1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 19TH DAY OF JUNE 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE M.NAGAPRASANNA I.T.A. NO.555 OF 2018 BETWEEN: M/S. HAJEE A.P. BAVA AND COMPANY CONSTRUCTIONS PVT. LTD. HAPBCO TOWER, #32, 9TH MAIN ROAD RPC LAYOUT, HAMPINAGAR VIJAYANAGAR, BENGALURU-560104 PAN: AACCH 1218 C (REPRESENTED BY ITS VICE PRESIDENT FINANCE, MR. SUNDARAM VENKATARAMAN AGED ABOUT 49 YEARS S/O M. VENKATARAMAN) ... APPELLANT (BY SRI. CHYTHANYA K.K. ADV.,) AND: ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 3(1)(2), ROOM NO.228 2ND FLOOR, BMTC BUILDING 80 FT. ROAD, 6TH BLOCK KORAMANGALA, BANGALORE-560095. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.,) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 20/04/2018 PASSED IN ITA 2 NO.2153/BANG/2017, FOR ASSESSMENT YEAR 2014-15, PRAYING TO: (I) FORMULATE SUBSTANTIAL QUESTION OF LAW STATED ABOVE. (II) ALLOW APPEAL AND SET ASIDE IMPUGNED ORDER OF INCOME TAX APPELLATE TRIBUNAL, BENGALURU BENCH, BEARING IN ITA NO.2153/BANG/2017 FOR AY 2014-15, AS ENCLOSED IN ANNEXURE-A & ETC. THIS ITA COMING ON FOR ORDERS, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by assessee. subject matter of appeal pertains to Assessment year 2014-15. appeal was admitted by bench of this Court vide order dated 20.11.2018 on following substantial questions of law: (i) Whether in facts and circumstances of case, tribunal is right in law in upholding disallowance of bad debts written off under Section- 36(1)(vii) of IT Act read with Section- 36(2)? (ii) Whether, in facts and circumstances of case, is not finding of 3 Tribunal that relevant income was not offered to tax and there was no subsisting debt perverse? 2. Facts leading to filing of appeal briefly stated are that assessee is private limited company, which is engaged in business of fabrication, erection, commissioning, maintenance of mechanical plants and machineries. assessee filed its return of income for Assessment year 2014-15 by declaring total income of Rs.7,71,76,700/- on 30.11.2014. assessee filed revised return of income on 28.11.2015 by declaring total income of Rs.20,83,75,020/-. original return of assessee was processed under Section 143(1) of Act and case of appellant was selected for scrutiny. Notices under Section 143(2) of Act dated 28.08.2015 and under Section 142(1) of Act were issued. assessing officer by order dated 29.11.2016 passed under Section 143(2) of Act inter alia held that from 4 perusal of ledger extracts, it is evident that no credit entry on account of bad debts has been made in debtors account during or at end of financial year 2013-14. It was further held that account has not been squared off and closed at year end and assessee continued to have transactions with debtor in subsequent financial year also. It was also held that amount claimed in profit and loss account as bad debts had not actually been written off from debtors account and has merely been transferred to account making provision for doubtful debts. By placing reliance on decision of Supreme Court in SOUTHERN TECHNOLOGIES LTD., VS. JCIT , (2010) 320 ITR 577 (SC) and by taking into account explanation to 36(1)(vii) it was held that mere provision for doubtful debts cannot be allowed as deduction and in instant case assessee has failed to credit account of individual debtor and has merely reduced gross sundry debtor account in balance sheet which does 5 not amount to writing off debt in assessee s books of account. assessing officer further held that decision rendered by Supreme Court in case of VIJAYA BANK VS. CIT , (2010) 323 ITR 166 (SC) is not applicable to in fact situation of case as assessee is non-banking and non-finance company and main issue involved in case of VIJAYA BANK supra was apprehension that if assessee failed to close each and every individual account of its debtors it might result in assessee claiming deduction twice over whereas, case of assessee in instant case is deferment of tax liability to subsequent years. Accordingly, bad debts written of to extent of Rs.11,45,33,140/- were disallowed. 3. appellant filed appeal before Commissioner of Income Tax (Appeals). Commissioner of Income Tax (Appeals) by order dated 20.09.2017 inter alia held that assessee has only created provision for doubtful entry in books of 6 accounts and since it is following double entry system of accounting, corresponding entries have been made in profit and loss and balance sheet, without actually writing off bad debts. Thus, it was held that claim of assessee for allowing bad debts is not sustainable. In result, appeal was dismissed. 4. Being aggrieved, assessee filed appeal before Income Tax Appellate Tribunal. tribunal by order dated 20.04.2018 inter alia held that on mere perusal of ledger account of company in books of account extracted in order of assessment it is clear that opening balance of Rs.8,91,12,550.61/- was shown as due from debtor and during course of year under consideration debtor had debited account of recoveries made towards statutory levies such as cess, sales tax and TDS recoveries. It was further held that as on end of accounting year ending on 31.03.2014 sum of Rs.3,79,64,917.38/- was debited by passing journal entry and therefore, it 7 is not clear whether aforesaid amount was offered to tax. It was also held that mere wrong entry in books of account does not constitute debt which can be written off. aforesaid amounts are not due from party and are not in nature of subsisting debt and requisite condition for allowance as bad debts that debt should have been offered to tax in earlier Assessment year is also not satisfied. In result, appeal was dismissed. assessee thereafter filed miscellaneous petition against order of tribunal, which is pending consideration before tribunal. In aforesaid factual background, this appeal has been filed. 