High Court Of Madras
T.N. Power Finance & Infrastructure Development Corporation Ltd. vs. JCIT
Section 36(1)(vii)
Asst. Year 1998-99
P.D. Dinakaran & N. Kannadasan, JJ.
Tax Case Nos. 1012 & 1013 of 2005
26th October, 2005
Counsel Appeared
P.P.S. Janarthana Raja, for the Assessee
JUDGMENT
P.D. Dinakaran, J. :
Against the order of the Tribunal in ITA Nos. 1864 and 1865/Mad/2000, dt. 27th Nov., 2001, the assessee has preferred the appeals and raised the following common substantial question of law : “Whether the Tribunal is correct in upholding the order of the CIT(A) in disallowing provision for non-performing assets which was debited to the P&L a/c ?” The assessee is the appellant. The assessment year involved is 1998-99. The assessee engaged in the business of providing long-term finance for infrastructure development, in the return for the asst. yr. 1998-99, admitted a total income of Rs. 5,16,48,010 which was processed under s. 143 (1)(a) of the IT Act. The AO issued a notice under s. 154 of the Act calling upon the assessee to show cause as to why the provision for non-performing assets which is debited to the P&L a/c should not be disallowed in view of the Explanation to s. 36(1)(vii) of the Act. Even though the assessee filed a reply, the AO held that any provision debited to the P&L a/c cannot be allowed as a deduction unless it is an ascertained liability as the provision made by the assessee is only contingent in nature. On appeal, the CIT(A) held that the non-performing assets related to capital goods/assets whereas bad and doubtful debts were revenue in nature/trade related and the direction of the RBI could not override the mandatory provisions of the Act. Even in the rectification petition filed by the assessee, the CIT(A) held that the fact that the debts of the assessee doing the business of financial investments in power sector, etc., were revenue in nature had already been considered and accordingly, rejected the plea of the assessee for rectification. The Tribunal confirmed the order of the CIT(A). The said order of the Tribunal is put in issue in the present appeals. Sec. 36(1)(vii) of the IT Act reads as follows : “36. Other deductions.—(1) 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—…….. (vii) subject to the provisions of sub-s. (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year : Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by 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 purposes 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.”
Even though the assessee has raised a ground to the effect that the debts have been incurred in the course of business and the purpose for which the finance was used by the other party is not relevant for allowing the deduction of debts written off and hence, s. 36(1)(vii) would apply, learned counsel appearing for the assessee has fairly submitted that the assessee is not entitled to deduction, in view of the Explanation to s. 36(1)(vii) which says that the provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction. Further, the CIT(A), on the facts of the case, found that merely because the RBI has directed the assessee to provide for non-performing assets, that direction cannot override the mandatory provisions of the IT Act contained in s. 36(1)(viia) which stipulate for deduction not exceeding 5 per cent of the total income only in respect of the provision for bad and doubtful debts which are predominately revenue in nature or trade related and not for provision for non-performing assets which are of predominately capital nature, and held that the AO was right in disallowing the provision of Rs. 30 lakhs debited in the P&L a/c of the assessee towards non-performing assets. In this view of the matter, we are of the view that the Tribunal was right in upholding the order of the CIT(A) in disallowing provision for non-performing assets which was debited to the P&L a/c. Accordingly, the question of law is answered in the affirmative, against the assessee and in favour of the Revenue. The appeals are dismissed. No costs.
[Citation : 280 ITR 491]
