because
the assessing officer apprehended that the assessee Bank might be
taking the benefit of deduction under Section 36(1)(vii) of the 1961
Act, twice over. [See the order of CIT(A) at pp. 66, 67 and 72 of the
paper book, which refers to the apprehensions of the assessing
officer.] In this context, it may be noted that there is no finding of the
assessing officer that the assessee had unauthorisedly claimed the
benefit of deduction under Section 36(1)(vii), twice over. The order of
the assessing officer is based on an apprehension that, if the assessee
fails to close each and every individual account of its debtor, it may
result in the assessee claiming deduction twice over. In this case, we
are concerned with the interpretation of Section 36(1)(vii) of the 1961
Act. We cannot decide the matter on the basis of
apprehensions/desirability. It is always open to the assessing officer
to call for details of individual debtor’s account if the assessing
officer has reasonable grounds to believe that the assessee has
claimed deduction, twice over. In fact, that exercise has been
undertaken in subsequent years. There is also a flip side to the
argument of the Department. The assessee has instituted recovery
suits in courts against its debtors. If individual accounts are to be
closed, then the debtor/defendant in each of those suits would rely
upon the bank statement and contend that no amount is due and
payable in which event the suit would be dismissed.
9. Before concluding, we may refer to an argument
advanced on behalf of the Department. According to the Department,
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Tax Case (Appeal).Nos.53 & 54 of 2010
it is necessary to square off each individual account failing which
there is likelihood of escapement of income from assessment.
According to the Department, in cases where a borrower’s account is
written off by debiting profit and loss account and by crediting loans
and advances or debtors accounts on the asset side of the balance
sheet, then, as and when in the subsequent years if the borrower
repays the loan, the assessee will credit the repaid amount to the
loans and advances account and not to the profit and loss account
which would result in escapement of income from assessment. On the
other hand, if bad debt is written off by closing the borrower’s
account individually, then the repaid amount in subsequent years will
be credited to the profit and loss account on which the assessee Bank
has to pay tax. Although, prima facie, this argument of the
Department appears to be valid, on a deeper consideration, it is not
so for three reasons. Firstly, the head office accounts clearly
indicate, in the present case, that, on repayment in subsequent years,
the amounts are duly offered for tax. Secondly, one has to keep in
mind that, under the accounting practice, the accounts of the rural
branches have to tally with the accounts of the head office. If the
repaid amount in subsequent years is not credited to the profit and
loss account of the head office, which is ultimately what matters,
then, there would be a mismatch between the rural branch accounts
and the head office accounts. Lastly, in any event, Section 41(4) of
the 1961 Act, inter alia, lays down that, where a deduction has been
allowed in respect of a bad debt or a part thereof under Section 36(1)
(vii) of the 1961 Act, then, if the amount subsequently recovered on
any such debt is greater than the difference between the debt and the
amount so allowed, the excess shall be deemed to be profits and gains
of business and, accordingly, chargeable to income tax as the income
of the previous year in which it is recovered. In the circumstances, we
are of the view that the assessing officer is sufficiently empowered to
tax such subsequent repayments under Section 41(4) of the 1961 Act
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Tax Case (Appeal).Nos.53 & 54 of 2010
and, consequently, there is no merit in the contention that, if the
assessee succeeds, then it would result in escapement of income from
assessment.
34. In T.R.F Ltd vs. Commissioner of Income Tax reported in [2010] 323
ITR 397(SC), Hon’ble Supreme Court held as below:
“4. This position in law is well settled. After 1-4-1989, it
is not necessary for the assessee to establish that the debt, in fact, has
become irrecoverable. It is enough if the bad debt is written off as
irrecoverable in the accounts of the assessee. However, in the
present case, the assessing officer has not examined whether the debt
has, in fact, been written off in the accounts of the assessee. When
bad debt occurs, the bad debt account is debited and the customer’s
account is credited, thus, closing the account of the customer. In the
case of companies, the provision is deducted from sundry debtors. As
stated above, the assessing officer has not examined whether, in fact,
the bad debt or part thereof is written off in the accounts of the
assessee. This exercise has not been undertaken by the assessing
officer. Hence, the matter is remitted to the assessing officer for de
novo consideration of the abovementioned aspect only and that too
only to the extent of the write-off.”
