M/S. VIJAYA BANKversusCOMMISSIONER OF INCOME TAX AND ANR.

                     [2010] 4 S.C.R. 721

                     M/S. VIJAYA BANK                              A
                              v.
      COMMISSIONER OF INCOME TAX AND ANR.
         (Civil Appeal Nos.3286-3287 of 2010)
                       APRIL 15, 2010
                                                                   B
    [S.H. KAPADIA AND SWATANTER KUMAR, JJ.)

    Income Tax Act, 1961:

     s.36(1)(vii), Explanation - Deduction under s.36{1)(vii) -    c
Held: With effect from April 1, 1989, mere provision for bad
debt would not be entitled to deduction under s.36(1)(vii) - For
availing benefit of the deduction, assessee has to write off the
debt by debiting the Profit and Loss Account to the extent of
provision for bad debt and simultaneously reducing                 0
corresponding amount from loans and advances/debtors from
the asset side of Balance Sheet - It is not imperative for
assessee to close the individual account of each of its debtors
in the books.

     The question which arose for consideration in these           E
 appeals was whether it was imperCJtive 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 its Balance
·Sheet to the extent of the provision for bad debt would           F
 be sufficient to constitute a write off.

    Allowing the appeals, the Court

     HELD: 1.1. Prior to April 1, 1989, the law, as it then        G
stood, was that even in cases in which the assessee
made only a provision in its accounts for bad debts and
interest thereon and even though the amount was not
actually written off by debiting the profit and loss account
of the assessee and crediting the amount to the account
                             721                                   H
    722     SUPREME COURT REPORTS              [2010] 4 S.C.R.


A of the debtor, the assessee was still entitled to deduction
  under Section 36(1 )(vii) of the Income Tax Act, 1961.
  However, by insertion (with eff1;1ct from April 1, 1989) of a
  new Explanation in Section 36(1 )(vii), it was clarified that
  any bad debt written off as irrecoverable in the account
B of the assessee would not include any provision for bad
  and doubtful debt made in the accounts of the assessee.
  Consequently, after April 1, 1989, a mere provision for bad
  debt would not be entitled to deduction under Section
  36(1 )(vii). [Paras 6] [727-G-H; 728-A-B]
c        Southern Technologies Limited v. Joint Commissioner
    of Income Tax (2010) 320 ITR 577, relied on.

        Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 130
    ITR 95 (Guj), referred to.
D
         1.2. In the instant 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 its
E   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". After the
F   Explanation, the assessee is 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
    corresponding amount so that, at the end of the year, the
G   amount of loans and advances/debtors is shown as net
    of provisions for impugned bad debt. In the
    circumstances, 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.
H   [Para 7] [729-D-H; 730-A-B]
VIJAYA BANK v. COMMISSIONER OF INCOME TAX 723
                 AND ANR.
     1.3. Section 36(1 )(vii) of 1961 Act applies both to A
Banking and Non-Banking businesses. 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. In other words, B
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 c
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)
                                                             0
of 1961 Act. This view has been taken by the Assessing
Officer because he apprehended that the assessee-Bank
might be taking the benefit of deduction under Section
36(1)(vii) of 1961 Act, twice over. There is no finding of
the Assessing Officer that the assessee had
unauthorisedly claimed the benefit of deduction under E
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. The matter cannot decide on the basis of F
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. [Para 8] [730-B-H; 731-A-B]                            G

     2. Section 41(4) of 1961 Act, lays down that, where a
deduction has been allowed in respect of a bad debt or
a part thereof under Section 36(1)(vii) of 1961 Act, then,
if the amount subsequently recovered on any such debt        H
    724      SUPREME COURT REPORTS                [2010) 4 S.C.R.

A 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, the
B 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. [Para 9] [732-
C A-D]
                         Case Law Reference:
     CIT (1981) 130 ITR 95 (Guj) referred to          Para 4
     (2010) 320 ITR 577           relied on     Para 5
D
        CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.
    3286-3287 of 2010.

      From the Judgment & Order dated 2.4.2009 of the High
E Court of Karnataka at Bangalore, in Income Tax Appeal Nos.
  54 and 55 of 2004.

        G. Sarangan, Sanjay Kunur and R.N. Keshwani for the
    Appellant.

F         Bishwajit Bhattacharya, ASG, Arijit Prasad, C.V. Subba
    Rao, Debashis Mukherjee, Ajay Singh and B.V. Balaram Das
    for the Respondents.

