The Madras High Court held that the deduction cannot be claimed on the bad debt which was not written off as required by law as per the provisions of Section 36 of the Income Tax Act.
The Assessee, Allu Arvind Babu submitted that since the Security Deposit or advance of Rs.30 Lakhs given by the Assessee/the developer, to the landowner, in the Assessment Year 2006-07, the Assessee made a provision for this expenditure of Rs.30.00 Lakhs in its Books of Accounts and therefore, the same could be allowed as an expenditure or deduction in the Assessment Year 2006-07.
Even though the advance given to the landowner was shown as receivable in the Balance Sheet for the previous year relevant for the Assessment Year 2006-07, the Revenue as well as the Tribunal were not justified in disallowing the same as “provisions for claims and compensation” on the ground that it was not written off in the Books of Accounts of the Assessee.
the Assessee reiterated his submissions and stated that to claim a deduction in relation to bad debts under Section 36(1)(vii) of the Act it was not for the Assessee to establish that the debt in fact had become irrecoverable and deduction should have been allowed in the hands of the Assessee, since a provision was made with regard to the said compensation of Rs.30 Lakhs.
On the other hand, the Revenue argued that mere creating of a provision for the said advance of security deposit made by the Assessee in favor of the landowner will not entitle the Assessee to claim the deduction, as the Assessee, by his own conduct, has shown it as outstanding receivable in the Balance Sheet of the Assessee for the relevant previous year.
The revenue further added that the Assessee has not written off the said claim against the landowner and has not actually paid the said amount to the landowner during this year, mere creating of a provision for the same does not entitle the Assessee to claim it as an expenditure and defer taxation to that extent.
He also refuted the alternative claim of the Assessee under Section 37 of the Act as the expenditure incurred wholly and exclusively for the purpose of business.
The division judge bench of Justice Vineet Kothari and Justice M.S. Ramesh while dismissing the appeal of the assessee held that merely by making a book entry for creating a provision for future expenditure or compensation, the Assessee cannot be permitted to claim deduction under Section 36 or 37 of the Act.
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