REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.3286-3287 OF 2010 (Arising out of S.L.P. (C) Nos.21568-21569 of 2009)

M/s. Vijaya Bank                        ...Appellant(s)

Versus

Commissioner of Income Tax & Anr.            ...Respondent(s)

J U D G E M E N T

S.H. KAPADIA,J.

Leave granted.

Whether  it  is  imperative  for  the  assessee-Bank  to  

close the individual account of each of it's debtors in it's  

books  or a  mere  reduction  in  the  Loans  and  Advances  or  

Debtors on the asset side of it's Balance Sheet to the extent  

of  the  provision  for  bad  debt  would  be  sufficient  to  

constitute a write off is the question which we are required  

to answer in these civil appeals?

In  these  civil  appeals,  we  are  concerned  with  

Assessment Years 1993-1994 and 1994-1995.  For the Assessment  

Year 1994-1995, the Assessing Officer disallowed a sum of  

Rs.7,10,47,161/-  which  the  assessee-Bank  had  reduced  from  

Loans and Advances or Debtors on the ground that the impugned

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bad debt had not been written off in an appropriate manner as  

required under the Accounting principles.  According to him,  

the impugned bad debt supposedly written off by the assessee-

Bank was a mere provision and the same could not be equated  

with  the  actual  write  off  of  the  bad  debt,  as  per  the  

requirement of Section 36(1)(vii) of the Income Tax Act, 1961  

[`1961 Act', for short] read with  Explanation thereto which  

Explanation stood inserted in 1961 Act by Finance Act, 2001  

with effect from 1st April, 1989.  The assessee carried the  

matter in appeal before the Commissioner of Income Tax (A)  

[`CIT(A)', for short], who opined that it was not necessary  

for  the  purpose  of  writing  off  of  bad  debts  to  pass  

corresponding entries in the individual account of each and  

every debtor and that it would be sufficient if the debit  

entries  are  made  in  the  Profit  and  Loss  Account  and  

corresponding  credit  is  made  in  the  “Bad  Debt  Reserve  

Account”.  Against the decision of CIT (A) on this point, the  

Department preferred an appeal to the Income Tax Appellate  

Tribunal [`Tribunal', for short].  Before the Tribunal, it  

was argued on behalf of the Department that write off of each  

and  every  individual  account  under  the  Head  `Loans  and  

Advances' or Debtors was a condition precedent for claiming  

deduction under Section 36(1)(vii) of 1961 Act.  According to  

the Department, the claim of actual write off of bad debts in  

relation  to  Banks  stood  on  a  footing  different  from  the  

accounts of the Non-Banking assessee(s),  though it was not  

disputed before us that Section 36(1)(vii) of 1961 Act covers  

Banking as  well as Non-Banking assessees.   According to the

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assessee,  once  a  provision  stood  created  and,  ultimately,  

carried to the Balance Sheet wherein Loans and Advances or  

Debtors  depicted  stood  reduced  by  the  amount  of  such  

provision, then, there was actual write off because, in the  

final analysis, at the year-end, the so-called provision does  

not remain and the Balance Sheet at the year-end only carries  

the amount of loans and advances or debtors,  net of such  

provision made by the assessee for the impugned bad debt.  

The Tribunal, accordingly, upheld the above contention of the  

assessee  on  three  grounds.   Firstly,  according  to  the  

Tribunal, the assessee had rightly made a provision for bad  

and doubtful debt by debiting the amount of bad debt to the  

Profit and Loss Account so as to reduce the profits of the  

year.  Secondly, the provision account so created was debited  

and  simultaneously  the  amount  of  loans  and  advances  or  

debtors  stood  reduced  and,  consequently,  the  provision  

account  stood  obliterated.   Lastly,  according  to  the  

Tribunal, loans and advances or the sundry debtors of the  

assessee as at the end of the year lying in the Balance Sheet  

was shown as net of “provisions for doubtful debt” created by  

way of debit to the Profit and Loss Account of the year.  

Consequently,  the  Tribunal,  on  this  point,  came  to  the  

conclusion that deduction under Section 36(1)(vii) of 1961  

Act was allowable.   

