No reassessment to disallow provision for bad debts if AO duly called for all details during original assessment: ITAT

Case details: District Co-operative Central Bank Ltd. V. ACIT - [2021] 129 taxmann.com 49 (Bangalore - Trib.)

Judiciary and Counsel Details

• • B.R. Baskaran, Accountant Member and SMT. Beena Pillai, Judicial Member.
  • S.V. Ravishankar, A.R. for the Appellant.
  • Smt. R. Premi, D.R. for the Respondent.

Facts of the Case

Assessee was a cooperative bank. Its original assessment was concluded under Section 143(3). Subsequently, Assessing Officer (AO) reopened the assessment by issuing notice under Section 148. Reassessment was opened on the ground that deduction claimed by assessee for provision for bad and doubtful debts was in excess of the amount debited in the profit and loss account. AO contended that assessee considered provision for standard assets also for claiming deduction under Section 36(1)(viia), which is not allowable. CIT(A) upheld the order of AO.

Assessee contended that provision for bad and doubtful debts was an estimate made based on past experiences regarding bad debts. The same was created in respect of all its outstanding debts. Further, the provisions of Section 36(1)(viia) nowhere mandate that the provision should be created only regarding doubtful debts. Further, AO had examined all these details during original assessment proceedings and had allowed the claim of assessee. Hence, AO had reopened the assessment on account of a change of opinion that the provision for standard assets was not allowable under Section 36(1)(viia). Accordingly, assessee submitted that reopening is bad in law.

ITAT held

On appeal, Bangalore ITAT held that a plain reading of Section 36(1)(viia) would show that the deduction is allowed regarding provisions for bad & doubtful debts made by specified banks, subject to the limits prescribed in the section. The term provision for bad & doubtful debts has not been defined under the Act. Hence, the meaning given to it in accounting parlance needs to be considered here. Under the accounting parlance, a provision for bad & doubtful debts represents the amount appropriated in the accounts for expected bad debts. Accordingly, while making provision for bad & doubtful debts, a reliable estimate is made towards expected bad debts out of the aggregate amounts of receivables. For that purpose, no distinction shall be made between doubts debts and good debts, since a businessman would always take full efforts to collect debts fully.

Accordingly, ITAT further held that AO, having allowed the claim of assessee in the original assessment proceedings, had reopened the assessment on mere change of opinion. Relying on the case of CIT v. Kelvinator of India Ltd. [2002] 123 Taxman 433 (Delhi), wherein it was held that reopening of assessment upon mere change of opinion is not valid in law, ITAT held that order passed by AO was liable to be quashed.

List of Cases Referred to

• • CIT v. Kelvinator of India Ltd. [2002] 123 Taxman 433/256 ITR 1 (Delhi) (para 5)
  • Cosmos Co-operative Bank Ltd. v. Dy. CIT [2014] 45 taxmann.com 13/64 SOT 90 (Pune Trib.) (para 6)
  • Beed District Central Co-operative Bank Ltd. v. Asstt. CIT [IT Appeal Nos. 1108 & 1109 (Pune) of 2011, dated 31-12-2015] (para 6).