Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.A Nos. 499 c/w 501, 504 and 510 of 2002

Judges

V. Gopala Gowda
Ravi Malimath, JJ.

Acts

provision of section 36(1)(vii) and Explanation part of Income-tax Act, 1961 (in short the Act)
section 36(2)(b) of the repealed Act, which provisions
INCOME TAX ACT 1961
clause (vii) of section 36(1) of the Income-tax Act.
provisions of the Indian Income-tax Act of 1922
sections 80-0, 80B(5) of the Income-tax Act
Finance (No. 2) Act, 1980. While section 80AA
provisions of sub-section (2)
FINANCE ACT 2001
INCOME TAX ACT

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Smart Summary

Structured Summary of the Court's Opinion (V. Gopala Gowda, J.)

Factual and Procedural Background

These consolidated appeals were filed by the Commissioner of Income-tax and the Deputy Commissioner of Income-tax (Assessments) challenging a common order dated July 31, 2002, of the Income-tax Appellate Tribunal (Tribunal) in several ITA matters. The Revenue urged various grounds and framed two substantial questions of law arising from the Tribunal's common order. The Tribunal had set aside certain concurrent findings of the Assessing Officer (AO) and the first appellate authority and, in respect of the claim for bad and doubtful debts, remanded the matter to the AO for verification of the assessee's claims. The Revenue challenged (a) the Tribunal's treatment of provision for bad and doubtful debts and (b) the Tribunal's holding on allowance of deduction under section 80-0 (and its interaction with section 80AB and section 80B(5)) as applied to gross versus net income.

Legal Issues Presented

Whether the Tribunal was correct in holding that the provision made by the assessee for bad and doubtful debts is an allowable deduction (i.e., whether the assessee need not prove that the debt had become bad or irrecoverable for the previous year).
Whether the Tribunal erred in holding that deduction under section 80-0 should be allowed on gross income received (without properly reducing direct expenses), contrary to section 80AB and section 80B(5) which, as argued, require deduction to be allowed on net income.

Arguments of the Parties

Revenue's Arguments

The Tribunal erred in remanding cases back to the AO after recording what the Revenue considered an erroneous finding that the assessee was entitled to deduction for provisions of bad and doubtful debts.
Relying on the Explanation to section 36(1)(vii) (inserted by Finance Act, 2001, with retrospective effect from April 1, 1989), the Revenue argued that any provision for bad and doubtful debts is not deductible; accordingly, the assessee was required to prove that specific debts had become irrecoverable in the relevant previous year.
On the section 80-0 issue, the Revenue contended that the Tribunal wrongly allowed deduction on gross income without accounting for expenses incurred to earn that income; sections 80AB and 80B(5) require deduction to be claimed on net income after such expenses.
The Revenue relied on several authorities (including Jubilant Organosys, Micromax, Asst. CIT v. Abcon Engineering, Asian Cable Corporation (No.2), and Distributors (Baroda) P. Ltd.) to support the view that deduction under Chapter VI-A items like section 80-0 is to be allowed on net income and that provisions (as distinct from amounts actually written off as irrecoverable) are not deductible.

