PR. COMMISSIONER OF INCOME TAX 6 versus KHYATI REALTORS PVT. LTD. on 25 August 2022

[2022] 7 S.C.R. 37

PR. COMMISSIONER OF INCOME TAX 6

v.

KHYATI REALTORS PVT. LTD.

(Civil Appeal No. 5804 of 2022)

AUGUST 25, 2022

[UDAY UMESH LALIT, S. RAVINDRA BHAT ANDSUDHANSHU DHULIA, JJ.]

Income Tax Act, 1961: s.36(1)(vii) – Determination of Incomeunder “Profits and Gains of Business or Profession – Deduction ofBad Debt – In the instant case, respondent-assessee sought deductionof the amount of Rs. 10 crores in determining its income under“Profits and Gains of Business or Profession” upon the premisethat said amount was deposited with a builder towards theacquisition of commercial premises two years prior to assessmentyear but later project did not make any progress and hence theassessee sought refund but the builder did not pay the amount andtherefore the same has become bad debt – Claim for deduction ofbad debt – Held: The assessee nowhere showed on record that theadvance was made to the builder in the ordinary course of businessas well as the time by which the constructed unit was to be given toit and area agreed to be purchased – The assessee failed to supportthe contention that the amount was paid as a loan since it nowhereestablished the duration of the advance, terms and conditionapplicable and interest payable – Therefore, assessee’s claim fordeduction of ` 10 crore as a bad and doubtful debt could not beallowed.

Income Tax Act, 1961: Chapter IV, Part D, ss.28, 36 – Scope– The income of every assessee has to be assessed as per ChapterIV, Part D of the Act – s.28 deals with the chargeability of income totax under the head ‘Profits and Gains of Business or Profession’ –The other deductions is given u/s.36 of the Act, which opens with thephrase “the deductions provided for in the following clauses shallbe allowed in respect of the matters dealt with therein, in computingthe income referred to in s.28” – For the purposes of computingincome chargeable to tax, therefore, besides specific deductions,‘other deductions’ enumerated in different clauses of s.36 can be

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Aallowed by the AO – Each of the deductions must relate to thebusiness carried out by the assessee – If the assessee carries on abusiness and writes off a debt relating to the business asirrecoverable, it would be entitled to a corresponding deductionunder clause (vii) of sub-section (1) of s.36 subject to the fulfilmentof the conditions set forth in sub-section (2) of s.36 of the IT Act.B

Income Tax Act, 1961: s.36(1)(vii) – Amendment of 1989 –Pre and Post amendment position – Before the amendment in 1989,even in cases where the assessee had made only a provision in itsaccounts for bad debts and interest thereon, without the amountactually being debited from the assessee’s Profit and Loss account,Cthe assessee could still claim deduction under s.36(1)(vii) of the Act– With effect from 1 April 1989, with the insertion of the newExplanation under s.36(1)(vii), any bad debt written-off asirrecoverable in the account of the assessee would not include any‘provision’ for bad and doubtful debt made in the accounts of theDassessee – In other words, before this date, even a provision couldbe treated as a write off, however, after this date, as per theExplanation to s.36(1)(vii), a mere provision for bad debt per sewas not entitled to deduction under s.36(1)(vii).

Allowing the appeal, the CourtE

Conclusion

Allowing the appeal, the CourtE

HELD: 1. The income of every assessee has to be assessedaccording to the statutory framework laid out Chapter IV, Part Dof the Act. That chapter deals with heads of income. Section 28 ofthe Act deals with the chargeability of income to tax under thehead ‘Profits and Gains of Business or Profession’. The otherdeductions that an assessee can claim are elaborated under SectionF36 of the Act, which opens with the phrase “the deductionsprovided for in the following clauses shall be allowed in respectof the matters dealt with therein, in computing the incomereferred to in Section 28”. For the purposes of computing incomechargeable to tax, therefore, besides specific deductions, ‘otherGdeductions’ enumerated in different clauses of Section 36 can beallowed by the AO. Each of the deductions must relate to thebusiness carried out by the assessee. If the assessee carries ona business and writes off a debt relating to the business asirrecoverable, it would without doubt be entitled to aHcorresponding deduction under clause (vii) of sub-section (1) of Section 36 subject to the fulfilment of the conditions set forth insub-section (2) of Section 36 of the IT Act. [Para 12][47-G-H; 48-A-B]

