Doubtful advances written off treated as provisions not allowable expenditure in contrast to bad debts

Doubtful advances written off treated as provisions not allowable expenditure u/s 37(1) in contrast to bad debts w/o u/s 36(i)(vii) qua sundry debtor – ITAT

Doubtful advances written off treated provisions not allowable u/s 36

ABCAUS Case Law Citation:
ABCAUS 1281 (2017) (06) ITAT

The Grievance:
The appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax  (Appeals) [CIT(A)] qua confirmation of disallowance of debit notes written off as doubtful advances claimed u/s 37 of the Income tax Act, 1961 (‘the Act’), treating the same as provision.

Assessment Year : 2009-10
Date/Month of Pronouncement: June, 2017

Important Case Laws Cited/relied upon:
(i) Vijaya Bank Vs. CIT [SC 323 ITR 166 2010]
(ii) Southern Technologies Ltd. Vs. JCIT [SC 320 TR 577]
(iii) CIT Vs. Tainwala Chemicals & Plastics India Ltd. [Bombay HC 215 Taxmann 153]
(iv) CIT Vs. Newanagar Co-operative Bank Ltd. [Gujarat HC 54 28]
(v) CIT Vs. Abdul Razak & Co. [Gujarat High Court 1982 136 ITR 825]
(vi) ACIT Vs. Hi-Lines Pens Pvt. Ltd. [Delhi Tribunal ITA No. 2925/Delhi/2012]
(vii) Minda (HUF) Limited Vs. JCIT [Delhi Tribunal 101 ITD 191]

Brief Facts of the Case:
The appellant assessee was a corporate assessee engaged in the business of manufacturing & Export. The assessment was completed u/s 143(3) by the Assessing Officer [AO] by making addition for Rs.530.47 Lacs against provision for certain doubtful debts u/s 36(i)(vii), as the same being, in the opinion of AO, mere provision for doubtful advances and hence was not allowable.

On first appeal, CIT(A) confirmed the said disallowance observing that the impugned amounts were not written off and was still outstanding in the books of the appellant company and as such it represented ‘provisions’ only which is not allowable as per Explanation to Section 36(i)(vii) of the Act

Contentions of the appellant assessee:
It was contended that the assessee, for the purpose of export, procured raw material and got them processed from third parties on contractual basis. However, since the ratio of wastage was very high during processing, the assessee raised debit notes against those parties who, in turn, refused to pay the outstanding amount which led the assessee to write-off these amounts and hence, allowable as business loss u/s 37 / 28(i) of the Act.

The debit notes were issued on account of loss of stock / process loss of goods for which the assessee had already paid higher charges to the processing parties. The assessee had actually written off the said amount in the books of accounts under the head ‘Provision for doubtful advances’ and therefore the same are allowable u/s 37 / 28(i) of the Income Tax Act.

Contention of the Respondent Revenue:
It was contended that deduction could be allowed against provisions for advances. Moreover, the assessee’s case was not at all covered under section 36(i)(vii) as it was not a case of ‘debts being written off’ but a matter of claim of business expenses u/s 37 and therefore, reliance placed by the assessee on the judicial pronouncements was misconceived.

Observations made by the Tribunal:
It was observed that the assessee had claimed the said expenditure of under the head ‘Provision for doubtful advances’ and this provisions has been reduced from the figures of Advances recoverable in cash or in kind or for value to be received under the head Other current Assets, Loans & Advances in the Balance Sheet.

The ITAT concurred that the issue under dispute was not at all covered by the provisions of Section 36(i)(vii) as this section deals with ‘bad debts written off’ by the assessee qua sundry debtors, which was not the case.

The ITAT opined that in the instant case, the assessee was claiming expenditure against debit notes raised by him against various suppliers, which, in his opinion, have become doubtful and hence allowable. Therefore, the admissibility of impugned expenditure was covered by the provisions of Section 37(1).

The Tribunal observed that the prime condition to claim the expenditure u/s 37(1) is that the expenditure, at the first instance, must have crystallized during the impugned AY before which the same could be claimed by the assessee and this factor, which was missing in the instant case.

It was found that the assessee could not produce any evidence to show that the suppliers refused to pay the outstanding amount or denied their liability in any manner which can lead to a conclusion that the impugned provision crystallized during the year. The relevant ledger extract revealed that the assessee himself has written off the same during Financial Year. It was also noted that the relevant portion of ‘Note No. 15’ of ‘Notes forming part of account’ attached to financial statements of relevant AY reads as under:-

“15(a) The Company has raised claims of Rs.6,99,57,965/- on the processing units for the rejections / damages to the fabrics. The company was in negotiation with parties to recover the amount. However, the company is of the opinion that Rs.5,30,47,066/- is doubtful of recovery. Accordingly, provisions is being made in the books of accounts.”

Thus the ITAT opined that the impugned expenditure, being mere provisions, did not crystallized during the year and hence not allowable to the assessee. The expenditure to be admissible, at the threshold, must be capable of being classified as an expenditure at the first instance and deduction of mere provisions / estimation could not be allowed to the assessee unless provided by the statute. On the same analogy, the same was not admissible either under Section 28(i).

The ITAT further observed that in all the case law relied by the assessee, there was no dispute as to the crystallization of expenses and those cases dealt with a situation where the expenditure itself, incurred by the assessee, was not in question and therefore, distinguishable with the present case in hand.

It was held that the impugned expenditure, being mere provisions, were not allowable to the assessee.

Doubtful advances written off

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