Assessee's Arguments

The assessee supported the Tribunal's findings that the accounting entries and item-wise particulars showed amounts treated as bad and doubtful debts written off in the profit & loss account (applying mercantile method of accounting permitted under the Income-tax Act and Companies Act) and that the AO and the first appellate authority failed to consider material particulars and item-wise evidence on record.
The assessee argued that the Tribunal correctly set aside the concurrent findings of fact and properly remanded the matter to the AO to examine material particulars and additional evidence concerning specific debts/advances and bad debts.
With respect to the section 80-0 issue, the assessee contended (and the Tribunal found on material particulars) that no expenses had been incurred in the circumstances to require deduction from gross income under section 80B(5), so the Tribunal's approach was correct for the facts before it.
The assessee relied on various authorities (e.g., Vithaldas H. Dhanjibhai Bardanwala, Amarchand Sobhachand, Jwala Prasad Tiwari, Kerala State Industrial Development Corporation, Vallabh Leasing) to support the proposition that entries in books and the manner of writing off could justify the deduction and that appellate interference with concurrent findings of fact was not warranted absent legal error.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
M.N. Dastur and Co. (P.) Ltd. v. Deputy CIT / CIT v. M.N. Dastur and Co. (P.) Ltd., [2000] 243 ITR 10 (Cal)	Relied upon by the Tribunal (and earlier courts) regarding allowance of deduction under section 80-0 (as interpreted by that decision).	The Tribunal had relied on this decision to set aside the first appellate authority's finding. The High Court found that reliance on M.N. Dastur was erroneous in the instant context because that decision was rendered prior to the clarification effected by section 80AB; to the extent the Tribunal followed M.N. Dastur without considering section 80AB, that reliance was set aside.
Distributors (Baroda) P. Ltd. v. Union of India, [1985] 155 ITR 120 (SC)	Held that certain earlier Supreme Court rulings were overruled and clarified that deduction is to be allowed only on net income; section 80AB was of clarificatory nature.	The Court relied on the principle from Distributors (Baroda) (as discussed in Asst. CIT v. Abcon Engineering) to support the conclusion that deductions under provisions like section 80-0 ought to be on net income after deducting expenses, and thus supported answering the second substantial question in favour of the Revenue.
Asst. CIT v. Abcon Engineering and Systems Pvt. Ltd., [2006] 287 ITR 201 (Karn)	Interpreted sections 80-0 and 80B(5) (and referred to apex court authorities) and laid down that deduction under section 80-0 is to be on net income (paragraph 19 cited).	The High Court followed this Division Bench decision and relied upon it directly in answering substantial question No. 2 in favour of the Revenue, treating it as authoritative precedent for requiring net-income computation under section 80-0/80B(5).
Motilal Pesticides (I.) Pvt. Ltd. v. CIT, [2000] 243 ITR 26 (SC)	One of the apex court decisions referred to in the Abcon Engineering analysis of sections 80-0 and 80B(5).	Referred to by the Court (via Abcon) as among apex court authorities supporting that special deductions under Chapter VI-A sections like section 80-0 are assessable on net income; formed part of the jurisprudential basis for answering Q2 in favour of Revenue.
H.H. Sir Rama Varma v. CIT, [1994] 205 ITR 433 (SC)	Observation that section 80AB declared the law as it always stood in relation to deductions under the relevant Chapter VI-A provisions.	Referred to (through the Abcon precedent's discussion) as supporting the net-income approach to special deductions; used as background to construe section 80AB's effect.
Cloth Traders (P) Ltd. v. Additional CIT, Gujarat-I, [1979] 118 ITR 243 (SC)	Earlier Supreme Court decision which was later overruled by Distributors (Baroda).	Mentioned in the chain of authority showing the evolution of the law; the High Court relied on the later Distributors (Baroda) analysis which overruled this earlier decision.
Jubilant Organosys v. CIT, [2004] 265 ITR 420 (All)	Division Bench decision of Allahabad High Court relying on the Explanation to section 36(1)(vii) (as inserted by Finance Act, 2001) holding that provisions for bad and doubtful debts are not deductible.	The Revenue relied on Jubilant Organosys for the proposition that provisions cannot be deducted; the High Court in the present case instructed that the first appellate authority, when reconsidering the assessee's claim, should strictly examine the matter keeping Jubilant Organosys in view.
Commissioner Of Income-Tax v. Micromax Systems P. Ltd., [2005] 277 ITR 409 (Mad)	Madras High Court decision cited by the Revenue regarding the non-deductibility of provisions under the Explanation to section 36(1)(vii).	Cited by the Revenue to support the non-deductibility of provisions; used in submissions but the High Court ultimately accepted the Tribunal's remand on facts and directed re-examination by AO in light of the Explanation and relevant case law.
Commissioner Of Income-Tax v. Asian Cable Corporation Ltd. (No. 2), [2003] 262 ITR 537 (Bomb)	Interpreted section 80-0 read with section 80AB and section 80B(5), concluding that deduction is on net income after deducting expenses incurred to earn gross income.	Relied upon by the Revenue as supporting the net-income approach; the High Court treated such authorities (including Asian Cable) as part of the body of decisions endorsing that section 80-0 deductions are to be on net income.
Vithaldas H. Dhanjibhai Bardanwala v. CIT, [1981] 130 ITR 95 (Guj)	Examined method of writing off and whether posting debit to P&L and credit to bad-debt reserve suffices — held relevant to claims under repealed 1922 Act provisions in pari materia with present section 36(1)(vii).	Relied upon by the assessee to support that accounting entries and method of writing off can justify deduction; the Court noted this authority in support of the assessee's contention that the Tribunal's remand for factual reconsideration was justified.
Amarchand Sobhachand v. CIT, [1971] 82 ITR 591 (SC)	Supreme Court authority cited in support of the assessee's position concerning writing off and accounting treatment.	Relied upon by the assessee and noted by the Court as part of the authorities supporting the proposition that, on facts, accounting treatment may sustain a deduction and that appellate interference with findings of fact is constrained.
Jwala Prasad Tiwari (CIT/EPT v. Jwala Prasad Tiwari), [1953] 24 ITR 537 (Bom)	Older authority cited by the assessee concerning factual sufficiency of accounting entries for deduction claims.	Listed among the precedents relied on by the assessee to support the contention that the Tribunal's factual conclusion/remand ought not to be disturbed; used to show established principles on appellate review of findings of fact.
CIT v. Kerala State Industrial Development Corporation Ltd., [2007] 289 ITR 238 (Ker)	Authority cited by the assessee in support of its case (no further rule extracted in the text).	Included by the assessee in its list of supportive decisions; the Court recorded reliance placed on it by the assessee in support of factual and accounting-contention arguments.
CIT v. Vallabh Leasing and Finance Co. Pvt. Ltd., [2004] 265 ITR 1 (MP)	Authority cited by the assessee (context: support on factual/accounting matters).	Noted among the decisions relied upon by the assessee to buttress its contention on treatment of bad debts and appellate review of facts.
M.N. Dastur and Co. (P.) Ltd. v. Deputy CIT, [1997] 62 ITD 113	ITAT decision earlier relied upon by the Tribunal in setting aside first appellate findings (predated amendment of section 80AB).	The High Court held that reliance by the Tribunal on this earlier ITAT decision (rendered prior to section 80AB amendment) was erroneous in law for the purposes of the section 80-0/80AB issue, and thus the Tribunal's decision on that ground was set aside.

