PR. COMMISSIONER OF INCOME TAX 6 VS KHYATI REALTORS PVT. LTD

PR. COMMISSIONER OF INCOME TAX 6 VS KHYATI REALTORS PVT. LTD

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले


1
REPORTABLE

 IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO._________OF 2022
(@ SPECIAL LEAVE PETITION (CIVIL) NO. 672 OF 2020)
PR. COMMISSIONER OF INCOME TAX 6 ...APPELLANT(S)
VERSUS
KHYATI REALTORS PVT. LTD. ...RESPONDENT(S)
J U D G M E N T
S. RAVINDRA BHAT, J.
1. Special leave granted. With consent of the counsels for the parties, the appeal
was heard finally. The Revenue has appealed a decision of the Bombay High Court1
which affirmed an order2 of the Income Tax Appellate Tribunal (hereinafter,
“ITAT”) which had upheld a claim by the respondent (hereinafter, “assessee”) for
writing off ₹ 10 crores as a bad debt.
2. The assessee carries on real estate development business, trading in
transferable development rights (TDR) and finance. In respect of its return for the
assessment year 2009-2010, the Assessment Officer (hereinafter, “AO”) issued a
1
In ITA No. 291 of 2017, decided on 30.04.2019.
2
In ITA No.129/Mum/2014, decided on 04.03.2016.
2
notice under Section 143(2) of the Income Tax Act 1961 (hereinafter “Act” or “IT
Act”) on 18.08.2010, and also under Section 142(1) of the Act, calling for various
details. The assessee filed its response thereto. The scrutiny assessment was
completed by the AO under Section 143(3) on 30.12.2011, determining the total
income of the assessee at ₹ 87,880/-. The assessee contended that an amount of ₹ 10
crores was deposited with one M/s C. Bhansali Developers Pvt. Ltd. towards
acquisition of commercial premises two years prior to the assessment year in
question (i.e., in 2007). It was contended that the project did not appear to make any
progress, and consequently, the assessee sought return of the amounts from the
builder. However, the latter did not respond. As a result, the assessee’s Board of
Directors resolved to write off the amount as a bad debt in 2009. It was also
contended that the amount could also be construed as a loan, since the assessee had
‘financing’ as one of its objects. In a letter dated 26.12.2011 to the AO, the assessee
inter alia contended as follows:
“We submit that as per provisions of Section 36(2), in respect of monies advanced
in the ordinary course of business, the same allowable as bad debts even if the
amount has not been taken into account in computing the total income. This is well
accepted position in respect of write off of advances given in the lending business.
The present case fully falls within the provisions of sec. 36(2) hence the write off of
advances is allowable u/s. 36(1)(vii).”
3. The AO disallowed the sum of ₹ 10 crores claimed as a bad debt in
determining its income under “Profits and Gains of Business or Profession”.
Aggrieved, the assessee appealed. Before the appellate Commissioner (hereinafter,
“CIT (A)”) the assessee reiterated the contents of a letter dated 05.12.2011 written
to the AO as follows:
“As part of our regular business activity, the company in order to purchase certain
commercial premises had made reservation by way of bookings in the upcoming
project at Old Mumbai Pune Highway, Khapoli, which was to be developed by M/s
C. Bhansali Developers Pvt Ltd. In order to confirm the reservation/booking of said
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commercial premises, builder insisted for advance of Rs 10 crores. Accordingly,
the company had advanced Rs 10 crores on 06.03.2007 towards reserving/booking
of the commercial premises in the said project ... Since the said advance was for
purchase of commercial property, there was no question of charging interest
thereon...However, further development about the said project of the builder is that
the builder after taking advances from us did not proceed in this matter and
possibly siphoned the money for other purposes. On coming to know about their
non-proceeding in the development of the said project, we had a number of
meetings with the directors of M/s C. Bhansali Developers Pvt Ltd. They did not
listen to our request for returning the money…”
4. The CIT(A) confirmed the disallowance on account of bad debts and interest.
A further appeal was preferred to the ITAT, which allowed the assessee’s plea. The
Revenue sought an appeal to the Bombay High Court under Section 260A of the IT
Act. The Bombay High Court ruled that no question of law requiring a decision arose
in the appeal and consequently declined to entertain the Revenue’s plea.
5. The Revenue contended that Section 36(1)(vii) of the Act gives benefit to the
assessee to claim a deduction on any bad debt or part thereof, which is written off as
irrecoverable in the accounts of the assessee 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 the case 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 in accepting the
assessee’s contentions, which were not supported by any material or document. It
was submitted that the assessee’s claim of giving ₹ 10 crores to M/s C. Bhansali
Developers Pvt. Ltd. for the alleged project was not substantiated by any material.
