ITAT permits a deduction for the provision of doubtful debts

Facts and issues of the case

The captioned two appeals have been filed at the instance of the Assessee against the common order of the Learned Commissioner of Income (Appeals)-8, Ahmedabad, dated 24/09/2019 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Years (2010-11 & 2011-12).The only interconnected issue raised by the assessee is that the Ld.CIT(A), erred in confirming the disallowance made by the AO for Rs. 24,31,091/- and Rs. 2,15,496/- representing the provision for doubtful debts and doubtful advances.

The assessee in the present case is a limited company and engaged in the business of selling, erection, installation and repairs & maintenance of elevators. The assessee in the year under consideration has claimed the deduction on account of provision for doubtful debts and doubtful advances amounting to Rs. 24,31,091/- and Rs. 2,15,496/- under the provision of 36(1)(vii) and section 37 of the Act. However, the AO was of the view that the assessee has just created the provision for doubtful debts and advances which cannot be allowed as a deduction. According to the AO, as per the principle laid down by the Hon’ble SC in the case of Vijaya Bank Vs. CIT reported in 323 ITR 166 is different from the present facts of the case in as much as the word provision was not used by the bank while writing off the bad debts.

The AO also observed that the conditions specified u/s 36(2) of the Act, with respect to the provision for doubtful advances has not been complied with, therefore the same cannot be allowed as deduction. In view of the above, the AO disallowed the claim made by the assessee for the provision of doubtful debts and doubtful advances aggregating to Rs. 26,46,587/- and added to the total income of the assessee.

Aggrieved assessee preferred an appeal to the Ld. CIT(A), who has confirmed the order of the AO by observing that the assessee has not written off the amount of bad debts in the ledger account of individual parties. Therefore, the same cannot be allowed as a deduction merely on the basis of the provision for doubtful debts and doubtful advances.The Ld. CIT(A), also held that the principles laid down by the Hon’ble SC in the case of Vijaya Bank (Supra) are different from the facts of the present case in as much as there was no provision made by the Vijya Bank in the case of bad debts. As such, the bad debts were actually written off in the books of accounts.

The Ld. CIT(A) also held that the principles laid down by the Jurisdictional High Court in the case of CIT vs. Vodafone Essar Gujarat Ltd in appeal No. 749 of 2012 are different as in that case the issue was related to the computation of book profit. In view of the above the Ld. CIT(A) confirmed the order of the AO.

Being aggrieved by the order of Ld. CIT(A), the assessee is in appeal before us. The Ld. AR, before us filed a paper book running from pages 1 to 165 and contended that the amount of provision for bad debts and doubtful advances was actually debited in the profit and loss accounts which were also adjusted against the sundry debtors as well as advances. Therefore, the same needs to be allowed in terms of the principles laid down by the Hon’ble SC in the case of Vijaya Bank (supra).On the other hand the Ld. DR vehemently supported the order of the authorities below.

Observation by the court

Court had heard the rival contentions of both the parties and perused the materials available on record. There is no dispute to the fact that the assessee has claimed deduction under the head provision for doubtful debts and doubtful advances by debiting the profit and loss account and simultaneously making adjustments in the sundry debtors account and advances account as reflected in the balance sheet as on 31/03/2010. This fact can be verified from the necessary details which are available in the Annual Account of the assessee.

Now the controversy arises whether the assessee can claim a deduction for the provision of doubtful debts without giving adjustment in the individual ledger account of the sundry debtors. From the above, we note that the ITAT in the case of Vidras India Ceramics (P.) Ltd (Supra) after considering and relying on the judgment of Hon’ble SC in the case of Vijaya Bank (Supra) has granted relief to the assessee for the provision made with respect to doubtful debts.

Respectfully following the same court hold that assessee is eligible for deduction on account of provision for doubtful debts in the given facts and circumstances. It is for this reason that the assessee in the present case has written off the provision of doubtful debts in the profits and loss account and also has given effect in the balance sheet of the assessee. Thus to our understanding the principle laid down by the Hon’ble S.C in the case Vijay Bank as discussed above cannot be denied for its application merely on the reasoning that the word provision for doubtful debts has been used by the assessee in its Financial Statements.

It is also important to note that the assessee has not written off the provision for doubtful debts in the individual ledger account of the sundry debtors for the reason that it will lose it right in the Civil proceedings for recovery of its dues from the sundry debdtors. This argument of the Ld. A.R was not controverted by the Ld. DR for the assessee at the time of hearing. Accordingly, we hold that the assessee is entitled to the deduction for the provision of doubtful debts in the given facts and circumstances.

Regarding the provision for doubtful advances, we note that the same stand on the footing of doubtful debts as long as they were given in the course of the business. Therefore, on the same line of reasoning we also hold that the assessee is allowed for the deduction of the provision for doubtful advances under the provision of section 37 of the Act. In view of the above and after considering the facts in totality we reverse the order of the authority below and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.In the result the appeal of the assessee is allowed.

Coming to the ITA No. 1726/Ahd/2019 for AY 2011-12, an appeal by the assessee.At the outset court note that similar ground was raised by the assessee in its own case bearing ITA No.1725/Ahd/2019 for AY 2010-11 which has been decided in favour of assessee by us vide paragraph no. 9 of this order. For the detailed discussion, please refer to the above para. Accordingly, Court hold that the finding given in the above paragraph of this order with regard to ITA No. 1725/Ahd/2019 will mutatis mutandis apply here in this case also. Thus the ground of appeal raised by the assessee is allowed.