Court's Reasoning and Analysis

The Court analyzed the two substantial questions separately and applied both factual review principles and statutory interpretation, with attention to the Explanation to section 36(1)(vii), the retrospective operation of that Explanation, and the interplay between sections 80-0, 80AB and 80B(5).

Analysis on Substantial Question No. 1 (bad and doubtful debts / section 36(1)(vii))

The Court first noted the statutory wording of section 36(1)(vii) and its Explanation (inserted by the Finance Act, 2001, with retrospective effect from April 1, 1989), which states that any "provision for bad and doubtful debts made in the accounts" is excluded from the meaning of "bad debt written off as irrecoverable."
The AO's assessment (passed March 11, 1993) preceded the Finance Act, 2001 amendment; the AO and the first appellate authority had concluded on facts that the assessee's entries represented only a provision and not amounts written off as irrecoverable.
The Tribunal, after examining item-wise particulars extracted from the assessee's annual returns and books, concluded that the AO and first appellate authority had failed to consider material particulars and therefore set aside the concurrent findings and remanded the matter to the AO for reconsideration and to allow the assessee to produce further materials; the Tribunal directed reassessment of the claim in light of the material particulars.
The Court reviewed the Tribunal's approach to the facts and the role of appellate bodies in reviewing concurrent findings of fact. It emphasized that where the AO and first appellate authority have not considered material evidence, the Tribunal was justified in setting aside those findings and remanding the matter for proper consideration in accordance with principles of natural justice.
The Court accepted the Tribunal's reasoning on the remand: because the AO and first appellate authority had not applied their minds to item-wise particulars and material evidence that might establish that amounts were in fact written off as irrecoverable (and not merely provisions), remand for reconsideration was appropriate. The Court therefore answered substantial question No. 1 in favour of the assessee and endorsed the remand to the AO, while instructing that the AO should strictly examine the claim in light of the Explanation to section 36(1)(vii) and relevant precedents (notably the Jubilant Organosys decision).

Analysis on Substantial Question No. 2 (section 80-0 deduction — gross v. net / sections 80AB and 80B(5))

The Court examined the legal position developed in decisions including the Division Bench decision in Asst. CIT v. Abcon Engineering, which considered sections 80-0 and 80B(5) and referred to apex court decisions such as Distributors (Baroda) and Motilal Pesticides. Those authorities established the proposition that deductions under specified Chapter VI-A sections should be computed on net income after allowing relevant expenses (i.e., section 80AB operates to require net-income computation).
The Court observed that the Tribunal had followed the earlier M.N. Dastur decision to set aside the first appellate authority's finding regarding the assessee's deduction practice (in effect allowing deduction relative to gross receipts without adequate deduction of direct expenses). However, M.N. Dastur was rendered prior to the amendment/clarification embodied in section 80AB.
Relying on Abcon (and the apex court authorities discussed therein), the Court held that the Tribunal's reliance on the pre-section-80AB decision (M.N. Dastur) was erroneous for the purposes of the section 80-0/80AB interpretive question. In the result, the Court concluded that deduction under section 80-0 must be allowed on net income after deducting the expenses incurred in earning the gross receipts as contemplated by section 80B(5).
Because the Tribunal had set aside the first appellate authority's factual conclusion without applying the correct legal framework (i.e., without adequately considering section 80AB/80B(5) and subsequent authorities), the Court set aside that portion of the Tribunal's judgment and answered substantial question No. 2 in favour of the Revenue.