2. Before the amendment in 1989, the law was that even incases where the assessee had made only a provision in its accountsfor bad debts and interest thereon, without the amount actuallybeing debited from the assessee’s Profit and Loss account, theassessee could still claim deduction under Section 36(1)(vii) ofthe Act. With effect from 1 April 1989, with the insertion of thenew Explanation under Section 36(1)(vii), any bad debt written-off as irrecoverable in the account of the assessee would notinclude any ‘provision’ for bad and doubtful debt made in theaccounts of the assessee. In other words, before this date, evena provision could be treated as a write off. However, after thisdate, the Explanation to Section 36(1)(vii) brought about a change.As a result, a mere provision for bad debt per se was not entitledto deduction under Section 36(1)(vii). Thus, merely stating a badand doubtful debt as an irrecoverable write off without theappropriate treatment in the accounts, as well as non-compliancewith the conditions in Section 36(1)(vii), 36(2), and Explanationto Section 36(1)(vii) would not entitle the assessee to claim adeduction. [Para 13, 14][48-C-E; 50-B-C]

Catholic Syrian Bank Ltd. v. Commissioner of IncomeTax, Thrissur (2012) 3 SCC 784 : [2012] 4 SCR 739 –relied on.

3. It is evident from the rulings of this Court that (i) the amountof any bad debt or part thereof has to be written-off as irrecoverablein the accounts of the assessee for the previous year; (ii) Suchbad debt or part of it written-off as irrecoverable in the accountsof the assessee cannot include any provision for bad and doubtfuldebts made in the accounts of the assessee; (iii) no deduction isallowable unless the debt or part of it “has been taken into accountin computing the income of the assessee of the previous year inwhich the amount of such debt or part thereof is written off or ofan earlier previous year”, or represents money lent in the ordinarycourse of the business of banking or money-lending which iscarried on by the assessee; (iv) the assessee is obliged to prove AB

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Ato the AO that the case satisfies the ingredients of Section36(1)(vii) as well as Section 36(2) of the Act. [Para 17][51-G-H;52-A-C]

T.R.F. Limited v. Commissioner of Income Tax, Ranchi(2010) 13 SCC 532; Southern Technologies Ltd. v. JointBCommissioner of Income Tax, Coimbatore [2010] 2 SCR380 – relied on.

4. In the present case, the record shows that the accountsof the assessee nowhere showed that the advance was made by itto M/s C. Bhansali Developers Pvt. Ltd. in the ordinary courseCof business. Its primary argument was that the amount of` 10 crores was given for the purpose of purchasing constructedpremises. However, the amount was written-off on 28.03.2009.As noted by the CIT(A), there was no material to substantiatethis submission, in respect of payment of the amount, the time bywhich the constructed unit was to be given to it, the area agreedDto be purchased, etc. Equally, in support of its other argumentthat the amount was given as a loan, the assessee nowhereestablished the duration of the advance, the terms and conditionsapplicable to it, interest payable, etc. The assessee concededthat it had received interest income for the relevant assessmentEyear. However, it could not establish that any interest was paid(or shown to be payable in its accounts) for the sum of ¹ 10 crores.Furthermore, there is nothing on record to suggest that therequirement of the law that the bad debt was written-off asirrecoverable in the assessee’s accounts for the previous yearhad been satisfied. Another reason why the amount could not haveFbeen written-off, is that the assessee’s claim was that it was givento M/s Bhansali Developers Pvt. Ltd. for acquiring immovableproperty – it therefore, was in the nature of a capital expenditure.It could not have been treated as a business expenditure. [Para18][52-C-G]

GA.V. Thomas and Co. Ltd., Alleppey v. The Commissionerof Income Tax, (Bangalore) Kerala [1963] 1 Suppl. SCR776 – relied on.

Commissioner of Income Tax v. Mysore Sugar Co. Ltd.[1963] 2 SCR 976; Mohan Meakin Ltd. v.

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PR. COMMISSIONER OF INCOME TAX 6 v. KHYATIREALTORS PVT. LTD.

Commissioner of Income Tax 2012 (348) ITR 109 (Del);Harshad J. Choksi v. Commissioner of Income Tax 349ITR 250 (Bom); IBM World Trade Corporation v.Commissioner of Income Tax 1990 (186) ITR 412(Bom) – referred to.

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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5804of 2022.

From the Judgment and Order dated 30.04.2019 of the High Courtof Judicature at Mumbai in I.T.A. No. 291 of 2017.

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N. Venkataraman, ASG, S. A. Haseeb, Ms. Neela Kedar Gokhale,H R Rao, Raj Bahadur Yadav, Advs. for the Appellant.

Ms. Kavita Jha, Vaibhav Kulkarni, Advs. for the Respondent.

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The Judgment of the Court was delivered by

S. RAVINDRA BHAT, J.

1. Special leave granted. With consent of the counsels for theparties, the appeal was heard finally. The Revenue has appealed a decisionof the Bombay High Court[1] which affirmed an order[2] of the Income TaxAppellate Tribunal (hereinafter, “ITAT”) which had upheld a claim bythe respondent (hereinafter, “assessee”) for writing off ` 10 crores as abad debt.