On the question whether it was imperative for the  

assessee to close each and every individual account and it's  

debtors in it's Books  or a mere reduction in the loans and  

advances to the  extent of the provision for bad and doubtful

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debt was sufficient, the answer given by the Tribunal was  

that, in view of the decision of the Gujarat High Court in  

the  case  of  Vithaldas  H.  Dhanjibhai  Bardanwala vs.  

Commissioner of Income Tax, Gujarat, reported in [1981] 130  

ITR  95  (Gujarat),  the  CIT(A)  was  right  in  coming  to  the  

conclusion  that,  since  the  assessee  had  written  off  the  

impugned bad debt in it's Books by way of a debit to the  

Profit  and  Loss  Account  simultaneously  reducing  the  

corresponding  amount  from  Loans  and  Advances  or  Debtors  

depicted on the asset side in the Balance Sheet at the close  

of the year, the assessee was entitled to deduction under  

Section 36(1)(vii) of 1961 Act.  This view was not accepted  

by the High Court which came to the conclusion by placing  

reliance  on  a  relied  upon  judgement  in  the  case  of  

Commissioner of Income Tax & Anr. vs.  M/s. Wipro Infotech  

Limited [See Page 5 of the Paper Book], that, in view of the  

insertion of the  Explanation vide Finance Act, 2001, with  

effect from 1st April, 1989, the decision of the Gujarat High  

Court  in  the  case  of  Vithaldas  H.  Dhanjibhai  Bardanwala  

[supra]  no  more  held  the  field  and,  consequently,  mere  

creation of a provision did not amount to actual write off of  

bad debts, hence, these civil appeals.

At  the  outset,  we  may  state  that,  in  these  civil  

appeals, broadly, two questions arise for determination.  The  

first question which arises for determination concerns the  

manner  in  which  actual  write  off  takes  place  under  the  

Accounting principles.   The second question which arises for

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determination  in  these  civil  appeals  is,  whether  it  is  

imperative  for  the  assessee-Bank  to  close  the  individual  

account of each debtor in it's Books or a mere reduction in  

the “Loans and Advances Account” or Debtors to the extent of  

the provision for bad and doubtful debt is sufficient?

The first question is no more res integra.  Recently,  

a  Division  Bench  of  this  Court  in  the  case  of  Southern  

Technologies Limited vs.  Joint Commissioner of Income Tax,  

reported in [2010] 320 ITR 577, [in which one of us [S.H.  

Kapadia,J.] was a party] had an occasion to deal with the  

first  question  and  it  has  been  answered,  accordingly,  in  

favour of the assessee  vide Paragraph (25), which reads as  

under:

“Prior to April 1, 1989, the law, as it then  stood, took the view that even in cases in which  the assessee(s) makes only a provision in its  accounts for bad debts and interest thereon and  even though the amount is not actually written  off by debiting the profit and loss account of  the  assessee  and  crediting  the  amount  to  the  account of the debtor, the assessee was still  entitled to deduction under section 36(1)(vii).  [See  CIT v. Jwala Prasad Tiwari (1953) 24 ITR  537 (Bom) and Vithaldas H. Dhanjibhai Bardanwala  vs. CIT (1981) 130 ITR 95 (Guj)]  Such state of  law prevailed up to and including the assessment  year  1988-89.   However,  by  insertion  (with  effect from April 1, 1989) of a new Explanation  in  section  36(1)(vii),  it  has  been  clarified  that any bad debt written off as irrecoverable  in the account of the assessee will not include  any provision for bad and doubtful debt made in  the  accounts  of  the  assessee.   The  said  amendment indicates that before April 1, 1989,  even a provision could be treated as a write  off.  However, after April 1, 1989, a distinct  dichotomy  is  brought in  by way  of  the  said

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Explanation to  section  36(1)(vii).  Consequently,  after  April  1,  1989,  a  mere  provision for bad debt would not be entitled to  deduction  under  Section  36(1)(vii).   To  understand  the  above  dichotomy,  one  must  understand `how to write off'.  If an assessee  debits an amount of doubtful debt to the profit  and loss account and credits the asset account  like  sundry  debtor’s  account,  it  would  constitute  a  write  off  of  an  actual  debt.  However, if an assessee debits `provision for  doubtful debt' to the profit and loss account  and makes a corresponding credit to the `current  liabilities and provisions' on the liabilities  side  of  the  balance-sheet,  then  it  would  constitute a provision for doubtful debt.  In  the  latter  case,  the  assessee  would  not  be  entitled to deduction after April 1, 1989.”