35. The Commissioner of Income Tax, Ahmedabad vs. M/s.Gujarat
Cyproment Ltd, (2019) 308 CTR 309 (SC) order dated 21.02.2019 is in respect of
interest liability which accrued during the relevant assessment year but not actually
paid back by the assessee rather was sought to be adjusted in the future loan of Rs
8.crores. In this contest, the Hon’ble Supreme Court referring Section 43 B and the
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Tax Case (Appeal).Nos.53 & 54 of 2010
earlier judgment of the Apex Court in Eicher Motors Ltd vs. Commissioner of
Income Tax [(2009) 315 ITR 312], held as below:-
“14. In so concluding, this Court is supported by the
decision of the Madhya Pradesh High Court in Eicher Motors Ltd. v.
CIT [Eicher Motors Ltd. v. CIT, 2006 SCC OnLine MP 731: (2009)
315 ITR 312] and subsequently, the judgment of the High Court of
Telangana and Andhra Pradesh in CIT v. Pennar Profiles Ltd. [CIT
v. Pennar Profiles Ltd., 2015 SCC OnLine Hyd 51] In Eicher Motors
[Eicher Motors Ltd. v. CIT, 2006 SCC OnLine MP 731 : (2009) 315
ITR 312], the Court noted:
“8. As observed supra, Explanation 3-C has now in clear
terms provided that such conversion of interest amount into loan
shall not be deemed to be regarded as “actually paid” amount within
the meaning of Section 43-B. In view of clear legislative mandate
removing this doubt and making the intention of legislature clear in
relation to such transaction, it is not now necessary for this Court to
interpret the unamended Section 43-B in detail, nor it is necessary for
this Court to take note of facts in detail as also the submissions urged
in support of various contentions except to place reliance on
Explanation 3-C to Section 43-B and answer the questions against
the assessee and in favour of Revenue.”
15. The Court in Pennar Profiles Ltd. [CIT v. Pennar
Profiles Ltd., 2015 SCC OnLine Hyd 51] considered the decisions in
Mahindra Nissan [CIT v. Mahindra Nissan Allywin Ltd., 1998 SCC
OnLine AP 202 : (1998) 4 ALD 11], Vinir Engineering [Vinir Engg.
(P) Ltd. v. CIT, 2008 SCC OnLine Kar 653] and Eicher Motors
[Eicher Motors Ltd. v. CIT, 2006 SCC OnLine MP 731 : (2009) 315
ITR 312] and held as follows:
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Tax Case (Appeal).Nos.53 & 54 of 2010“8. In this backdrop, we have perused the provisions
contained in Section 43-B of the Act, in particular, Explanation 3-C
thereof, which was inserted by the Finance Act, 2006 with
retrospective effect from 1-4-1989. This provision was inserted in
2006 and hence, this Court in Mahindra Nissan case [CIT v.
Mahindra Nissan Allywin Ltd., 1998 SCC OnLine AP 202 : (1998) 4
ALD 11], had no occasion to deal with the case in the light of this
provision. Insofar as the Karnataka High Court is concerned, though
this provision was existing on the date of judgment, it appears that it
was not brought to the notice of learned Judges and hence, the
Division Bench proceeded to consider and decide the appeal of the
assessee without referring to Explanation 3-C appended to Section
43-B of the Act.
9. As a matter of fact, from reading of Explanation 3-C, in
our opinion, the question as raised in the present appeals stands
answered without further discussion. This provision was inserted for
removal of doubts and it was declared that deduction of any sum,
being interest payable under clause (d) of Section 43-B of the Act,
shall be allowed if such interest has been actually paid and any
interest referred to in that clause, which has been converted into a
loan or borrowing, shall not be deemed to have been actually paid.