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2. The assessee carries on real estate development business,trading in transferable development rights (TDR) and finance. In respectof its return for the assessment year 2009-2010, the Assessment Officer(hereinafter, “AO”) issued a notice under Section 143(2) of the IncomeTax Act 1961 (hereinafter “Act” or “IT Act”) on 18.08.2010, and also G

1 In ITA No. 291 of 2017, decided on 30.04.2019.

2 In ITA No.129/Mum/2014, decided on 04.03.2016.

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42SUPREME COURT REPORTS

Aunder Section 142(1) of the Act, calling for various details. The assesseefiled its response thereto. The scrutiny assessment was completed bythe AO under Section 143(3) on 30.12.2011, determining the total incomeof the assessee at ` 87,880/-. The assessee contended that an amountof ` 10 crores was deposited with one M/s C. Bhansali Developers Pvt.Ltd. towards acquisition of commercial premises two years prior to theBassessment year in question (i.e., in 2007). It was contended that theproject did not appear to make any progress, and consequently, theassessee sought return of the amounts from the builder. However, thelatter did not respond. As a result, the assessee’s Board of Directorsresolved to write off the amount as a bad debt in 2009. It was alsoCcontended that the amount could also be construed as a loan, since theassessee had ‘financing’ as one of its objects. In a letter dated 26.12.2011to the AO, the assessee inter alia contended as follows:

“We submit that as per provisions of Section 36(2), in respectof monies advanced in the ordinary course of business, theDsame allowable as bad debts even if the amount has not beentaken into account in computing the total income. This is wellaccepted position in respect of write off of advances given inthe lending business. The present case fully falls within theprovisions of sec. 36(2) hence the write off of advances isallowable u/s. 36(1)(vii).”E

3. The AO disallowed the sum of ` 10 crores claimed as a baddebt in determining its income under “Profits and Gains of Business orProfession”. Aggrieved, the assessee appealed. Before the appellateCommissioner (hereinafter, “CIT (A)”) the assessee reiterated thecontents of a letter dated 05.12.2011 written to the AO as follows:F

“As part of our regular business activity, the company in orderto purchase certain commercial premises had made reservationby way of bookings in the upcoming project at Old MumbaiPune Highway, Khapoli, which was to be developed by M/sC. Bhansali Developers Pvt Ltd. In order to confirm theGreservation/booking of said commercial premises, builderinsisted for advance of Rs 10 crores. Accordingly, the companyhad advanced Rs 10 crores on 06.03.2007 towards reserving/booking of the commercial premises in the said project ... Sincethe said advance was for purchase of commercial property,Hthere was no question of charging interest thereon...However, further development about the said project of the builder isthat the builder after taking advances from us did not proceedin this matter and possibly siphoned the money for otherpurposes. On coming to know about their non-proceeding inthe development of the said project, we had a number ofmeetings with the directors of M/s C. Bhansali DevelopersPvt Ltd. They did not listen to our request for returning themoney…”

4. The CIT(A) confirmed the disallowance on account of baddebts and interest. A further appeal was preferred to the ITAT, whichallowed the assessee’s plea. The Revenue sought an appeal to theBombay High Court under Section 260A of the IT Act. The BombayHigh Court ruled that no question of law requiring a decision arose in theappeal and consequently declined to entertain the Revenue’s plea.

5. The Revenue contended that Section 36(1)(vii) of the Act givesbenefit to the assessee to claim a deduction on any bad debt or partthereof, which is written off as irrecoverable in the accounts of theassessee for the previous year. This benefit is subject to Section 36(2)of the Act. It is obligatory upon the assessee to prove to the AO that thecase satisfies the ingredients of both Section 36(1)(vii) and Section 36(2)of the Act. It was urged that the ITAT and the High Court erred inaccepting the assessee’s contentions, which were not supported by anymaterial or document. It was submitted that the assessee’s claim ofgiving ` 10 crores to M/s C. Bhansali Developers Pvt. Ltd. for thealleged project was not substantiated by any material. Additionally, theassessee had also pleaded that the amount was given as a ‘loan’ to thedeveloper, which was a different plea altogether. This plea was bereftof any material as to the terms of the loan, or the conditions of repayment,including interest. It was submitted that by virtue of Section 36(2) of theAct, the AO has to be satisfied that the action of writing off is on soundand reasonable basis, and not a device. Reliance was placed on CatholicSyrian Bank Ltd. v. Commissioner of Income Tax, Thrissur[3] to urgethat the assessee is obligated to prove to the AO that the claim satisfiesthe ingredients of both Section 36(1)(vii) on the one hand and Section36(2) of the Act as well.

6. The Revenue further argued that the assessee’s submissionthat the amount could alternatively be deducted as an expenditure3 (2012) 3 SCC 784.

