Commissioner of Income Tax vs Union Carbide India Ltd.

Suhas Chandra Sen, J.—The Tribunal has referred the following two questions of law to this Court u/s 256(1) of the income tax Act, 1961 (''the Act''): "1. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the provisions of section 36(2) of the income tax Act, 1961, the Tribunal was right in allowing the assessee''s claim for bad debts of Rs. 25,67,488 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in accepting the assessee''s claim that once the amount of the debt is debited to the profit and loss account, it is immaterial which account, has been credited and that mere passing of the entry into the debt side of the profit and loss account tantamounts to writing off of the bad debts ?"

The facts found by the Tribunal are as under :

"The assessee is Union Carbide India Ltd. and the assessment year involved is 1979-80.

The assessee-company debited a sum of Rs. 25,67,438 in its profit and loss account as debts and credited the provisions for doubtful debts, to that extent. The assessee claimed the debts as bad debts. The income tax Officer held that the debts claimed as bad had not been written off in the books of the assessee in terms of the provisions of section 36(2) of the income tax Act, 1961. The income tax Officer, therefore, did not allow the claim of the assessee.

On appeal, the Commissioner (Appeals) analysed the conditions of section 36(2) and took into consideration in the decisions reported in Vithaldas H. Dhanjibhai Bardanwala Vs. Commissioner of Income Tax, Gujarat-V, , Shrimati Tarulata Shyam and Others Vs. Commissioner of Income Tax, West Bengal, and The Commissioner of Income Tax, Lucknow Vs. Sh. Madho Pd. Jatia, and came to the conclusion that the assessee did not satisfy the conditions of section 36(2)(i)(b) of the Act. Consequently, the disallowance made by the income tax Officer was confirmed by the Commissioner (Appeals).

Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal observed that, according to the principles of accountancy, the writing off denotes the charging of the amount in the profit and loss account. According to the Tribunal, once the amount is charged in the profit and loss account, the amount which is charged in the profit and loss account vanishes from the books of the assessee and an adjustment entry may appear under another head. The Tribunal held that if this accountancy principle was applied to the entries made by the assessee, the assessee had written off the debts in its books of account. The Tribunal, therefore, allowed the assessee''s claim."

The Tribunal has recorded the arguments made on behalf of the assessee as under:

"At the time of hearing of the appeal, Sarvashri V.K. Kalra and K.S. Ramchandran drew my attention to the fact that the primary and most important requirement for the allowance of bad and or irrecoverable debts is that the same has become bad and/or irrecoverable in the relevant accounting year, in which respect the onus is on the assessee to establish the claim. It has been vehemently urged before me at the time of hearing of the appeal that this onus of the appellant has been fully discharged before the income tax Officer during the course of assessment proceedings in regard to justifying claim for deduction of the debts in question which have become bad and/or irrecoverable in the accounting year relevant to the assessment year 1979-80. Continuing their submissions, Sarvashri V.K. Kalra and K.S. Ramchandran pointed out to the relevant portion contained in para 12 of the impugned assessment order, wherein the income tax Officer has clearly stated that-

''Detailed statement giving particulars of the debts in question is on record. Assessee has produced relevant records and documents and established that all the debts in question have become bad during the previous year ended 25th December, 1978. The debts have been taken into account in computing the income of earlier years.''

In view of the above, it has been stated on behalf of the appellant-company that the income tax Officer has not doubted the factual position of the debts in question, viz., that the same had become bad and/or irrecoverable in the accounting year relevant to the assessment year 1979-80. However, the income tax Officer has not allowed the claim of the appellant-company on the point that the appellant has not satisfied the requirements of section 36(2)(i)(b) of the income tax Act, 1961 as the debts have not been written off in the accounts of the respective parties. Against this conclusion of the income tax Officer it has been contended that the posting of debit entries in the profit and loss account and credit entries in bad debts reserve account are sufficient and are also in conformity with the requirements of the income tax Act so far as the meaning of the words ''write off is concerned and that it is not necessary for the purpose of claim of deduction pertaining to bad debts, to post corresponding entries in ledger accounts of the concerned parties and to close their accounts, on reference to section 36(2)(i)(b) of the income tax Act, 1961 based on which the income tax Officer has made the instant addition. In this regard, reference has been invited to the Gujarat High Court judgment in the case of Vithaldas H. Dhanjibhai Bardanwala Vs. Commissioner of Income Tax, Gujarat-V, wherein, it has been claimed on behalf of to appellant-company, that the facts, which are exactly similar to the point presently under appeal, have been decided in favour of the assessee and against the revenue."

