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Vijaya Bank v. Commissioner Of Income Tax And Another
Factual and Procedural Background
The dispute concerns the assessee, a banking company, for Assessment Years 1993-1994 and 1994-1995. The Bank debited its profit and loss account with an amount representing bad and doubtful debts and, simultaneously, reduced the figure of “loans and advances/debtors” on the asset side of its balance-sheet by the same amount.
The Assessing Officer disallowed ₹ 7,10,47,161 for A.Y. 1994-1995, branding the adjustment a mere “provision” rather than an actual write-off as required by Section 36(1)(vii) of the Income-tax Act, 1961, as clarified by the Explanation inserted w.e.f. 1-4-1989.
On appeal, the Commissioner of Income-tax (Appeals) held that closing each individual debtor account was unnecessary and that the Bank’s method constituted a valid write-off. The Department’s appeal to the Income-tax Appellate Tribunal failed; the Tribunal upheld the CIT(A)’s view. The High Court, relying on CIT v. Wipro Infotech Ltd., reversed the Tribunal, reasoning that after the 2001 Explanation a mere provision could not qualify. The assessee appealed to the Supreme Court, resulting in the present decision.
Legal Issues Presented
- What constitutes an “actual write-off” of bad debt under Section 36(1)(vii) of the Income-tax Act after insertion of the Explanation w.e.f. 1-4-1989?
- Is it mandatory for a bank to close the individual account of every debtor, or is a simultaneous reduction of the loans and advances/debtors figure in the balance-sheet sufficient to claim the deduction?
Arguments of the Parties
Department (Revenue)
- After the 2001 Explanation, a mere debit to the profit and loss account is only a provision; actual write-off requires closing each debtor’s account.
- Absence of individual account closure risks double deduction and potential escapement of income when recoveries are made later.
- The Gujarat High Court ruling in Vithaldas H. Dhanjibhai Bardanwala is no longer good law post-Explanation.
Assessee Bank
- Debit to profit and loss account coupled with a simultaneous reduction of loans and advances/debtors obliterates the provision; therefore an actual write-off has occurred.
- Section 36(1)(vii) applies identically to banking and non-banking assessees; no statutory requirement exists to close every debtor account.
- Subsequent recoveries are adequately taxed under Section 41(4), eliminating the Revenue’s apprehensions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Southern Technologies Ltd. v. CIT, (2010) 2 SCC 548; 320 ITR 577 | Drew a distinction between an “actual write-off” (debit P&L and credit asset account) and a mere “provision” (debit P&L and credit liabilities). | Followed to affirm that after 1-4-1989 an assessee must both debit the P&L and reduce the asset to claim deduction; the Bank satisfied this test. |
| Vithaldas H. Dhanjibhai Bardanwala v. CIT, (1981) 130 ITR 95 (Guj) | Pre-1989 law held that debiting the P&L alone sufficed for write-off. | Court noted the decision’s limited applicability post-Explanation but distinguished it by emphasising the Bank’s additional step of reducing the asset figure. |
| CIT v. Jwala Prasad Tiwari, (1953) 24 ITR 537 (Bom) | Earlier authority permitting deduction on a mere provision. | Cited within Southern Technologies to illustrate the position prior to 1-4-1989. |
| CIT v. Wipro Infotech Ltd. (citation not fully provided) | Relied upon by the High Court to deny deduction where only a provision existed. | Supreme Court found the High Court’s reliance misplaced because it overlooked the Bank’s simultaneous reduction of the asset side. |
Court's Reasoning and Analysis
First issue – nature of write-off: Citing Southern Technologies, the Court reaffirmed that post-1989 an actual write-off requires (a) debiting the profit and loss account and (b) crediting or reducing the corresponding asset. The Bank performed both steps; hence the requirement was met.
Second issue – need to close individual accounts: Section 36(1)(vii) contains no stipulation that each debtor’s account be squared off. The Assessing Officer’s insistence stemmed from a preventive concern of double deduction. The Court dismissed this as speculative, noting (i) officers may always call for individual ledgers if warranted, (ii) closing accounts could prejudice the Bank’s civil recovery suits, and (iii) subsequent recoveries are taxable under Section 41(4), adequately protecting revenue interests.
The High Court had “lost sight” of the fact that the Bank not only made a provision but also netted the asset figure; this dual action constituted an actual write-off under the statutory scheme.