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Aexclusively laid out for commercial purposes under Section 37 of theAct was belated, and raised for the first time only after the order of theCIT(A).

7. Ms. Kavita Jha, learned counsel for the assessee urged thiscourt not to interfere with the findings of the ITAT and the High Court.BShe highlighted that the following facts and circumstances were not indispute:

i)The assessee was engaged in the business of real estateand financing.

ii)The objects clause of the Memorandum of Association ofCthe assessee company reflected the business of contractors,erectors, constructors of buildings, etc., as well as receivingor lending money as its objects.

iii)` 10 crores was advanced on 06.03.2007 to M/s C. BhansaliDevelopers Pvt. Ltd. to acquire certain commercial premisesDand for reservation by way of bookings in their upcomingproject on the Old Mumbai-Pune Highway in Khopoli.

iv)The said ` 10 crores was written off during assessmentyear 2009-10.

v)The ` 10 crores advanced to M/s C. Bhansali on 06.03.2007Ewas in the ordinary course of its business.

8. It was contended that since the builder/borrower defaulted inrepaying the amount, the respondent assessee decided to write off thesame as a bad debt under Section 36(1)(vii) read with Section 36(2) ofthe Act. It was contended that after the amendment of Section 36 of theFAct in 1989, there was virtually no scope for the AO to scrutinize indetail a decision to write off the debt. Counsel relied on the decision ofthis court in T.R.F. Limited v. Commissioner of Income Tax, Ranchi[4].

9. Ms. Jha further contended that there was nothing in the Actwhich barred an assessee from claiming the benefit of Section 37 of theGAct in a case where the expenditure was laid out or incurred exclusivelyfor business or commercial purposes, where it might not be successfulto establish its claim for deduction under any other head.

10. The learned counsel also relied on the judgment of this courtin Commissioner of Income Tax v. Mysore Sugar Co. Ltd.[5] As well asother judgments of High Courts, such as Mohan Meakin Ltd. v.Commissioner of Income Tax[6]; Harshad J. Choksi v. Commissionerof Income Tax[7]and IBM World Trade Corporation v. Commissionerof Income Tax[8]to buttress her submissions.

Analysis and Conclusions

11. Section 36 of the Act occurs under the heading ‘otherdeductions’, and its relevant extract, for the purpose of this case, is asfollows:

“36. (1) The deductions provided for in the following clausesshall be allowed in respect of the matters dealt with therein,in computing the income referred to in section 28—***

(vii) subject to the provisions of sub-section (2), the amountof any bad debt or part thereof which is written off asirrecoverable in the accounts of the assessee for the previousyear:

Provided that in the case of an assessee to which clause (viia)applies, the amount of the deduction relating to any such debtor part thereof shall be limited to the amount by which suchdebt or part thereof exceeds the credit balance in the provisionfor bad and doubtful debts account made under that clause:

Provided further that where the amount of such debt or partthereof has been taken into account in computing the incomeof the assessee of the previous year in which the amount ofsuch debt or part thereof becomes irrecoverable or of anearlier previous year on the basis of income computation anddisclosure standards notified under sub-section (2) of Section145 without recording the same in the accounts, then, suchdebt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it 5 1963 (2) SCR 976.

6 2012 (348) ITR 109 (Del).

7 349 ITR 250 (Bom).

8 1990 (186) ITR 412 (Bom).

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SUPREME COURT REPORTS

shall be deemed that such debt or part thereof has been writtenoff as irrecoverable in the accounts for the purposes of thisclause.

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Explanation 1.—For the purposes of this clause, any bad debtor part thereof written off as irrecoverable in the accounts ofthe assessee shall not include any provision for bad anddoubtful debts made in the accounts of the assessee.

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Explanation 2.—For the removal of doubts, it is herebyclarified that for the purposes of the proviso to clause (vii) ofthis sub-section and clause (v) of sub-section (2), the accountreferred to therein shall be only one account in respect ofprovision for bad and doubtful debts under clause (viia) andsuch account shall relate to all types of advances, includingadvances made by rural branches;….

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(2) In making any deduction for a bad debt or part thereof,the following provisions shall apply—

(i) no such deduction shall be allowed unless such debt orpart thereof has been taken into account in computing theincome of the assessee of the previous year in which theEamount of such debt or part thereof is written off or of anearlier previous year, or represents money lent in the ordinarycourse of the business of banking or money-lending which iscarried on by the assessee;

(ii) if the amount ultimately recovered on any such debt orpart of debt is less than the difference between the debt orpart and the amount so deducted, the deficiency shall bedeductible in the previous year in which the ultimate recoveryis made; F

(iii) any such debt or part of debt may be deducted if it hasGalready been written off as irrecoverable in the accounts ofan earlier previous year (being a previous year relevant tothe assessment year commencing on the 1st day of April, 1988,or any earlier assessment year), but the Assessing Officerhad not allowed it to be deducted on the ground that it hadnot been established to have become a bad debt in that year; H