The Tribunal following the aforesaid judgment of the Gujarat High Court held that the assessee can be said to have actually written off its claim for bad debt of Rs. 25,67,488 in its accounts and as such was entitled to succeed in the appeal on this point.

The only question that arises for consideration in this case is whether debiting of ''profit and loss account'' and crediting ''provisions for doubtful debts account'' amount to writing off the debts as irrecoverable. It has been held by the Supreme Court that whether a debt has become bad and irrecoverable in the year in which it has become bad and irrecoverable are essentially questions of fact. Unless a question of perversity is raised that question cannot be gone into by the Court.

Mr. Bagchi, advocate appearing for the revenue has, however, contended that even assuming that a debt has become irrecoverable the assessee is not entitled to get the benefit of section 36(2) of the Act unless he actually writes off the debt in his books of account. Section 36(2) provides that in making a deduction of a bad debt or a part thereof, certain conditions will have to be fulfilled. One of the conditions is that the amount of debt will have to be written off as irrecoverable in the accounts of the assessee for the previous year. Now the question is whether the ''writing off in the instant case can be said to have taken place in the facts of the case. In other words, whether the posting of debit entries in ''profit and loss account and credit entries in the bad debts reserve account'' are sufficient to constitute the writing off of bad debts in the accounts of the assessee. No book on accounting practice has been cited before this Court to show that what the assessee has done will not be sufficient to constitute the writing off bad debt.

Dr. Pal in his reply has contended that the requirement of writing off of a bad debt as irrecoverable in the accounts of the assessee is to reflect the fact that assessee had written off, as irrecoverable, the debt in his books of account for the relevant previous year. By such debiting to the profit and loss account the amount of bad debt, the assessee has indicated a clear intention of treating the bad debt as irrecoverable and the said amount no longer forms part of the asset of the assessee as the sundry debtors account into which all the individual ledger accounts of debtors are incorporated have been credited with the said amount and thus the said amount no longer represents any asset in the balance sheet. Once the profit and loss account is debited to the extent of the concerned bad debt amount, the amount is written off in the accounts of the assessee and the corresponding credit entry in the bad debt reserve account goes to swell the liability of the assessee to that extent. Thus, the debts which were treated as assets formerly and appeared in the sundry debtors account is now taken away from the asset side by crediting the said amount to the sundry debtors account instead of crediting it to the individual ledger account. The amount is now treated as a provision for bad and doubtful debt thereby increasing the liability of the assessee to that extent. The write off of a bad debt in terms of the aforesaid section is complied with when the amount of bad debt is debited to the profit and loss account. The corresponding credit may be made either in the individual ledger account or instead of doing that it may be credited to the sundry debtors account into which the individual ledger account is incorporated.

In the present case, the sundry debtors account has been credited with the aforesaid sum. By reducing the sundry debtors account in respect of the aforesaid amount the assessee has clearly demonstrated its intention not to treat the said bad debt as an asset and provided for the said amount by crediting the amount with the account ''provision for doubtful debt'' and debiting the profit and loss account under the heading ''Provision for doubtful debts''.

In my judgment, the assessee is not entitled to get the relief provided by section 36 unless it strictly complies with the terms and conditions thereof. A number of deductions are allowed u/s 36. In order to avail of the deductions, certain conditions will have to be fulfilled. One of the deductions available to the assessee u/s 36 is on account of bad and irrecoverable debts. But in order to claim these deductions it will not be sufficient to the assessee to establish that the debt has become bad and irrecoverable in the relevant previous year, the assessee will also write off the debt in his books of account, the language of section 36(2)(i) is as under:

" (i) no such deduction shall be allowed unless such debt or part thereof-

(a) has been taken into account in computing the income of the assessee of that previous year 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, and

(b) has been written off as irrecoverable in the accounts of the assessee for that previous year;"

There is no dispute in this case that the debt had become irrecoverable in the relevant year of accounts. There is also no dispute that in order to claim of relief on account of bad debt, the amount must be written off in the books of account of the assessee. It has been claimed on behalf of the assessee that it has written off the amount in his books of account. This manner of accounting is in consonance with well-established accounting practice. Mr. Bagchi has contended that the account has not been written off.

The Tribunal has also referred in accounting practice and has relied on a judgment of the Gujarat High Court to come to the conclusion that the amount has actually been written off in the accounts.

We are of the view that it is basically a question of accounting practice. The Tribunal has taken a reasonable view of the matter, we are disinclined to interfere in the matter in the facts of this case.

Both the questions are, therefore, answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

Bhagabati Prasad Banerjee, J.

I agree.