5. Learned counsel for assessee submitted that sole issue which arises for consideration in this appeal is whether assessee has written off debt as bad debt as required under Section 36(1)(vii) read with Section 36(2) of Act. It is further submitted that assessee has debited amount of doubtful debt 8 to profit and loss account and has credited asset account like sundry debtors account and therefore, has complied with provisions in Section 36(1)(vii) of Act. It is further submitted that assessee has made provision for bad debt and debtor is under liquidation and claim has been made before official liquidator by assessee. It is further submitted that it is not necessary for assessee to demonstrate that it has taken action for recovery of debt and Section 36(1)(vii) of Act applies to banking as well as non banking companies. It is also urged that merely on basis of apprehension that if assessee failed to close each and every individual account of its debtor, it might result in assessee claiming deduction twice over, benefit of writing off debt under Section 36(1)(vii) of Act cannot be denied to assessee. It is pointed out that Section 41(4) is incorporated in statute book to deal with assessee who may claim deduction twice over as under aforesaid provision, 9 action for recovery of amount can be initiated. It is also urged that finding recorded by authorities that assessee has failed to actually write off debt in books of accounts is perverse. It is also urged that revenue has not referred to any material on record to prove that assessee has abused provision of law. Alternatively it is submitted that matter be remitted to assessing officer for determining question whether debt written off during year in question was offered to income in Previous year. In support of aforesaid submissions, reference has been made only to decisions in cases hereinafter referred even though compilation contains list of as many as 36 judgments, viz., VIJAYA BANK VS. CIT , (2010) 323 ITR 166 (SC), T.R.F. LTD. VS. CIT , (2010) 323 ITR 397 (SC), CIT VS. YOKOGAWA INDIA LTD., , (2012) 17 TAXMANN.COM 15 (KAR), CIT VS. KIRLOSKAR SYSTEMS LTD., , (2013) 220 TAXMAN 1 (KAR), CIT 10 VS. VODAFONE ESSAR GUJARAT LTD., , (2017) 397 ITR 55 (GUJ), CIT VS. TAINWALA CHEMICALS & PLASTICS INDIA LTD., , (2013) 215 TAXMAN 153 (BOM.), CIRCULAR NO.516 DATED 15.06.1988. 6. On other hand, learned counsel for revenue submitted that assessee is required to make provision for debiting amount from profit and loss account and same has to be reduced from asset side of balance sheet. It is also urged that assessee in instant case has not complied with requirement under Section 36(1)(vii) of Act and facts that whether or not debt which was written off during relevant year was offered to income in previous years and whether assessee has complied with requirement of writing off debt as prescribed in VIJAYA BANK supra need to be examined. 11 7. We have considered submissions made on both sides and have perused record. Section 36(1)(vii) of Act was amended with effect from 01.04.1989 which is reproduced below for facility of reference: 36. Other deductions : (1) deductions provided for in following clauses shall be allowed in respect of matters dealt with therein, in computing income referred to in S.28- (i) to (vi) (vii) subject to provisions of sub- s,(2), amount of any bad debt or part thereof which is written off as irrecoverable in accounts of assessee for previous year. 8. Thus, it is evident that after 01.04.1989 it is not necessary for assessee to establish fact that debt in fact had become irrecoverable and it is sufficient if bad debt is written off as irrecoverable in books of accounts of assessee. 12 9. In facts of case, twin issues viz., (i) whether debt which was written off during relevant year was offered to income in Previous year or earlier years, (ii) whether assessee has debited amount of doubtful debt to profit and loss account and has reduced same from asset side of balance sheet require determination to decide claim of assessee with regard to writing off bad debt. Supreme Court dealt with Section 36(1)(vii) of Act, which was amended with effect from 01.04.1989 in SOUTHERN TECHNOLOGIES LTD. VS. JT. CIT , (2010) 320 ITR 577. It was inter alia held that after 01.04.1989, mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii) of Act. It was further held that if assessee debits amount of doubtful debt to profit and loss account and credits asset account like sundry debtors account, it would constitute right of actual debt. However, if assessee debits provision for doubtful debit to profit 13 and loss account and makes corresponding credit to current liabilities and provisions on liabilities side of balance sheet then it would constitute provision for doubtful debt. It was thus held that in latter case assessee would not be entitled to deduction after 01.04.1989. aforesaid decision was referred to with approval in VIJAYA BANK supra. 10. However, from close scrutiny of orders passed by assessing officer, Commissioner of Income Tax (Appeals) as well as Income Tax Appellate Tribunal, we find that aforesaid aspect of matter has not been examined. Therefore, impugned orders are quashed and matter is remitted to assessing officer to ascertain twin questions viz., (i) whether debt which was written off during relevant year was offered to income in Previous year or earlier years, (ii) whether assessee has debited amount of doubtful debt to profit and loss account and has reduced same from asset side of balance sheet. 14 matter is remitted to assessing officer for de novo consideration of aforementioned aspect. In view of preceding analysis, it is not necessary to answer substantial questions of law framed by this court. In result, appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss Hajee A.P. Bava and Company Constructions Pvt. Ltd. v. Assistant Commissioner of Income-tax Circle 3(1)(2), Bangalore