(iv) where any such debt or part of debt is written off asirrecoverable in the accounts of the previous year (being aprevious year relevant to the assessment year commencingon the 1st day of April, 1988, or any earlier assessment year)and the Assessing Officer is satisfied that such debt or partbecame a bad debt in any earlier previous year not fallingbeyond a period of four previous years immediately precedingthe previous year in which such debt or part is written off,the provisions of sub-section (6) of Section 155 shall apply;

(v) where such debt or part of debt relates to advances madeby an assessee to which clause (viia) of sub-section (1)applies, no such deduction shall be allowed unless the assesseehas debited the amount of such debt or part of debt in thatprevious year to the provision for bad and doubtful debtsaccount made under that clause.”

Section 37 reads as follows:

“37. (1) Any expenditure (not being expenditure of the naturedescribed in sections 30 to 36 and not being in the nature ofcapital expenditure or personal expenses of the assessee),laid out or expended wholly and exclusively for the purposesof the business or profession shall be allowed in computingthe income chargeable under the head “Profits and gains ofbusiness or profession”.

Explanation 1.—For the removal of doubts, it is herebydeclared that any expenditure incurred by an assessee forany purpose which is an offence or which is prohibited bylaw shall not be deemed to have been incurred for the purposeof business or profession and no deduction or allowance shallbe made in respect of such expenditure.”

12. The income of every assessee has to be assessed accordingto the statutory framework laid out Chapter IV, Part D of the Act. Thatchapter deals with heads of income. Section 28 of the Act deals with thechargeability of income to tax under the head ‘Profits and Gains ofBusiness or Profession’. The other deductions that an assessee canclaim are elaborated under Section 36 of the Act, which opens with thephrase “the deductions provided for in the following clauses shallbe allowed in respect of the matters dealt with therein, in computing A

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Athe income referred to in Section 28”. For the purposes of computingincome chargeable to tax, therefore, besides specific deductions, ‘otherdeductions’ enumerated in different clauses of Section 36 can be allowedby the AO. Each of the deductions must relate to the business carriedout by the assessee. If the assessee carries on a business and writes offa debt relating to the business as irrecoverable, it would without doubtBbe entitled to a corresponding deduction under clause (vii) of sub-section(1) of Section 36 subject to the fulfilment of the conditions set forth insub-section (2) of Section 36 of the IT Act.

13. Before the amendment in 1989, the law was that even incases where the assessee had made only a provision in its accounts forCbad debts and interest thereon, without the amount actually being debitedfrom the assessee’s Profit and Loss account, the assessee could stillclaim deduction under Section 36(1)(vii) of the Act. With effect from 1April 1989, with the insertion of the new Explanation under Section36(1)(vii), any bad debt written-off as irrecoverable in the account ofDthe assessee would not include any ‘provision’ for bad and doubtful debtmade in the accounts of the assessee. In other words, before this date,even a provision could be treated as a write off. However, after thisdate, the Explanation to Section 36(1)(vii) brought about a change. As aresult, a mere provision for bad debt per se was not entitled to deductionunder Section 36(1)(vii). This position in law was recognized by thisEcourt in Southern Technologies Ltd. v. Joint Commissioner of IncomeTax, Coimbatore[9]:

“25. [B]y insertion (w.e.f. 1.4.1989) of a new Explanation inSection 36(1)(vii), it has been clarified that any bad debtwritten off as irrecoverable in the account of the assesseeFwill not include any provision for bad and doubtful debt madein the accounts of the assessee. The said amendment indicatesthat before 1.4.1989, even a provision could be treated as awrite off. However, after 1.4.1989, a distinct dichotomy isbrought in by way of the said Explanation to SectionG36(1)(vii). Consequently, after 1.4.1989, a mere provision forbad debt would not be entitled to deduction under Section36(1)(vii). To understand the above dichotomy, one mustunderstand “how to write off”. If an assessee debits an amountof doubtful debt to the P&L Account and credits the asset H9 (2010) 2 SCR 380.

account like sundry debtor’s Account, it would constitute awrite off of an actual debt. However, if an assessee debits“provision for doubtful debt” to the P&L Account and makesa corresponding credit to the “current liabilities andprovisions” on the Liabilities side of the balance sheet, thenit would constitute a provision for doubtful debt. In the lattercase, assessee would not be entitled to deduction after1.4.1989.

38. The point to be noted is that the IT Act is a tax on “realincome”, i.e., the profits arrived at on commercial principlessubject to the provisions of the IT Act. Therefore, if byExplanation to Section 36(1)(vii) a provision for doubtful debtis kept out of the ambit of the bad debt which is written offthen, one has to take into account the said Explanation incomputation of total income under the IT Act failing whichone cannot ascertain the real profits. This is where the conceptof “add back” comes in. In our view, a provision for NPAdebited to P&L Account under the 1998 Directions is only anotional expense and, therefore, there would be add back tothat extent in the computation of total income under the ITAct.