Holding and Implications

Holding: The appeals are partly allowed.

Concretely:

Substantial Question No. 1: Answered in favour of the assessee. The Court upheld the Tribunal's decision to set aside concurrent findings of the AO and the first appellate authority and remand the matter to the AO for reconsideration with directions to examine material particulars and any additional evidence in light of the Explanation to section 36(1)(vii) (and relevant authorities such as Jubilant Organosys).
Substantial Question No. 2: Answered in favour of the Revenue. The Court held that deductions under section 80-0 must be computed on net income after deducting expenses incurred in earning the gross receipts (as contemplated by section 80B(5) and clarified by section 80AB and supporting decisions). The Tribunal's contrary approach (following pre-80AB authority) was set aside to that extent.

Implications:

The immediate effect is that the remanded matters proceed to the AO who must re-examine the assessee's claims for bad and doubtful debts strictly in accordance with the Explanation to section 36(1)(vii) and relevant precedents (including Jubilant Organosys), and allow the assessee an opportunity to produce material particulars. If the AO concludes on re-consideration that specific debts were written off as irrecoverable (and not merely provisions), appropriate deduction may be allowed subject to the Explanation.
On the section 80-0 point, the Court's ruling requires computing the eligible deduction on net income after deducting direct expenses as per section 80B(5) and in conformity with section 80AB and the line of authorities summarized in Asst. CIT v. Abcon Engineering. The Tribunal's allowance on gross income without taking into account the statutory expense deductions has been set aside.
The Court did not purport to create a novel precedent beyond applying and following existing authoritative decisions (including apex court decisions and Division Bench rulings). The decision primarily applies those authorities to the facts before the Court and orders partial allowance of the appeals consistent with those legal principles.

Note: This summary is based exclusively on the text of the provided opinion. No information has been added beyond what appears in that opinion.

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Commissioner Of Income-Tax And Another v. Wipro Infotech Ltd.

The judgment of the court was delivered by

V. Gopala Gowda, J.:— These appeals are filed by the Commissioner of Income-tax and Deputy Commissioner of Income-tax (Assessments) questioning the correctness of the common order dated July 31, 2002, passed by the Appellate Tribunal in I.T.A Nos. 651.Bang/94, 521, 522, 523.Bang/97, 369, 370, 461, 462 and 538.Bang/2001 framing two substantial questions of law in the appeals by urging various grounds in support of the same and prayed to set aside the common judgment by answering the same in favour of the Revenue. The common substantial questions framed reads as under:

“1. Whether the Tribunal was correct in holding that the provision made by the assessee for bad and doubtful debt is an allowable deduction.

2. Whether the Tribunal committed an error in holding that section 80-0 deduction should be allowed on the gross income received by the assessee by ignoring the provisions of section 80AB of the Act which contemplates granting of such a deduction on the amount of income as computed in accordance with the provisions of the Act and the judgment of the Calcutta High Court reported in CIT v. M.N Dastur and Co. (P.) Ltd., [2000] 243 ITR 10 and that of the apex court in 239 ITR 233.”

2. During the course of arguments, the learned counsel for the appellants Mr. M.V Seshachala, has reframed the substantial questions of law by filing a memo which read thus:

“1. Whether the Tribunal after having correctly held that the evidence adduced by the assessee was not sufficient to show that the bad debts was written off as irrecoverable proceeded to erroneously hold that the assessee need not prove the debt having become bad?

2. Whether the Tribunal was correct in holding that the direct expenses is required to be reduced from the gross receipts out of amount received in convertible foreign exchange and over the balance deduction under section 80-0 of the Act is to be allowed as against the net income computed in accordance with the provisions of the Act as contemplated under section 80AB of the Act?”