One point needs to be clarified.  According to Shri  

Bishwajit Bhattacharya, learned Additional Solicitor General  

appearing  for  the  Department,  the  view  expressed  by  the  

Gujarat High Court in the case of  Vithaldas H. Dhanjibhai  

Bardanwala [supra]  was  prior  to  the  insertion  of  the  

Explanation vide Finance  Act,  2001,  with  effect  from  1st  

April,  1989,  hence,  that  law  is  no  more  a  good  law.  

According to the learned counsel, in view of the insertion of  

the said  Explanation in Section 36(1)(vii) with effect from  

1st April, 1989, a mere debit of the impugned amount of bad  

debt  to  the  Profit  and  Loss  Account  would  not  amount  to  

actual write off.  According to him, the Explanation makes it  

very clear that there is a dichotomy between actual write off  

on the one hand and a provision for bad and doubtful debt on  

the other.  He submitted  that a mere debit to the Profit and

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Loss  Account  would  constitute  a  provision  for  bad  and  

doubtful debt, it would not constitute actual write off and  

that was the very reason why the Explanation stood inserted.  

According to him, prior to Finance Act, 2001, many assessees  

used  to  take  the  benefit  of  deduction  under  Section  

36(1)(vii) of 1961 Act by merely debiting the impugned bad  

debt  to  the  Profit  and  Loss  Account  and,  therefore,  the  

Parliament stepped in by way of Explanation to say that mere  

reduction of profits by debiting the amount to the Profit and  

Loss Account  per se would not constitute actual write off.  

To  this  extent,  we  agree  with  the  contentions  of  Shri  

Bhattacharya.  However, as stated by the Tribunal, in the  

present case, besides debiting the Profit and Loss Account  

and  creating  a  provision  for  bad  and  doubtful  debt,  the  

assessee-Bank had correspondingly/simultaneously obliterated  

the  said  provision  from  it's  accounts  by  reducing  the  

corresponding amount from Loans and Advances/debtors on the  

asset side of the Balance Sheet and, consequently, at the end  

of the year, the figure in the loans and advances or the  

debtors on the asset side of the Balance Sheet was shown as  

net of  the  provision  “for  impugned  bad  debt”.   In  the  

judgement of the Gujarat High Court in the case of Vithaldas  

H. Dhanjibhai Bardanwala [supra], a mere debit to the Profit  

and Loss Account was sufficient to constitute actual write  

off whereas, after the  Explanation, the assessee(s) is now  

required not only to debit the Profit and Loss Account but  

simultaneously also reduce loans and advances or the debtors  

from the asset side of the Balance Sheet to the extent of the

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corresponding amount so that, at the end of the year, the  

amount  of  loans  and  advances/debtors  is  shown  as  net  of  

provisions for impugned bad debt.  This aspect is lost sight  

of by the High Court in it's impugned judgement.  In the  

circumstances,  we  hold,  on  the  first  question,  that  the  

assessee  was  entitled  to  the  benefit  of  deduction  under  

Section 36(1)(vii) of 1961 Act as there was an actual write  

off by the assessee in it's Books, as indicated above.

Coming to the second question, we may reiterate that  

it is not in dispute that Section 36(1)(vii) of 1961 Act  

applies  both  to  Banking  and  Non-Banking  businesses.   The  

manner in which the write off is to be carried out has been  

explained hereinabove.  It is important to note that the  

assessee-Bank has not only been debiting the Profit and Loss  

Account  to  the  extent  of  the  impugned  bad  debt,  it  is  

simultaneously reducing the amount of loans and advances or  

the debtors at the year-end, as stated hereinabove.  In other  

words, the amount of loans and advances or the debtors at the  

year-end  in  the  balance-sheet  is  shown  as  net  of  the  

provisions  for  impugned  debt.   However,  what  is  being  

insisted upon by the Assessing Officer is that mere reduction  

of the amount of loans and advances or the debtors at the  

year-end  would  not  suffice  and,  in  the  interest  of  

transparency, it would be desirable for the assessee-Bank to  

close each and every individual account of loans and advances  

or debtors as a pre-condition for claiming deduction under  

Section 36(1)(vii) of 1961 Act.   This view has been taken by

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the  Assessing  Officer  because  the  Assessing  Officer  