39. One of the contentions raised on behalf of NBFC beforeus was that in this case there is no scope for “add back” ofthe Provision against NPA to the taxable income of theassessee. We find no merit in this contention. Under the ITAct, the charge is on Profits and Gains, not on gross receipts(which, however, has Profits embedded in it). Therefore,subject to the requirements of the IT Act, profits to be assessedunder the IT Act have got to be Real Profits which have to becomputed on ordinary principles of commercial accounting.In other words, profits have got to be computed after deductingLosses/ Expenses incurred for business, even though suchlosses/ expenses may not be admissible under Sections 30 to43D of the IT Act, unless such Losses/ Expenses are expresslyor by necessary implication disallowed by the Act. Therefore,even applying the theory of Real Income, a debit which isexpressly disallowed by Explanation to Section 36(1)(vii), ifclaimed, has got to be added back to the total income of the ABC

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assessee because the said Act seeks to tax the “real income”which is income computed according to ordinary commercialprinciples but subject to the provisions of the IT Act. UnderSection 36(1)(vii) read with the Explanation, a “write off” isa condition for allowance.”

14. It is thus evident that merely stating a bad and doubtful debtas an irrecoverable write off without the appropriate treatment in theaccounts, as well as non-compliance with the conditions in Section36(1)(vii), 36(2), and Explanation to Section 36(1)(vii) would not entitlethe assessee to claim a deduction. This position was reiterated again inCatholic Syrian Bank (supra):

“5. The language of Section 36(1)(vii) of the Act isunambiguous and does not admit of two interpretations. Itapplies to all banks, commercial or rural, scheduled orunscheduled. It gives a benefit to the Assessee to claim adeduction on any bad debt or part thereof, which is writtenoff as irrecoverable in the accounts of the Assessee for theprevious year. This benefit is subject only to Section 36(2) ofthe Act. It is obligatory upon the Assessee to prove to theassessing officer that the case satisfies the ingredients ofSection 36(1)(vii) on the one hand and that it satisfies therequirements stated in Section 36(2) of the Act on the other.The proviso to Section 36(1)(vii) does not, in absolute terms,control the application of this provision as it comes intooperation only when the case of the Assessee is one whichfalls squarely under Section 36(1)(viia) of the Act. We mayalso notice that the explanation to Section 36(1)(vii),introduced by the Finance Act, 2001, has to be examined inconjunction with the principal section. The explanationspecifically excluded any provision for bad and doubtful debtsmade in the account of the Assessee from the ambit and scopeof ‘any bad debt, or part thereof, written off as irrecoverablein the accounts of the Assessee’. Thus, the concept of makinga provision for bad and doubtful debts will fall outside thescope of Section 36(1)(vii) simplicitor. The proviso, as alreadynoticed, will have to be read with the provisions of Section36(1) (viia) of the Act.”

15. The assessee had relied on the ruling in T.R.F. Limited (supra).In that judgment, this court had inter alia, observed that:

“4. This position in law is well-settled. After 1st April, 1989,it is not necessary for the assessee to establish that the debt,in fact, has become irrecoverable. It is enough if the baddebt is written off as irrecoverable in the accounts of theassessee. However, in the present case, the Assessing Officerhas not examined whether the debt has, in fact, been writtenoff in accounts of the assessee. When bad debt occurs, thebad debt account is debited and the customer’s account iscredited, thus, closing the account of the customer. In the caseof Companies, the provision is deducted from Sundry Debtors.As stated above, the Assessing Officer has not examinedwhether, in fact, the bad debt or part thereof is written off inthe accounts of the assessee. This exercise has not beenundertaken by the Assessing Officer. Hence, the matter isremitted to the Assessing Officer for de novo considerationof the above-mentioned aspect only and that too only to theextent of the write off.”

16. This court did not examine the impact of Section 36(2) andthe condition of write off, in the accounts of the assessee during theprevious year, in T.R.F Ltd. (supra). However, the judgments in SouthernTechnologies (supra), and Catholic Syrian Bank (supra) spelt out theconditions subject to which an assessee could write off a bad and doubtfuldebt. Interestingly, Kapadia, C.J was a party to T.R.F and CatholicSyrian Bank; he in fact authored the judgment in SouthernTechnologies. Furthermore, Catholic Syrian Bank (supra) is by a benchof three judges, whereas the other decisions are by benches of twoJudges. In the circumstances, this Court has to accord primacy toSouthern Technologies (supra).