Thus, the doubt stands removed in view of Explanation 3-C. This
provision was considered by the Madhya Pradesh High Court in
Eicher Motors Ltd. v. CIT [Eicher Motors Ltd. v. CIT, 2006 SCC
OnLine MP 731: (2009) 315 ITR 312] to hold that in view of
Explanation 3-C appended to Section 43-B with retrospective effect
from 01-04-1989, conversion of interest amount into loan would not
be deemed to be regarded as actually paid amount within the
meaning of Section 43-B of the Act.
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Tax Case (Appeal).Nos.53 & 54 of 2010
12. In light of the introduction of Explanation 3-C, this
Court does not consider it necessary to discuss the precedents relied
upon by the assessee delivered prior to the enactment of the Finance
Act, 2006. As regards the decision in Shakti Spring Industries [CIT v.
Shakti Spring Industries (P) Ltd., 2013 SCC OnLine Jhar 18] , the
interest due in that case was offset against a subsidy which the
assessee was entitled to, and it did not involve an instance where it
was “converted into a loan or borrowing” within the meaning of
Explanation 3-C. It is perhaps for this reason that Explanation 3-C
was not discussed.”
36. Conclusion:
The clear and specific case of the Department against the assessee
Company is that in the earlier years the assessee company had been charging interest
on advances to its subsidiaries/associates. It was following the mercantile system of
accounting. While so, for the Assessment Years 2003-04 and 2004-05, to reduce the
incidence of tax, the assessee against the accounting standard, had not charged
interest on advances to its subsidiaries.
37. The Appellate Authority as well as the Tribunal has held that the
interest on advances were not charged to auger the commercial expediency and not
charging interest was a prudent business measure in view of the fact that the
subsidiaries were not financially doing well. For each of these four subsidiaries,
different reasons were recorded to arrive at the conclusion as to why they were not
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Tax Case (Appeal).Nos.53 & 54 of 2010
financially doing well and how the decision not to charge interest fall within the
meaning of ‘commercial expediency’.
38. We are of the view that the law and the decisions of the Court cited
does not endorse the manner in which the assessee deviated from the previous years
and omit to charge interest on the ground that the recovery of the principal amount is
in doubt without write off the debt as required under the law. Also, the claim of the
assessee company that the advance made to the subsidiaries from the reserve funds
available with the assessee company at that point of time was accepted by the
Appellate Authority without any verification. No data referred in the order of the
Appellate Authority to justify the said conclusion. The order of the Appellate
Authority also silent about the details of the statement submitted by the assessee to
satisfy that the assessee company had surplus reserve to advance loans to its
subsidiaries. In this regard, the Tribunal had failed to properly consider the grounds
of appeal raised by the Department. Contrarily, it had invented a new reasons to
interfere the order of the Assessing Officer. For example, while the assessee
accepting the advances made to its subsidiaries and collecting interest for the earlier
years, had given commercial expediency as a reason for not charging for the
subsequent Assessment Years under consideration. Whereas, the Tribunal had erred
by treating the advance to the Industrial Chemicals & Monomers Ltd (ICMR) as not
an advance but an undeniable capital subscription. In respect of another subsidiary
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Tax Case (Appeal).Nos.53 & 54 of 2010
Company, namely ICL International Ltd, the Tribunal has held that the advances to
this subsidiary, which provided logistic support services to the cement transport of
the assessee company and advances were only running accounts in the ordinary
course of business. Hence, no notional interest can be added, even if the assessee
follow the mercantile system of accounting.
39. In our considered view, the Appellate Authority as well as the Tribunal
badly erred in misapplying the judgment of S.A.Builders, which is not similar to the
facts of the case in hand. Further invented new reasons for deciding in favour of the
assessee, which is neither pleaded nor supported by records.