apprehended  that  the  assessee-Bank  might  be  taking  the  

benefit of deduction under Section 36(1)(vii) of 1961 Act,  

twice over. [See Order of CIT (A) at Pages 66, 67 and 72 of  

the Paper Book, which refers to the apprehensions of the  

Assessing Officer].  In this context, it may be noted that  

there  is  no  finding  of  the  Assessing  Officer  that  the  

assessee had unauthorisedly claimed the benefit of deduction  

under  Section  36(1)(vii),  twice  over.   The  Order  of  the  

Assessing Officer is based on an apprehension that, if the  

assessee fails to close each and every individual account of  

it's debtor,  it may result in assessee claiming deduction  

twice  over.   In  this  case,  we  are  concerned  with  the  

interpretation of Section 36(1)(vii) of 1961 Act.  We cannot  

decide the matter on the basis of apprehensions/desirability.  

It  is  always  open  to  the  Assessing  Officer  to  call  for  

details  of  individual  debtor's  account  if  the  Assessing  

Officer has reasonable grounds to believe that assessee has  

claimed deduction, twice over.  In fact, that exercise has  

been undertaken in subsequent years.  There is also a flip-

side  to  the  argument  of  the  Department.   Assessee  has  

instituted recovery suits in Courts against it's debtors.  If  

individual  accounts  are  to  be  closed,  then  the  

Debtor/Defendant in each of those suits would rely upon the  

Bank statement and contend that no amount is due and payable  

in which event the suit would be dismissed.

Before  concluding,  we  may  refer  to  an  argument  

advanced  on  behalf  of  the  Department.   According  to  the  

Department,  it is necessary  to square  off each  individual

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account failing which there is likelihood of escapement of  

income  from  assessment.   According  to  the  Department,  in  

cases where a borrower's account is written off by debiting  

Profit and Loss Account and by crediting Loans and Advances  

or Debtors Accounts on the asset side of the Balance Sheet,  

then, as and when in the subsequent years if the borrower  

repays the loan, the assessee will credit the repaid amount  

to the Loans and Advances Account and not to the Profit and  

Loss Account which would result in escapement of income from  

assessment.  On the other hand, if bad debt is written off by  

closing the borrower's account individually, then the repaid  

amount in subsequent years will be credited to the Profit and  

Loss  Account  on  which  the  assessee-Bank  has  to  pay  tax.  

Although,  prima  facie,  this  argument  of  the  Department  

appears to be valid, on a deeper consideration, it is not so  

for three reasons.  Firstly, the Head Office Accounts clearly  

indicate,  in  the  present  case,  that,  on  repayment  in  

subsequent  years,  the  amounts  are  duly  offered  for  tax.  

Secondly, one has to keep in mind that, under the Accounting  

practice, the Accounts of the Rural Branches have to tally  

with the Accounts of the Head Office. If the repaid amount in  

subsequent  years  is  not  credited  to  the  Profit  and  Loss  

Account of the Head Office, which is ultimately what matters,  

then, there would be a mis-match between the Rural Branch  

Accounts and the Head Office Accounts.  Lastly, in any event,  

Section 41(4) of 1961 Act, inter alia, lays down that, where  

a deduction  has  been  allowed  in  respect  of  a bad  debt

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or a part thereof under Section 36(1)(vii) of 1961 Act, then,  

if the amount subsequently recovered on any such debt is  

greater than the difference between the debt and the amount  

so allowed, the excess shall be deemed to be profits and  

gains of business and, accordingly, chargeable to income tax  

as the income of the previous year in which it is recovered.  

In the circumstances, we are of the view that the Assessing  

Officer  is  sufficiently  empowered  to  tax  such  subsequent  

repayments under Section 41(4) of 1961 Act and, consequently,  

there is no merit in the contention that, if the assessee  

succeeds, then it would result in escapement of income from  

assessment.

For the afore-stated reason, we uphold the judgement  

of  the  Tribunal  dated  31st July,  2003,  and  set  aside  the  

impugned  judgement  of  the  High  Court.   Consequently,  the  

assessee's appeals stand allowed with no order as to costs.

......................J.               [S.H. KAPADIA]

......................J.               [SWATANTER KUMAR]

New Delhi, April 15, 2010.