17. It is evident from the above rulings of this court, that:

(i) The amount of any bad debt or part thereof has to be written-off as irrecoverable in the accounts of the assessee for theprevious year;

(ii) Such bad debt or part of it written-off as irrecoverable in theaccounts of the assessee cannot include any provision forbad and doubtful debts made in the accounts of the assessee; A

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A(iii) No deduction is allowable unless the debt or part of it “hasbeen taken into account in computing the income of theassessee of the previous year in which the amount of suchdebt or part thereof is written off or of an earlier previousyear”, or represents money lent in the ordinary course of the-business of banking or moneylending which is carried on byBthe assessee;

(iv) The assessee is obliged to prove to the AO that the casesatisfies the ingredients of Section 36(1)(vii) as well as Section36(2) of the Act.

C18. In the present case, the record shows that the accounts of theassessee nowhere showed that the advance was made by it toM/s C. Bhansali Developers Pvt. Ltd. in the ordinary course of business.Its primary argument was that the amount of ` 10 crores was given forthe purpose of purchasing constructed premises. However, the amountwas written-off on 28.03.2009. As noted by the CIT(A), there was noDmaterial to substantiate this submission, in respect of payment of theamount, the time by which the constructed unit was to be given to it, thearea agreed to be purchased, etc. Equally, in support of its other argumentthat the amount was given as a loan, the assessee nowhere establishedthe duration of the advance, the terms and conditions applicable to it,Einterest payable, etc. The assessee conceded that it had received interestincome for the relevant assessment year. However, it could not establishthat any interest was paid (or shown to be payable in its accounts) forthe sum of ` 10 crores. Furthermore, there is nothing on record to suggestthat the requirement of the law that the bad debt was written-off asirrecoverable in the assessee’s accounts for the previous year had beenFsatisfied. Another reason why the amount could not have been written-off, is that the assessee’s claim was that it was given to M/s BhansaliDevelopers Pvt. Ltd. for acquiring immovable property – it therefore,was in the nature of a capital expenditure. It could not have been treatedas a business expenditure. In A.V. Thomas and Co. Ltd., Alleppey v.GThe Commissioner of Income Tax, (Bangalore) Kerala[10]this courtheld as follows:

“16. Now, a question under s. 10(2)(xi) can only arise if thereis a bad or doubtful debt. Before a debt can become bad ordoubtful it must first be a debt. What is meant by debt in thisH10 [1963] Supp (1) SCR 776.

connection was laid down by Rowlatt J., in Curtis v. J. & G.Oldfield Ltd., (1925) 9 TC 319 as follows :- “When the Rule speaks of a bad debt it means a debt which isa debt that would have come into the balance sheet as atrading debt in the trade that is in question and that it is bad.It does not really mean any bad debt which, when it was agood debt, would not have come in to swell the profits.”

17. A debt in such cases is an outstanding which if recoveredwould have swelled the profits. It is not money handed overto someone for purchasing a thing which that person hasfailed to return even though no purchase was made. In thesection a debt means something more than a mere advance. Itmeans something which is related to business or results fromit. To be claimable as a bad or doubtful debt it must first beshown as a proper debt…”

19. In view of the above discussion, it is held that the assessee’sclaim for deduction of ` 10 crore as a bad and doubtful debt could nothave been allowed. The findings of the ITAT and the High Court, to thecontrary, are therefore, insubstantial and have to be set aside.

20. The second issue relates to the admissibility of an expenditureas a deduction, which does not fall within the provisions of Sections 28to 43, and is not capital in nature, but is laid out or spent exclusively forthe purpose of business, under Section 37 of the Act. A similar provisionexisted under the old Income Tax Act, 1922 as in the case of provisionfor bad debts, by Section 10(2)[11]. This aspect was considered by this 11 Section 10(2): [S]uch profits or gains shall be computed after making the followingallowances, namely :- ***

(xi) When the assessee’s accounts in respect of any part of his business, profession orvocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts,due to the assessee in respect of that part of his business, profession or vocation, andin the case of an assessee carrying on a banking or money lending business such sum inrespect of loans made in the ordinary course of such business as the Income-tax Officermay estimate to be irrecoverable but not exceeding the amount actually written off asirrecoverable in the books of the assessee :***

(xv) any expenditure (not being an allowance of the nature described in any of theclauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure orpersonal expenses) laid out or expended wholly and exclusively for the purpose of suchbusiness, profession or vocations”.

