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May 17, 2022

Provisions for dubious debt are equal to income used for charitable purposes

by CA Shivam Jaiswal in Income Tax

Provisions for dubious debt are equal to income used for charitable purposes.

Facts and Issue of the case

Assessee is a trust registered under the Societies Act, 1860 and also registered u/s  12A of the  I.T. Act, 1961. The  assessee has also been granted approval u/s 80G(5)(vi) by DIT(E). Assessee filed its return of income for A.Y. 2014-15 on 03.11.2014 declaring Nil income. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 22.12.2016 and the total Excess of Income over Expenditure was computed at Rs.5,74,04,860/- by inter alia disallowing the claim of provision for doubtful debts amounting to Rs.3,32,58,322/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 01.01.2018 in Appeal No.269/2016-17 granted substantial relief to the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal before us and has raised the following grounds:

  • On the facts and in circumstances of the case and in law, Ld C1T(A) has erred in allowing the Provision for doubtful debts as application of income ignoring that the assessee had not actually incurred such expenses during the previous year.
  • On the facts and in circumstances of the case and in law, Ld CIT(A) has erred in allowing the provisions for doubtful debts when Hon’ble Supreme Court in the case of Southern Technologies Ltd. Vs JV1T 320 ITR 577 (2010) and Hon’ble High Court in the case of CIT Vs ILPLA Paramount (P.) Ltd [2010] 192 Taxman 65 (Delhi) upheld that provision for doubtful debts are not allowable.
  • The appellant craves leave to add, to alter or  amend  any ground of appeal raised above at the time of hearing.

Before this court, at the outset, Learned DR submitted that though Revenue has raised various grounds but the sole controversy is with respect to the allowing of Provision for doubtful debts as application of income by Learned CIT(A).

During the course of assessment proceedings, AO on perusing the Income and Expenditure Account noticed that an amount of Rs.3,32,58,322/- was claimed as application of income on account of “Provision for doubtful debts”. AO was of the view that the same was not allowable as application as it is not an ascertained liability and had not been applied during the relevant financial year 2013-14. He  was further of the  view that assessee is entitled only for the deduction of bad debts written off and not of doubtful debts in respect of which a provision is created purely on the basis of estimation and apprehensions. He accordingly disallowed the amount of Rs.3,32,58,322/- as application of income.

Aggrieved by the order of AO, assessee carried the matter before CIT(A). Before CIT(A), it was inter alia submitted that the amount claimed as deduction was a quantified and ascertained amount and it was with respect to the outstanding from various individuals institutes which could not be recovered by the assessee for the year altogether and therefore it was written off after seeking the approval governing body. It was further submitted that though the claim was described as “provision for doubtful debts” but in fact it was a provision for  bad  debts created by debiting the income and expenditure account and was supported by complete details and was not an estimate built on apprehensions as alleged by AO. It was further submitted that since assessee was maintaining its account for mercantile basis it was entitled to exemption u/s 11 of the Act and that the income had to be computed on commercial principles as held by Hon’ble Apex Court in the case of Commissioner Of Income-Tax vs. Programme For Community (2001) 248 ITR 001 (SC). Reliance was also placed on the decision of Hon’ble Delhi High Court in the case of DIT(E) vs. NASSOM 345 ITR 362. Aggrieved by the order of CIT(A), Revenue is before this court. Learned AR on the other hand reiterated  the  submissions made before the lower authorities and supported the order  of CIT(A).

Observation and Conclusion of the court

Court has heard the rival submissions and perused the material available on record. The issue in the  present  ground  is with respect to the denial of claim of Rs.3.32 crores (rounded off) as application of income on account of  provisions  for  doubtful debts. We find that  CIT(A)  after  considering  the  submissions  of the assessee has given a finding that the provision made by the assessee was ascertained and quantified and the  provision  was made in furtherance of the objectives of  the  trust.  He  further relying on the decision of Hon’ble Delhi High Court in the case of NASSCOM (supra) held that the income for application for charitable purpose is to be computed in accordance with the commercial principles. Before us, Revenue has not placed any contrary binding decision in its support nor has pointed to  any fallacy in the findings of CIT(A). In such a situation, we find  no reason to interfere with the order of CIT(A). Thus the grounds of the Revenue are dismissed.

DCIT-Vs-Flt-Lt.-Rajan-Dhall-Charitable-Trust-ITAT-Delhi

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