Pr. Commissioner of Income Tax 6 vs Khyati Realtors Pvt. Ltd.

Income Tax Act, 1961: Chapter IV, Part D, ss.28, 36 – Scope – The income of every assessee has to be assessed as per Chapter IV, Part D of the Act – s.28 deals with the chargeability of income to tax under the head ‘Profits and Gains of Business or Profession’ – The other deductions is given u/s.36 of the Act, which opens with the phrase “the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s.28” – For the purposes of computing income chargeable to tax, therefore, besides specific deductions, ‘other deductions’ enumerated in different clauses of s.36 can be allowed by the AO – Each of the deductions must relate to the business carried out by the assessee – If the assessee carries on a business and writes off a debt relating to the business as irrecoverable, it would be entitled to a corresponding deduction under clause (vii) of sub-section (1) of s.36 subject to the fulfilment of the conditions set forth in sub-section (2) of s.36 of the IT Act. Income Tax Act, 1961: s.36(1)(vii) – Amendment of 1989 – Pre and Post amendment position – Before the amendment in 1989, even in cases where the assessee had made only a provision in its accounts for bad debts and interest thereon, without the amount actually being debited from the assessee’s Profit and Loss account, the assessee could still claim deduction under s.36(1)(vii) of the Act – With effect from 1 April 1989, with the insertion of the new Explanation under s.36(1)(vii), any bad debt written-off as irrecoverable in the account of the assessee would not include any ‘provision’ for bad and doubtful debt made in the accounts of the assessee – In other words, before this date, even a provision could be treated as a write off, however, after this date, as per the Explanation to s.36(1)(vii), a mere provision for bad debt per se was not entitled to deduction under s.36(1)(vii). Allowing the appeal, the Court

HELD: 1. The income of every assessee has to be assessed according to the statutory framework laid out Chapter IV, Part D of the Act. That chapter deals with heads of income. Section 28 of the Act deals with the chargeability of income to tax under the head ‘Profits and Gains of Business or Profession’. The other deductions that an assessee can claim are elaborated under Section

36 of the Act, which opens with the phrase “the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28”. For the purposes of computing income chargeable to tax, therefore, besides specific deductions, ‘other deductions’ enumerated in different clauses of Section 36 can be allowed by the AO. Each of the deductions must relate to the business carried out by the assessee. If the assessee carries on a business and writes off a debt relating to the business as irrecoverable, it would without doubt be entitled to a corresponding deduction under clause (vii) of sub-section (1) of Section 36 subject to the fulfilment of the conditions set forth in sub-section (2) of Section 36 of the IT Act. [Para 12][47-G-H; 48A-B]

2. Before the amendment in 1989, the law was that even in cases where the assessee had made only a provision in its accounts for bad debts and interest thereon, without the amount actually being debited from the assessee’s Profit and Loss account, the assessee could still claim deduction under Section 36(1)(vii) of the Act. With effect from 1 April 1989, with the insertion of the new Explanation under Section 36(1)(vii), any bad debt writtenoff as irrecoverable in the account of the assessee would not include any ‘provision’ for bad and doubtful debt made in the accounts of the assessee. In other words, before this date, even a provision could be treated as a write off. However, after this date, the Explanation to Section 36(1)(vii) brought about a change. As a result, a mere provision for bad debt per se was not entitled to deduction under Section 36(1)(vii). Thus, merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non-compliance with the conditions in Section 36(1)(vii), 36(2), and Explanation to Section 36(1)(vii) would not entitle the assessee to claim a deduction. [Para 13, 14][48-C-E; 50-B-C]

Catholic Syrian Bank Ltd. v. Commissioner of Income Tax, Thrissur (2012) 3 SCC 784 : [2012] 4 SCR 739 – relied on.

3. It is evident from the rulings of this Court that (i) the amount of any bad debt or part thereof has to be written-off as irrecoverable in the accounts of the assessee for the previous year; (ii) Such bad debt or part of it written-off as irrecoverable in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee; (iii) no deduction is allowable unless the debt or part of it “has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year”, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (iv) the assessee is obliged to prove to the AO that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act. [Para 17][51-G-H; 52-A-C]

T.R.F. Limited v. Commissioner of Income Tax, Ranchi (2010) 13 SCC 532; Southern Technologies Ltd. v. Joint Commissioner of Income Tax, Coimbatore [2010] 2 SCR

380 – relied on.

4. In the present case, the record shows that the accounts of the assessee nowhere showed that the advance was made by it to M/s C. Bhansali Developers Pvt. Ltd. in the ordinary course of business. Its primary argument was that the amount of ` 10 crores was given for the purpose of purchasing constructed premises. However, the amount was written-off on 28.03.2009. As noted by the CIT(A), there was no material to substantiate this submission, in respect of payment of the amount, the time by which the constructed unit was to be given to it, the area agreed to be purchased, etc. Equally, in support of its other argument that the amount was given as a loan, the assessee nowhere established the duration of the advance, the terms and conditions applicable to it, interest payable, etc. The assessee conceded that it had received interest income for the relevant assessment year. However, it could not establish that any interest was paid (or shown to be payable in its accounts) for the sum of ¹ 10 crores. Furthermore, there is nothing on record to suggest that the requirement of the law that the bad debt was written-off as irrecoverable in the assessee’s accounts for the previous year had been satisfied. Another reason why the amount could not have been written-off, is that the assessee’s claim was that it was given to M/s Bhansali Developers Pvt. Ltd. for acquiring immovable property – it therefore, was in the nature of a capital expenditure. It could not have been treated as a business expenditure. [Para 18][52-C-G]

A.V. Thomas and Co. Ltd., Alleppey v. The Commissioner of Income Tax, (Bangalore) Kerala [1963] 1 Suppl. SCR

776 – relied on.

Commissioner of Income Tax v. Mysore Sugar Co. Ltd. [1963] 2 SCR 976; Mohan Meakin Ltd. v.

Commissioner of Income Tax 2012 (348) ITR 109 (Del); Harshad J. Choksi v. Commissioner of Income Tax 349 ITR 250 (Bom); IBM World Trade Corporation v.

Commissioner of Income Tax 1990 (186) ITR 412

(Bom) – referred to.