          The Judgment of the Court was delivered by

G         S.H. KAPADIA, J. 1. Leave granted.

       2. 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
H asset side of it's B~lance Sheet to the extent of the provision
  VIJAYA BANK v. COMMISSIONER OF INCOME TAX 725
           AND ANR. [S.H. KAPADIA, J.]
 for bad debtwould be sufficient to constitute a write off is the   A
 question which we are required to answer· in these civil
 appeals?

        3. In these civil appeals, we are concerned with
  Assessment Years 1993-1994 and 1994-1995. For the B
  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 bad debt had not been written off in an
  appropriate manner as required under the Accounting C
  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 D
  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 E
  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 F
 ·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 G
  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 assessee, once H
    726     SUPREME COURT REPORTS                  (2010) 4 S.C.R.


A a provision stood created and, ultimately, carried to the
  Balanca 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
B 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
c 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
D 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
E conclusion that deduction under Section 36(1)(vii) of 1961 Act
  was allowable.

       4. On the question whether it was imperative for the
  assessee to close each and every individual account and it's
F debtors in it's Books or a mere reduction in the loans and
  advances to the extent of the provision for bad and doubtful 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
G 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
H or Debtors depicted on the asset side in lne Balance Sheet at
  VIJAYA BANK v. COMMISSIONER OF INCOME TAX 727
           AND ANR. [S.H. KAPADIA, J.]
 the close of the year, the assessee was entitled to deduction A
 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 lnfotech
 Limited [See Page 5 of the Paper Book], that, in view of the B
 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 Vitha/das 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,  c
  these civil appeals.

        5. 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 -0
  principles. The second question which arises for 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 E
  doubtful debt is sufficient?

      6. 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,          F
 reported in [2010] 320 ITR 577, [in which one of us [S.H.
 Kapadia, J.] was a party] ~ad 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   G
      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     H
    728       SUPREME COURT REPORTS                    [2010) 4 S.C.R.


A         assessee was still entitled to deduction under section
          36(1)(vii). [See CIT v. Jwala Prasad Tiwari (1953) 24 ITR
          537 (Born) 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.
B         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
c         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

          Explanation to section 36(1 )(vii). Consequently, after April
D         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 ofr. If an assessee debits an amount of
          doubtful debt to the profit and loss account and credits the
E         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
F         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."

       7. One point needs to be clarified. According to Shri
G 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
H
 VIJAYA BANK v. COMMISSIONER OF INCOME TAX 729
          AND ANR. [S.H. KAPADIA, J.]

 counsel, in view of the insertion of the said Explanation in A
 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 B
 bad and doubtful debt on the other. He submitted that a mere
 debit to the Profit and 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    c
 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 0
  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 E
  by reducing the corresponding amount from Loans and
  Advancesfdebtors 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 F
  the judgement of the Gujarat High Court in the case of Vithaldas
  H. Dhanjibhai Bardanwa/a [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 G
  also reduce loans and advances or the debtors from the asset
  side of the Balance Sheet to the extent of the 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 H
    730      SUPREME COURT REPORTS                   [2010] 4 S.C.R.


A   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.
B
          8. 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
C   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
D   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
E   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 the Assessing Officer because the Assessing Officer
    apprehended that the assessee-Bank might be taking the
F   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
G   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
H   concerned with the interpretation of Section 36(1 )(vii) of 1961
VIJAYA BANK v. COMMISSIONER OF INCOME TAX 731
         AND ANR. [S.H. KAPADIA, J.]
Act. We cannot decide the matter on the basis of                    A
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          B
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 D~btor/
Defendant in each of those suits would rely upon the Bank
statement and contend that no amount is due and payable in          c
which event the suit would be dismissed.

     9. Before concluding, we may refer t6 an argument
advanced on behalf of the Department. According to the
Department, it is necessary to square off each individual
account failing which there is likelihood of escapement of          D
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           E
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        F
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            G
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        H
    732     SUPREME COURT REPORTS                  [2010) 4 S.C.R.

A 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
B respect of a bad debt 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
c 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
0
  income from assessment.

         10. 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
E   assessee's appeals stand allowed with no order as to costs.

    D.G.                                         Appeals allowed.