Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 Supreme(Online)(ITAT) 21844

INCOME TAX APPELLATE TRIBUNAL (MUMBAI BENCH)
C V Bhadang, President, Padmavathy S, Accountant Member
Small Industries Development Bank Of India – Appellant
Versus
Dy. Commissioner Of Income Tax – Respondent
I.T.A. No. 2943/Mum/2023 | I.T.A. No. 2894/Mum/2023 | I.T.A. No. 2893/Mum/2023 | I.T.A. No. 3160/Mum/2023 | I.T.A. No. 3173/Mum/2023 | I.T.A. No. 2971/Mum/2023 | I.T.A. No. 2970/Mum/2023

Advocates:
For the Appellants/Petitioners: Arun Kanti Datta
For the Respondents: Rakesh Joshi

Deductions under separate clauses of Section 36 of the Act operate independently and do not depend on each other for computation. Furthermore, rejecting an assessee's suo-motu disallowance under Section 14A requires the Assessing Officer to record objective satisfaction regarding the incorrectness of the accounts before applying prescribed rules.

Headnote:(A) Income Tax Act, 1961 - Sections 36(1)(vii), 36(1)(viia)(c), 36(1)(viii), 14A, 158A - Bad debts - Disallowance of expenditure for earning exempt income - Deduction for special reserves - Assessee claimed bad debts under Section 36(1)(vii) and deduction for provision for bad and doubtful debts under Section 36(1)(viia)(c) - Proviso to Section 36(1)(vii) limits bad debt deduction to the excess over the credit balance in the provision account - Provisions are independent of each other and intended to prevent double deduction - Deduction under Section 36(1)(viii) for special reserve must be computed without reducing total income by other independent deductions under Section 36 - Requirement of establishing expenditure for exempt income under Section 14A requires objective recording of dissatisfaction with books of accounts by Assessing Officer before applying Rule 8D. (Paras 5, 8, 9, 10, 12, 17, 21)

(B) Appellate Procedure - Power to invoke provisions for quantifying disallowance - Requirement of satisfaction - Assessing Officer must record objective satisfaction regarding incorrectness of assessee's claim based on books of account before rejecting them - Ad-hoc disallowance is not permissible under the law. (Paras 12, 17)

Facts of the case:
The revenue challenged the deletion of additions related to bad debts, disallowance under Section 14A, and the method of calculating special reserve deductions. The assessee contested the ad-hoc disallowance under Section 14A and the disallowance of amortized lease premium payments. The tribunal examined whether bad debt claims were restricted by existing provisions and whether multiple independent deductions under Section 36 acted as a subset of each other.

Findings of Court:
The court found that the bad debt deduction and the provision for bad debts are distinct, and where no double deduction occurs, the full write-off is allowable. Regarding Section 14A, the Assessing Officer failed to record specific dissatisfaction with the books of account, rendering excessive disallowances unsustainable. Deductions under Section 36(1)(viia)(c) and Section 36(1)(viii) are independent and should not be reduced against each other. The issue of lease premium amortization was remanded for consideration under Section 158A.

Issues: Whether bad debt write-offs are limited by provisions for bad debts; whether deductions under different clauses of Section 36 are independent; whether ad-hoc disallowance of administrative expenditure is legally permissible without recording dissatisfaction.

Ratio Decidendi: Deductions under separate clauses of Section 36 are independent in operation; the proviso to Section 36(1)(vii) acts only to prevent double deduction where none exists; and invoking Rule 8D for Section 14A requires the Assessing Officer to record objective dissatisfaction with the assessee's accounts.

Result: Appeals of the revenue dismissed; appeals of the assessee partly allowed.

Table of Content
1. proviso to section 36(1)(vii) regarding bad debts against provision for bad/doubtful debts. (Para 5 , 6 , 7 , 8 , 9 , 10)
2. requirement of objective satisfaction by ao to invoke rule 8d for section 14a disallowance. (Para 11 , 12 , 13 , 14 , 15 , 16 , 17)
3. independence of deductions under section 36(1)(viia) and 36(1)(viii) without mutual reduction. (Para 18 , 19 , 20 , 21)
4. remand for adjudication pending outcome of identical questions before the high court. (Para 22 , 23 , 24)
5. consistency of findings across multiple assessment years. (Para 25 , 26)

O R D E R

Per Padmavathy S, AM:

These cross appeals by the revenue and the assessee for Assessment Years (AY) 2017-18 & 2018-19 and the appeals of the revenue for AY 2014-15 to 2016-17 are against the separate orders of the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre, Delhi, [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 26.06.2023 for (AY) 2014-15, dated 19.06.2023 for AY 2015-16 & 2016-17, dated 11.07.2023 for 2017-18 & 2018-19. The common issues contended by the assessee and revenue in all these appeals are listed as under:

Revenue's Appeal – Issues contended

(i) Learned Commissioner of come Tax (Appeals) erred in deleting the addition made by the A.O. u/s 36(1)(vii) without considering the fact that assessee has been allowed deduction u/s. 36(1)(viia)(c) and assessee has credit balance in provision for bad a doubtful account allowed us. 36(1)(viia) (c) of the Act. - AY 2014-15, AY 2015-16, AY 2016-17, AY 2017-18 and AY 2018-19

(ii) Learned Commissioner of Income Tax (Appeals) erred in directing the learned Assessing Officer to restrict the disallowance us. 14A, relying upon the Judgement of the case pertaining to the A.Y. 2004-05, ignoring the fact that during the current A.Y provisions of Rule 8D are applicable. - AY 2014-15, AY 2015-16, AY 2016-17, AY 2017-18 and AY 2018-19

(iii) Learned Commissioner of Income Tax (Appeals) was not justified in allowing the appeal of the assessee on the issue of claim of deduction u/s. 36(1) (viii) without appreciating that deduction has been calculated after making deductions under all other clauses of section 36(1) which includes the claim of deductions u/s 36(1) (viia)(c) also. - AY 2016-17, and AY 2017-18

Assessee's Appeal – Issues contended

(i) Learned CIT(A) has erred in confirming the disallowance u/s. 14A of the Income Tax Act, 1961 to the extent of an adhoc amount over and above the disallowance made by the assessee - AY 2014-15, AY 2015-16, AY 2016-17, AY 2017-18 and AY 2018-19

(ii) Learned CIT (A) has erred in confirming the action of Learned assessing officer in disallowing the claim of proportionate amortized amount of lease premium paid to MMRDA in respect of leasehold land. - AY 2017-18 and AY 2018-19

2. Since the issues contended are common across all these appeals they are heard together and disposed of by this common order. For the purpose of adjudication, we will consider the appeal for AY 2016-17 as lead case.

3. The assessee is a company functioning as Principal Financial Institution for promotion, financing and development of Micro, Small & Medium Enterprises and to co-ordinate the functions of Institutions engaged in similar activities. The assessee filed the return of income for AY 2016-17 on 29.09.2016 declaring a total income of Rs. 1552,64,02,200/- under the normal provisions of the Act and book profit of Rs. 1861,94,44,229/- under section 115JB of the Act. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) made the following disallowance while assessing the income at Rs. 1646,52,55,744/- under the normal provision of the Act and recomputed the book profit after adjusting the disallowance under section 14A of the Act at Rs. 1867,45,30,421/-.

(i) Disallowance to bad-debts u/s 36(1)(vii) - Rs. 84,46,95,341/-

(ii) Disallowance of amortized rent - Rs. 60,79,

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