40. The unique dispute in respect to the assessment for the Assessment
Year 2004-05, is with regard to the disallowance of interest amount Rs.17.72 crores
debited to the share premium account, we find that the assessee company had
redeemed Deep Discount Bonds issued by the assessee company to Deutsche Bank
and later transferred to UTI. Rs.17.72 crores represents the discount accrued on
conversion of few of the debentures and bonds into term loans. When the said term
loan with UTI got settled later, the assessee had claimed this as an expense.
Whereas, the Assessing Officer has opined that when Deep Discount Bonds and
Debentures are converted into premium loans, the interest remains unpaid.
Therefore, charging of the interest as expenditure against redemption premium as
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Tax Case (Appeal).Nos.53 & 54 of 2010
well as claiming deduction in the computation statement goes against the purpose of
Section 43B. The Tribunal, after examining the paper book produced by the assessee
has held that Rs.17.72 crores disallowed by the Assessing Officer is part of Rs.88.91
crores added back under Section 43B wrongly.
41. It is an admitted fact that UTI is not the original allottee of the Deep
Discount Bonds and also it was not a party to the CDR. Therefore, till the conversion
of UTI Bonds into term loan, the interest payable (as redemption premium) and the
subsequent interest debited to the Profit and Loss Account remained unpaid. The
amount was eventually waived by UTI consequent to one-time settlement and this
fact is also not in dispute.
42. In such facts and circumstances, the Appellate Authority has held that
the disallowance under Section 43B starts when the expenditure is debited and not
when paid. Further, it had observed that, when the assessee had not claimed the
expenditure in the Profit and Loss Account and has claimed it in the computation of
income, it was disallowed under Section 43B. Therefore, there was no justification of
disallowance of the said amount again. As a result, the Authority directed the
Assessing Officer to delete the addition of Rs.17.72 crores.
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Tax Case (Appeal).Nos.53 & 54 of 2010
43. The Tribunal, after being satisfied by the details found in the paper
book relied by the assessee had held that those materials were produced before the
Assessing Officer and available with him. However, had disallowed the claim
holding that the details to claim deduction had not made available by the assessee.
44. It is strange to note that the Tribunal, while holding as above, had not
mentioned what are the materials produced by the assessee and considered by it. A
vague and general observation that the paper book contains the required details and
that those details had satisfied them to hold the addition of Rs.17.72 crores by
Assessing Officer is erroneous and is not a justifiable finding on fact, since the
Appellate Authority CIT(A) as well as the Tribunal had consciously omitted to take
into consideration that the assessee, in its Audit Report Annexure-V, had not included
Rs.17.72 crores in the disallowance under Section 43B.
45. If at all there is any necessity to reappreciate the facts is view of new
plea or document raised in the appeal, in all fairness, the matter should have been
remitted back to Assessing Officer for fresh consideration of the deduction claimed.
Instead, without indicating which document provided satisfaction for them to reverse
the finding of the Assessing Officer and without any plausible explanation from the
assessee for not disclosing this amount in Annexure-V of the Audit Report, the
appeal of the assessee was allowed by CIT (A) and the same was confirmed by the
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Tax Case (Appeal).Nos.53 & 54 of 2010
ITAT.
46. To sum up, the above discussion leads to the following irresistible
conclusion:-
(a) The assessee’s claim before the Assessing Officer regarding non-
charging of interest on advances to subsidiaries, deviating from the prevailing
accounting practice of earlier years, was based on the financial condition of the
subsidiary companies. If the financial condition of the subsidiary company was so
bad, the debt should have been write off before foregoing the interest accrued.
Without such change, the non-charging of interest is impermissible. When the
disallowance by the Assessing Officer was challenged before the Appellate
Authority, the assessee realising that the said reason will not sustain, hence it has put
forth different defence and succeeded by citing the ruling in S.A.Builders was
applicable to its case.
(b) In fact, S.A.Builder case is in respect of interest on borrowed capital
advanced to third party as loan. The assessee which borrowed loan from a bank and
advanced part of it to its sister concern (a subsidiary) as interest-free loan. Whereas,
the assessee in this case, the advance to subsidy was not made interest-free. For the
previous years, the interest accrued was included in the Profit and Loss Account.