3. In support of the aforesaid legal contentions, he has urged that the Tribunal committed an error in law in remanding the cases back to the Assessing Officer to verify the claim made by the assessee for deduction of bad and doubtful debts after recording an erroneous finding that the assessee on facts was entitled to deduction in respect of provision of bad and doubtful debts. Elaborating his submissions he has placed strong reliance upon the amending provision of section 36(1)(vii) and Explanation part of Income-tax Act, 1961 (in short “the Act”) he further submits that the Tribunal has committed an error in law in holding that the assessee is not required to demonstrate that the bad debts also become bad in the previous year. He has sought to justify the concurrent finding of fact recorded by the first appellate authority, the same has been set aside by the Tribunal in the impugned judgment and remanded the case to the Assessing Officer ignoring the Explanation to the aforesaid provision of the Act which clearly states that there shall not be a provision made by the assessee while claiming the benefit of deduction for the purpose of bad debt and the Tribunal has erroneously set aside the same in the absence of material particulars produced by it before the Assessing Officer, first appellate authority or before it. The learned counsel in support of his submission has placed reliance upon the Division Bench decision of the Allahabad High Court in the case of Jubilant Organosys v. CIT reported in [2004] 265 ITR 420 (All) wherein the said Division Bench has placed reliance upon the Explanation to section 36(1)(vii) of the Act which was inserted by the Finance Act of 2001 and held that the deduction is not permissible in respect of any provision for bad and doubtful debts made in the accounts of the assessee the said decision, according to the learned counsel the for the Revenue is affirmed by the apex court by dismissing the SLP in SLP No. 3828/04 filed by the assessee and he has also placed reliance upon another decision of the Madras High Court in the case of Commissioner Of Income-Tax v. Micromax Systems P. Ltd., [2005] 277 ITR 409.

4. In support of the second substantial question of law, he has contended that the Tribunal has erroneously proceeded to hold that deduction claimed by the assessee under section 80-0 of the Act is admissible on the gross profits of the assessee without taking into consideration the expenses incurred to earn that gross income ignoring the definition of gross total income as defined under section 80B(5) of the Act to arrive at the net income claimed by the assessee for deduction under section 80-0 of the Act, ignoring the concurrent finding of fact recorded by the first appellate authority, wherein he has concurred with the finding of fact recorded by the Assessing Officer, the expenses incurred by the assessee should be taken into account in accordance with the provisions of section 80B(5) of the Act for the purpose of claiming deduction, therefore, he submits that in the absence of furnishing the details of expenses incurred by the assessee to earn the total gross income which amount shall be deducted as provided under section 80B of the Act for the purpose of claiming the benefit under section 80-0 of the Act, the assessee is not entitled for the benefit which he has claimed

5. The assessee for the purpose of working out its right regarding the “direct expenses” contained in the Explanation to section 80-0 towards the transfer of salary at Rs. 7,61,699 which was taken into account for the purpose of producing software out of which the gross income earned is taken as 40 per cent, of the income at Rs. 9,85,152 on the basis of consequential net income worked out over the balance amount of deduction which claim of the assessee is refused by the first appellate authority by treating expenses towards travelling and salary of Rs. 7,61,686 at 10 per cent, worked to Rs. 2,46,200 at 40 per cent, as held by the Assessing Officer is set aside by the Tribunal which decision of it is contrary to the provisions of section 80B, sub-section (5) of the Act Hence, he has pleaded that the order passed by the Tribunal is bad in law and, therefore, the second substantial question reframed is required to be answered in favour of the Revenue. In support of this submission, he has placed reliance upon the Division Bench decision of this court in the case of Asst. CIT v. Abcon Engineering and Systems Pvt. Ltd. reported in [2006] 287 ITR 201 (Karn) which has been followed by another Division Bench of this court (of which V.G.G.J was a member) in I.T.A Nos. 438-444/2002 c/w. I.T.A Nos. 3047/2005 and 6/2004 dated September 21, 2007. He has also placed reliance upon the Division Bench decision of the Bombay High Court in the case of Commissioner Of Income-Tax v. Asian Cable Corporation Ltd. (No. 2) (No. 2) reported in [2003] 262 ITR 537 wherein the Bombay High Court has interpreted section 80-0 read with section 80AB and section 80B(5) of the Act, claiming the benefit under the above provision of the Act and came to the conclusion that it is the net income after deducting the expenses incurred by the assessee to earn the gross income upon which the benefit of deduction in the returns can be claimed under section 80-0 of the Act.

6. Further, it is contended by the learned counsel for the Revenue that the Appellate Tribunal has committed an error in law in setting aside the order regarding deduction of 10 per cent, of the expenses out of gross income claimed by the assessee by placing reliance upon the decision of M.N Dastur's case, [2000] 243 ITR 10 (Cal), further on the basis of the said decision approved by this court in C.P No. 58/98 (IT) disposed on June 4, 2001, without taking into consideration the provisions of section 80B(5) of the Act which provisions are interpreted by the apex court in Distributors (Baroda) P. Ltd., [1985] 155 ITR 120 which decision is followed by the Division Benches of this court referred to supra.

7. The learned counsel for the assessee in all these cases has sought to justify the correctness of the findings and reasons recorded by the Tribunal in the impugned judgment on both the aspects regarding the claim made by the assessee under section 36(1)(vii) which are irrecoverable, written off, bad and doubtful debts written by the assessee for the previous years by showing the same in the books of account applying mercantile method of accounting which method of accounting is permissible under the Income-tax Act read with the Companies Act.