Additionally, the assessee had also pleaded that the amount was given as a ‘loan’ to
the developer, which was a different plea altogether. This plea was bereft of 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 the Act, the AO has to
be satisfied that the action of writing off is on sound and reasonable basis, and not a
device. Reliance was placed on Catholic Syrian Bank Ltd. v. Commissioner of
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Income Tax, Thrissur3
to urge that the assessee is obligated to prove to the AO that
the claim satisfies the ingredients of both Section 36(1)(vii) on the one hand and
Section 36(2) of the Act as well.
6. The Revenue further argued that the assessee’s submission that the amount
could alternatively be deducted as an expenditure exclusively laid out for
commercial purposes under Section 37 of the Act was belated, and raised for the first
time only after the order of the CIT(A).
7. Ms. Kavita Jha, learned counsel for the assessee urged this court not to
interfere with the findings of the ITAT and the High Court. She highlighted that the
following facts and circumstances were not in dispute:
i) The assessee was engaged in the business of real estate and financing.
ii) The objects clause of the Memorandum of Association of the assessee
company reflected the business of contractors, erectors, constructors of
buildings, etc., as well as receiving or lending money as its objects.
iii) ₹ 10 crores was advanced on 06.03.2007 to M/s C. Bhansali Developers
Pvt. Ltd. to acquire certain commercial premises and for reservation by
way of bookings in their upcoming project on the Old Mumbai-Pune
Highway in Khopoli.
iv) The said ₹10 crores was written off during assessment year 2009-10.
v) The ₹ 10 crores advanced to M/s C. Bhansali on 06.03.2007 was in the
ordinary course of its business.
8. It was contended that since the builder/borrower defaulted in repaying the
amount, the respondent assessee decided to write off the same as a bad debt under
3
(2012) 3 SCC 784.
5
Section 36(1)(vii) read with Section 36(2) of the Act. It was contended that after the
amendment of Section 36 of the Act in 1989, there was virtually no scope for the
AO to scrutinize in detail a decision to write off the debt. Counsel relied on the
decision of this court in T.R.F. Limited v. Commissioner of Income Tax, Ranchi4
.
9. Ms. Jha further contended that there was nothing in the Act which barred an
assessee from claiming the benefit of Section 37 of the Act in a case where the
expenditure was laid out or incurred exclusively for business or commercial
purposes, where it might not be successful to establish its claim for deduction under
any other head.
10. The learned counsel also relied on the judgment of this court in Commissioner
of Income Tax v. Mysore Sugar Co. Ltd.
5 As well as other judgments of High Courts,
such as Mohan Meakin Ltd. v. Commissioner of Income Tax6
; Harshad J. Choksi v.
Commissioner of Income Tax7
and IBM World Trade Corporation v. Commissioner
of Income Tax8
to buttress her submissions.
Analysis and Conclusions
11. Section 36 of the Act occurs under the heading ‘other deductions’, and its
relevant extract, for the purpose of this case, is as follows:
“36. (1) The deductions provided for in the following clauses shall be allowed in
respect of the matters dealt with therein, in computing the income referred to in
section 28—
***
4
(2010) 13 SCC 532.
5 1963 (2) SCR 976.
6 2012 (348) ITR 109 (Del).
7 349 ITR 250 (Bom).
8 1990 (186) ITR 412 (Bom).
6
(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part
thereof which is written off as irrecoverable in the accounts of the assessee for the
previous year:
Provided that in the case of an assessee to which clause (viia) applies, the amount
of the deduction relating to any such debt or part thereof shall be limited to the
amount by which such debt or part thereof exceeds the credit balance in the
provision for bad and doubtful debts account made under that clause:
Provided further that where the amount of such debt or part thereof has been taken
into account in computing the income of the assessee of the previous year in which
the amount of such debt or part thereof becomes irrecoverable or of an earlier
previous year on the basis of income computation and disclosure standards notified
under sub-section (2) of Section 145 without recording the same in the accounts,
then, such debt or part thereof shall be allowed in the previous year in which such
debt or part thereof becomes irrecoverable and it shall be deemed that such debt
or part thereof has been written off as irrecoverable in the accounts for the
purposes of this clause.
Explanation 1.—For the purposes of this clause, any bad debt or part thereof
written off as irrecoverable in the accounts of the assessee shall not include any
provision for bad and doubtful debts made in the accounts of the assessee.
Explanation 2.—For the removal of doubts, it is hereby clarified that for the
purposes of the proviso to clause (vii) of this sub-section and clause (v) of subsection (2), the account referred to therein shall be only one account in respect of
provision for bad and doubtful debts under clause (viia) and such account shall
relate to all types of advances, including advances made by rural branches;….