Holding and Implications
Holding: The Supreme Court upheld the Tribunal’s decision and allowed the assessee’s appeals, setting aside the High Court’s judgment. No order as to costs.
Implications: The ruling clarifies that a bank (and by extension any assessee) need not close each debtor’s ledger to claim deduction for bad debts under Section 36(1)(vii) when it has (a) debited the profit and loss account and (b) simultaneously reduced the loans and advances/debtors figure in its balance-sheet. The decision underscores that Section 41(4) sufficiently addresses taxability of later recoveries and that administrative apprehensions alone cannot impose extra-statutory conditions on taxpayers.
S.H Kapadia, J.— Leave granted.
2. Whether it is imperative for the assessee Bank to close the individual account of each of its debtors in its books or a mere reduction in the loans and advances or debtors on the asset side of its 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 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 (“the 1961 Act”, for short) read with Explanation thereto which Explanation stood inserted in the 1961 Act by the Finance Act, 2001 with effect from 1-4-1989.
4. 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 (“the Tribunal”, for short).
5. 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 the 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 the 1961 Act covers banking as well as non-banking assessees.
6. 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.
7. 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 the 1961 Act was allowable.
8. On the question whether it was imperative for the assessee to close each and every individual account and its debtors in its books or a mere reduction in the loans and advances to the extent of the provision for bad and doubtful debt was sufficient, the answer given by the Tribunal was that, in view of the decision of the Gujarat High Court in Vithaldas H. Dhanjibhai Bardanwala v. CIT (1981) 130 ITR 95 (Guj), CIT(A) was right in coming to the conclusion that, since the assessee had written off the impugned bad debt in its books by way of a debit to the profit and loss account simultaneously reducing the corresponding amount from loans and advances or debtors depicted on the asset side in the balance sheet at the close of the year, the assessee was entitled to deduction under Section 36(1)(vii) of the 1961 Act. This view was not accepted by the High Court which came to the conclusion by placing reliance on a relied upon judgment in CIT v. Wipro Infotech Ltd., that, in view of the insertion of the Explanation vide the Finance Act, 2001 with effect from 1-4-1989, the decision of the Gujarat High Court in Vithaldas H. Dhanjibhai Bardanwala (1981) 130 ITR 95 (Guj) no more held the field and, consequently, mere creation of a provision did not amount to actual write-off of bad debts, hence, these civil appeals.
9. At the outset, we may state that, in these civil appeals, broadly, two questions arise for determination. The first question which arises for determination concerns the manner in which actual write-off takes place under the accounting principles. The second question which arises for determination in these civil appeals is, 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 “loans and advances account” or debtors to the extent of the provision for bad and doubtful debt is sufficient?
10. 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:
“36. 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 537 (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).
37. 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.”
11. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in Vithaldas H. Dhanjibhai Bardanwala (1981) 130 ITR 95 (Guj) was prior to the insertion of the Explanation vide the Finance Act, 2001, with effect from 1-4-1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation to Section 36(1)(vii) with effect from 1-4-1989, a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write-off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write-off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the profit and loss account would constitute a provision for bad and doubtful debt, it would not constitute actual write-off and that was the very reason why the Explanation stood inserted. According to him, prior to the Finance Act, 2001, many assessees used to take the benefit of deduction under Section 36(1)(vii) of the 1961 Act by merely debiting the impugned bad debt to the profit and loss account and therefore, Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write-off.
12. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee Bank had correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the asset side of the balance sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision “for impugned bad debt”.
13. In the judgment of the Gujarat High Court in Vithaldas H. Dhanjibhai Bardanwala (1981) 130 ITR 95 (Guj), a mere debit to the profit and loss account was sufficient to constitute actual write-off whereas, after the Explanation, the assessee(s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the asset side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in its impugned judgment. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under Section 36(1)(vii) of the 1961 Act as there was an actual write-off by the assessee in its books, as indicated above.
14. 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.
15. 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.
16. 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.
17. 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.
18. Before concluding, we may refer to an argument advanced on behalf of the Department. According to the Department, 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.
19. 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 and, consequently, there is no merit in the contention that, if the assessee succeeds, then it would result in escapement of income from assessment.
20. For the aforestated reason, we uphold the judgment of the Tribunal dated 31-7-2003, and set aside the impugned judgment of the High Court. Consequently, the assessee's appeals stand allowed with no order as to costs.
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