8. The learned counsel for the assessee further submits that the Assessing Officer and the first appellate authority who has disallowed the claim of the assessee without examining the provisions applicable to it for giving deductions under section 36(1)(vii) of the Act for the assessment years in question on the basis of annual report made available and Without verifying the item-wise particulars available on record. Further, it is urged that the Assessing Officer and the first appellate authority on erroneous assumption came to the wrong conclusion and held that the deduction claimed by the assessee regarding irrecoverable debt and bad debt is only a provision made by it in its books of account, therefore, they have wrongly held that it is not permissible for the assessee to claim the benefit of deduction of the same in view of the Explanation to section 36(1)(vii) of the Act. Therefore, he submits that both the orders passed by both the authorities suffer from error in law for the reason that merely because nomenclature of the provisions mentioned in the annual report submitted by the assessee before the Assessing Officer is not the criteria to find out and accept the claim with reference to entries made in the books of account, where the same are actually treated as incidental bad and doubtful debts written off under various items as stated at paragraph 3.7 of the Appellate Tribunal judgment the Tribunal after referring to the facts and rival legal contentions urged on behalf of the parties has examined the correctness of the concurrent finding of fact as recorded by the first appellate authority in its order at paragraph 6 on the contentious point that arose for his consideration with reference to the legal submissions made on behalf of the assessee's counsel that the Assessing Officer without verifying the particulars made available before him has passed the assessment order. Therefore, he has submitted that the concurrent finding recorded by the first appellate authority is erroneous for non-consideration of material evidence on record and urged that the Tribunal after referring to the same and extracting the item-wise claim made by the assessee with reference to the bad and doubtful debts for the deduction claimed by it under section 36(1)(viii) of the Act has been rightly set aside by the Tribunal and remanded the matter back to the Assessing Officer to reconsider the same by recording its reasons at paragraph 3.11 in the impugned judgment. Therefore, the finding recorded by the Appellate Tribunal in the impugned judgment for setting aside the concurrent finding of the first appellate authority is neither erroneous nor error in law. Therefore, the learned counsel submits that the first substantial question of law reframed as extracted above, does not arise for consideration in this appeal and, therefore, requested this court to dismiss the appeal.

9. In support of the above legal contention, the learned counsel has placed reliance upon the Division Bench decision of the Gujarat High Court reported in Vithaldas H. Dhanjibhai Bardanwala v. CIT, [1981] 130 ITR 95, wherein that court with reference to the repealed provisions of the Indian Income-tax Act of 1922 examined the method of writing off and its meaning of posting the debit entries in the profit and loss account and credit entries in the bad debt reserve account is sufficient or not to claim the benefit under section 36(2)(b) of the repealed Act, which provisions are in pari materia with section 36(1)(vii) of the Act and also placed reliance upon another decision of the apex court in the case of Amarchand Sobhachand v. CIT reported in [1971] 82 ITR 591 in support of his submission that the finding of fact recorded by the Appellate Tribunal is justified and the same need not be interfered with by this court in exercise of its appellate jurisdiction unless it is shown that the substantial question of law framed in the appeal by the Revenue would arise in the case, he further submits that the Tribunal has set aside the concurrent finding of the first appellate authority holding that the same is erroneous for non-consideration of material evidence on record, therefore, the first substantial question of law does not arise.

10. In support of the above legal submissions he has placed reliance upon the following decisions:

(a) CIT/EPT v. Jwala Prasad Tiwari reported in [1953] 24 ITR 537 (Bom);

(b) CIT v. Kerala State Industrial Development Corporation Ltd., [2007] 289 ITR 238 (Ker); and

11. The learned counsel for the assessee has rebutted the legal submission made on behalf of the Revenue on the second substantial question of law reframed in these appeals contending that the Tribunal on a careful perusal of the record has examined the material particulars available and found fault with both the orders of the assessing authority and the first appellate authority to deduct the amount towards the expenses incurred by the assessee for the purpose of earning gross income as provided under section 80B(5) of the Act, for exporting the software to claim the benefit of deduction under section 80-0 of the Act by the assessee for the assessment years in question.