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Tax Case (Appeal).Nos.53 & 54 of 2010
There was no change of character of the said advance from loan on interest to a loan
without interest. Whereas, the Tribunal while deciding the appeal by the Revenue,
substituted its own view on the character of the advance and had termed the advance
to one of its subsidiary – ICMR, as capital subscription to a company and for the
other subsidiary – ICL International Ltd., as advances under running account. These
observations, which the Tribunal to confirm the order of the CIT(A) is neither based
on the information disclosed by the assessee in its books of account nor in the
pleadings before the Assessing Officer or the Commissioner of Income Tax
(Appeals).
(c) No proper reason assigned by the CIT (A) as well as ITAT to accept the
case of the assessee to write off the bad debts based on the consolidated statement,
without production of details of the individual debtors. In this case, the advances
made by the assessee company is to its own subsidiary companies. Unlike a Banking
company, as in the case of Vijaya Bank vs. Commissioner of Income Tax reported
in (2010) 190 Taxman 257 (SC), which has several branches in various places and
several customers in each branch whose account declared as bad debt and
reconciliation, the same will take reasonable time, for the assessee Company, the
same logic does not apply. Atleast to establish that no escape of income due to the
delay in write off the bad debts at the branch level, the assessee ought to have
produced party-wise details maintained in the branches.
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Tax Case (Appeal).Nos.53 & 54 of 2010
(d) From the discussion of the Commissioner of Income Tax (Appeals) and
Income Tax Appellate Tribunal, we do not find any records of branch offices
produced to rule out escaped income. Prior to 01.04.1989, even a provision for bad
and doubtful debts made in the accounts of assessee could be treated as written off.
However, after the new explanation to Section 36(1)(vii) w.e.f 01.04.1989, the
dichotomy is taken care. In Southern Technologies Ltd vs. Jr.Commissioner of
Income Tax reported in (2010) 320 ITR 577, the Hon’ble Supreme Court has
explained how to understand ‘write off’ in the following words:-
‘if an assessee debits an amount of doubtful debt to
the profit and loss account and credits the asset account like
sundry debtor’s account, it would constitute write off of an
actual debt. However, if an assessee debits provision for
‘doubtful debt’ to the profit and loss account and makes a
corresponding credit to the ‘current liabilities and provisions on
the liabilities side of the balance sheet, then it would constitute
a provision for doubtful debt. In the latter case, the assessee
would not be entitled to deduction after 01/04/1989’
47. This judgment has been followed and reiterated in Vijaya Bank’s case
cited supra. The guidelines laid down by the Hon’ble Supreme Court in Southern
Technologies case cited supra, later followed in Vijaya Bank’s case were not
available for the Commissioner of Income Tax (Appeals) and the Income Tax
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Tax Case (Appeal).Nos.53 & 54 of 2010
Appellate Tribunal when they decided the case in hand. We therefore hold that the
order impugned requires a test afresh based on the above guidelines.
48. As a result, the findings of the Commissioner of Income Tax (Appeals)
and Income Tax Appellate Tribunal are set-aside. Both matters are remitted back to
the Commissioner of Income Tax (Appeals) for fresh consideration of all the grounds
of appeal challenging the assessment orders and pass orders after affording
opportunity of hearing the parties.
49. In fine, Tax Case Appeals are disposed of on the above terms. There
shall be no order as to costs.
(Dr. G.JAYACHANDRAN, J.) & (SHAMIM AHMED, J.)
09-04-2026
Index :Yes/No.
Neutral Citation :Yes/No.
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Tax Case (Appeal).Nos.53 & 54 of 2010
Dr. G.JAYACHANDRAN, J.
&
SHAMIM AHMED, J.
bsm
Pre-Delivery common judgment made in
Tax Case (Appeal).Nos.53 & 54 of 2010
09-04-2026
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