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Acourt in The Commissioner of Income Tax v. The Mysore Sugar Co.,Ltd.[12] The assessee there was engaged in production of sugar. It usedto advance monies to cane growers in consideration of supply ofsugarcane. Due to drought, the cane growers could not repay amountsadvanced. The assessee claimed the outstanding to be bad debts, andsought to write them off. This was not allowed; the Income Tax OfficerBheld the expenditure to be capital in nature. The High Court however,set aside that determination. This court confirmed the view of the HighCourt. However, the court also examined the argument whether in sucheventualities, the expenditure could be claimed to be exclusively laid outfor the purpose of business (under the provision corresponding to SectionC37(1) of the Act). This court held as follows:

“7. The tax under the head “Business” is payable under s.10 of the Income-tax Act. That section provides by sub-s. (1)that the tax shall be payable by an assessee under the head“profits and gains of business, etc.” in respect of the profitsDor gains of any business, etc. carried on by him. Under sub-s. (2), these profits or gains are computed after making certainallowances. Clause (xi) allows deduction of bad and doubtfulbusiness debts. It provides that when the assessee’s accountsin respect of any part of his business are not kept on the cashbasis, such sum, in respect of bad and doubtful debts, due toEthe assessee in respect of that part of the his business isdeductible but not exceeding the amount actually written offas irrecoverable in the books of the assessee. Clause (xv)allows any expenditure not included in cls. (i) to (xiv), whichis not in the nature of capital expenditure or personal expensesFof the assessee, to be deducted, if laid out or expanded whollyand exclusively for the purpose of such business, etc. Theclauses expressly provided what can be deducted; but thegeneral scheme of the section is that profits or gains must becalculated after deducting outgoings reasonably attributableas business expenditure but so as not to deduct any portionGof an expenditure of a capital nature. If an expenditure comeswithin any of the enumerated classes of allowances, the casecan be considered under the appropriate class; but there maybe an expenditure which, though not exactly covered by any of the enumerated classes, may have to be considered infinding out the true assessable profits or gains. This was laiddown by the Privy Council in Commissioner of Income-tax v.Chitnavis I.L.R. (1932) IndAp 290 and has been accepted bythis Court. In other words, s. 10(2) does not deal exhaustivelywith the deductions, which must be made to arrive at the trueprofits and gains.

8. To find out whether an expenditure is on the capital accountor on revenue, one must consider the expenditure in relationto the business. Since all payments reduce capital in theultimate analysis, one is apt to consider a loss as amountingto a loss capital. But this is not true of all losses, becauselosses in the running of the business cannot be said to be ofcapital. The questions to consider in this connection are : forthat was the money laid out? Was it to acquire an asset of anenduring nature for the benefit of the business, or was it anoutgoing in the doing of the business? If money be lost in thefirst circumstances, it is a loss of capital, but if lost in thesecond circumstances, it is a revenue loss. In the first, it bearsthe character of an investment, but in the second, to use acommonly understood phrase, it bears the character of currentexpenses.

21. It is apparent that this court was satisfied that the disallowanceof the amount, on account of bad and doubtful debt, did not preclude aclaim for deduction, on the ground that the expenditure was exclusivelylaid out for the purpose of business. The court applied the test of whetherthe expense was incurred for business, or whether it fell into the capitalstream. In the facts of the case, the tests were satisfied – the expenditurewas for the purpose of business, and did not fall in the capital stream.

22. The assessee had relied on a few High Court judgments whichhave ruled that even if a claim for deduction under Section 36(1) is notallowed, the possibility of its exclusion under Section 37 cannot be ruledout. This court is of the opinion that as a proposition of law, that enunciationis unexceptional, since the heads of expenditure that can be claimed asdeduction are not exhaustive – which is the precise reason for theexistence of Section 37. Therefore, in a given case, if the expenditurerelates to business, and the claim for its treatment under other provisionsare unsuccessful, application of Section 37 is per se not excluded.

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A23. This court is of the opinion however, that in the facts of thiscase, the judgment in Southern Technologies (supra) on this issue (wherethe claim of bad and doubtful debt was disallowed) is appropriate, andapplicable. The relevant extract of the said judgment is as follows:

“44. As stated above, Section 36(1)(vii) after 1.4.1989 drawsBa distinction between write off and provision for doubtfuldebt. The IT Act deals only with doubtful debt. It is for theassessee to establish that the provision is made as the loan isirrecoverable. However, in view of Explanation which keepssuch a provision outside the scope of “written off” bad debt,Section 37 cannot come in. If an item falls under SectionsC30 to 36, but is excluded by an Explanation to Section 36 (1)(vii) then Section 37 cannot come in. Section 37 applies onlyto items which do not fall in Section 30 to 36. If a provisionfor doubtful debt is expressly excluded from Section 36 (1)(vii) then such a provision cannot claim deduction underDSection 37 of the IT Act even on the basis of “real incometheory” as explained above.”

24. In view of the foregoing discussion, the Revenue’s appeal hasto succeed. The impugned judgment of the High Court and the order ofITAT are hereby set aside. The appeal is allowed, in the above terms,Ewithout order on costs.

Devika Gujral

(Assisted by : Mahendra Yadav, LCRA)

Appeal allowed.

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