12. The Tribunal has recorded a finding of fact on the basis of material particulars furnished by the assessee which are on the record to show that no expense was incurred by the assessee, therefore, there was no need for it to deduct expenses out of gross income earned by the assessee for the manufacture of software exported as provided under section 80AB of the Act in respect of the assessment years and, therefore, the learned counsel submits that the Tribunal has rightly set aside the concurrent findings of first appellate authority in exercise of its appellate jurisdiction and power, therefore, he submits that the second substantial question of law referred to above does not arise for consideration of this court these appeals and requested to answer the same against the Revenue. After hearing these appeals at length and on a careful consideration of rival legal contentions urged on behalf of the parties, we answer substantial question of law No. 1 in favour of the assessee by assigning the following reasons:

(i) In all these appeals the assessee has claimed the benefit of deduction under section 36(1)(vii) with regard to provisions of debt/advances in regard to item No. 1 and so far as item No. 2 in respect of bad or doubtful debt which is irrecoverable amount for different assessment years before the Assessing Officer for which deduction under the above provisions of the Act is claimed by the assessee. The said claim is disallowed by the assessing authority treating the same for different assessment years is only a provision made by the assessee which is not permissible in law in view of the Explanation to clause (vii) of section 36(1) of the Income-tax Act. The Explanation is provided by way of amendment to the said clause by Finance Act, 2001, which provision has been given retrospective effect from April 1, 1989. The Assessing Officer had no benefit of this provision for his consideration at the time of passing assessment order as the assessment order was passed on March 11, 1993, prior to the Finance Act of 2001. To appreciate the above legal contention it is necessary for us to extract section 36(1), clause (vii) and Explanation which reads thus:

“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 year:

Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.”

Explanation.— For the purpose of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;

(emphasis1.supplied)

(ii) We have also perused the concurrent finding of the first appellate authority in its order and the impugned judgment in these appeals passed by the Appellate Tribunal wherein it has set aside the order of the first appellate authority.

(iii) The learned counsel appearing for the assessee has invited our attention to the relevant paragraph of the judgment passed by the appellate authority. We have also considered the legal contentions urged before us in all the appeals on behalf of the assessee that the assessing authority has not considered the material evidence on record before him to justify the claim under the aforesaid provisions of the Act under two items, viz., provision of debt/advances by debiting to the books of account for the assessment years in question in respect of different items though the same are not written off against each individual debtor, but, the same is written off as bad and doubtful debt which is permissible in law. Merely because the nomenclature of bad and doubtful debts is used in the annual returns, the Assessing Officer was required to examine as to whether on the facts and in law the same is in respect of various items claimed by the assessee for deduction in all these appeals is shown as provision as stated in the Explanation to clause (vii) of section 36(1) of the Act. On a careful consideration of the accounts and appreciating the material facts he has recorded a finding of fact holding that it is only a provision but not written off in books of account as the debt is irrecoverable from its debtors. The said finding is challenged by the assessee before the first appellate authority as erroneous in law urging the same legal grounds which contentions of it are rejected and concurred with the findings of the assessing authority.

(iv) The learned counsel for the appellants has submitted that the Tribunal while examining the correctness of the concurrent finding of the first appellate authority has come to the conclusion with reference to the entries made in the annual returns and the deductions claimed by the assessee by furnishing the particulars and extracting various items in respect of deduction claimed under the aforesaid statutory provision. The Tribunal has set aside the order and remanded the matter to the Assessing Officer with a direction to reconsider the claim of the assessee in the light of the material particulars furnished under the item found on all debt/advances, bad and doubtful debt shown in the profit and loss account with reference to the entries made in the annual returns is bad in law, the Tribunal while setting aside the order has directed the assessee to produce additional material evidence before the Assessing Officer, this portion of the order is questioned by the learned counsel for the Revenue. The submission made on behalf of the assessee that the Assessing Officer has not applied his mind to the material particulars available before him and came to the wrong conclusion regarding bad and doubtful debts which is concurred with by the first appellate authority. Therefore, it is contended by the learned counsel that the Tribunal is justified in setting aside that portion of the order and remitting back the matter for reconsideration of the Assessing Officer after perusal of material evidence that may be produced by the assessee holding that neither the Assessing Officer nor the first appellate authority have referred to the material particulars furnished by the assessee which are available on record and consideration of the same are very much required.

(v) The learned counsel for the appellant has sought to annul the findings recorded on this aspect by the Tribunal contending that the substantial question of law which would certainly arise for the reason that the claim made by the assessee with regard to irrecoverable debt, bad debt and written off debt is only the provision made by it. On a perusal of the Explanation to section 36(1)(vii) of the Act, the submissions may be tenable but the assessing authority is required to consider and examine the claim of the assessee on the basis of the facts stated and material available before him, that has not been done either by the assessing authority or by the first appellate authority. Therefore, the Tribunal is perfectly justified in setting aside the concurrent finding of the first appellate authority on that contentious point, in the absence of additional evidence the Tribunal must have come to the conclusion that the matter requires reconsideration, hence the same was remanded back to the assessing authority to give an opportunity to the assessee which is in compliance with the principles of natural justice. Therefore, we are of the view that the first substantial question of law framed in this appeal placing reliance on the various provisions of the Act and decisions referred to in the earlier paragraph of this judgment by the learned counsel for the appellant does not arise for our consideration for the reason that we have to accept the conclusions arrived at by the Tribunal in its judgment on the contentious point that arose for its consideration for remanding the matter to the Assessing Officer. We are in respectful agreement with the finding of fact recorded by the Appellate Tribunal with regard to bad debt and, therefore, the remand order is justified. The first appellate authority at the time of reconsidering the claim of the appellant in the light of the material particulars that are going to be placed on record shall strictly examine the same keeping in view the Explanation to clause (vii) of section 36(1) of the Act and the Division Bench judgment of the Allahabad High Court in the case of Jubilant Organosys v. CIT reported in [2004] 265 ITR 420 (All).

13. With regard to substantial question No. 2, the same has to be answered in favour of the Revenue for the following reasons:

(i) The learned counsel for the Revenue Mr. Seshachala has rightly placed reliance upon the Division Bench judgment of this court in the case of Asst. CIT v. Abcon Engineering and Systems Pvt. Ltd. reported in [2006] 287 ITR 201 wherein the Division Bench of this court after referring to sections 80-0, 80B(5) of the Income-tax Act and referring to various decisions of the apex court particularly in Motilal Pesticides (I.) Pvt. Ltd. v. CIT reported in [2000] 243 ITR 26 has clearly laid down the law with regard to deduction under sections 80-0 and 80B(5) of the Act at paragraph 19 page 207 which relevant paragraph of the said judgment is extracted as hereunder:

“Two sections 80AA and 80AB of the Income-tax Act, 1961, were introduced by the Finance (No. 2) Act, 1980. While section 80AA was to have retrospective effect from April 1, 1968, section 80AB was to have operation with effect from April 1, 1981. Section 80AA had the effect of effacing the decision of the Supreme Court in Cloth Traders (P) Ltd. v. Additional Cit, Gujarat-I, [1979] 118 ITR 243 which had interpreted section 80M. Section 80AB was made applicable to all the sections in Chapter VI-A except section 80M. In Distributors (Baroda) P. Ltd. v. Union of India, [1985] 155 ITR 120 (SC), however, the Supreme Court specifically overruled its earlier decision in Cloth Traders (P) Ltd. v. Additional Cit, Gujarat-I, [1979] 118 ITR 243 (SC) and held that deduction is to be allowed only on the net dividend income and not on the gross income. With reference to section 80AB, the Supreme Court said that it was merely of a clarificatory nature. In H.H Sir Rama Varma v. CIT, [1994] 205 ITR 433 (SC), the Supreme Court observed that on a parity of reasoning with section 80AA as given in Distributors (Baroda) P. Ltd. v. Union of India, [1985] 155 ITR 120 (SC), it must be held that section 80AB was enacted to declare the law as it always stood in relation to the deductions to be made in respect of the income specified under the head “C” in Chapter VI-A of the Act. The special deduction under section 80HH is allowable on the net income and not the gross income.”

14. The above referred judgment is followed by this court in its subsequent unreported decision in I.T.A Nos. 433-444 of 2002 c/w I.T.A Nos. 3047 of 2005 and 6/2004 disposed of on September 21, 2007. In the instant case, on a perusal of the order passed by the first appellate authority after careful examination of the concurrent finding of fact recorded by it is that the assessee has preferred claim without furnishing the details with regard to expenses incurred for earning gross income for the assessment years in question. In the absence of non-furnishing of particulars by the assessee to claim the benefit before the Assessing Officer for the purpose of section 80-0, the same cannot be accepted by us. The said finding of fact recorded by the first appellate authority has been set aside by the Tribunal following the earlier decision in the case of M.N Dastur and Co. (P.) Ltd. v. Deputy CIT, [1997] 62 ITD 113 which decision was rendered prior to amending the section 80AB. No doubt this court in C.P No. 580 of 1998, without noticing the provisions of section 80AB of the Act and the decision of the apex court has rejected the review petition, therefore, the reliance placed by the Tribunal on the said decision to set aside the concurrent finding of the first appellate authority is erroneous in law. Therefore, the substantial question of law referred to supra would certainly arise for our consideration and accordingly we answer the same in favour of the Revenue and to that extent the judgment of the Tribunal is hereby set aside.

15. The appeals are partly allowed as indicated above.

Commissioner Of Income-Tax And Another v. Wipro Infotech Ltd.

Structured Summary of the Court's Opinion (V. Gopala Gowda, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax And Another v. Wipro Infotech Ltd.

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