***
(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 or part thereof has been
taken into account in computing the income of the assessee of the previous year in
which the amount of such debt or part thereof is written off or of an earlier previous
year, or represents money lent in the ordinary course of the business of banking or
money-lending which is carried on by the assessee;
(ii) if the amount ultimately recovered on any such debt or part of debt is less than
the difference between the debt or part and the amount so deducted, the deficiency
shall be deductible in the previous year in which the ultimate recovery is made;
(iii) any such debt or part of debt may be deducted if it has already been written off
as irrecoverable in the accounts of an earlier previous year (being a previous year
relevant to the assessment year commencing on the 1st day of April, 1988, or any
earlier assessment year), but the Assessing Officer had not allowed it to be
deducted on the ground that it had not been established to have become a bad debt
in that year;
(iv) where any such debt or part of debt is written off as irrecoverable in the
accounts of the previous year (being a previous year relevant to the assessment
year commencing on the 1st day of April, 1988, or any earlier assessment year) and
the Assessing Officer is satisfied that such debt or part became a bad debt in any
earlier previous year not falling beyond a period of four previous years
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immediately preceding the 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 made by an assessee to
which clause (viia) of sub-section (1) applies, no such deduction shall be allowed
unless the assessee has debited the amount of such debt or part of debt in that
previous year to the provision for bad and doubtful debts account made under that
clause.”
Section 37 reads as follows:
“37. (1) Any expenditure (not being expenditure of the nature described in sections
30 to 36 and not being in the nature of capital expenditure or personal expenses
of the assessee), laid out or expended wholly and exclusively for the purposes of
the business or profession shall be allowed in computing the income chargeable
under the head "Profits and gains of business or profession".
Explanation 1.—For the removal of doubts, it is hereby declared that any
expenditure incurred by an assessee for any purpose which is an offence or which
is prohibited by law shall not be deemed to have been incurred for the purpose of
business or profession and no deduction or allowance shall be made in respect of
such expenditure.”
12. The income of every assessee has to be assessed according to the statutory
framework laid out Chapter IV, Part D of the Act. That chapter deals with heads of
income. Section 28 of the Act deals with the chargeability of income to tax under
the head ‘Profits and Gains of Business or Profession’. The other deductions that an
assessee can claim are elaborated under Section 36 of the Act, which opens with the
phrase “the deductions provided for in the following clauses shall be allowed in
respect of the matters dealt with therein, in computing the income referred to in
Section 28”. For the purposes of computing income chargeable to tax, therefore,
besides specific deductions, ‘other deductions’ enumerated in different clauses of
Section 36 can be allowed by the AO. Each of the deductions must relate to the
business carried out by the assessee. If the assessee carries on a business and writes
off a debt relating to the business as irrecoverable, it would without doubt be entitled
to a corresponding deduction under clause (vii) of sub-section (1) of Section 36
subject to the fulfilment of the conditions set forth in sub-section (2) of Section 36
of the IT Act.
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13. Before the amendment in 1989, the law was that even in cases where the
assessee had made only a provision in its accounts for bad debts and interest thereon,
without the amount actually being debited from the assessee’s Profit and Loss
account, the assessee could still claim deduction under Section 36(1)(vii) of the Act.
With effect from 1 April 1989, with the insertion of the new Explanation under
Section 36(1)(vii), any bad debt written-off as irrecoverable in the account of the
assessee would not include any ‘provision’ for bad and doubtful debt made in the
accounts of the assessee. In other words, before this date, even a provision could be
treated as a write off. However, after this date, the Explanation to Section 36(1)(vii)
brought about a change. As a result, a mere provision for bad debt per se was not
entitled to deduction under Section 36(1)(vii). This position in law was recognized
by this court in Southern Technologies Ltd. v. Joint Commissioner of Income Tax,
Coimbatore9
:
“25. [B]y insertion (w.e.f. 1.4.1989) of a new Explanation in Section 36(1)(vii), it
has been clarified that any bad debt written off as irrecoverable in the account of
the assessee will not include any provision for bad and doubtful debt made in the
accounts of the assessee. The said amendment indicates that before 1.4.1989, even
a provision could be treated as a write off. However, after 1.4.1989, a distinct
dichotomy is brought in by way of the said Explanation to Section 36(1)(vii).
Consequently, after 1.4.1989, a mere provision for bad debt would not be entitled
to deduction under Section 36(1)(vii). To understand the above dichotomy, one
must understand “how to write off”. If an assessee debits an amount of doubtful
debt to the P&L Account and credits the asset account like sundry debtor’s
Account, it would constitute a write off of an actual debt. However, if an assessee
debits “provision for doubtful debt” to the P&L Account and makes a
corresponding credit to the “current liabilities and provisions” on the Liabilities
side of the balance sheet, then it would constitute a provision for doubtful debt. In
the latter case, assessee would not be entitled to deduction after 1.4.1989.
38. The point to be noted is that the IT Act is a tax on “real income”, i.e., the profits
arrived at on commercial principles subject to the provisions of the IT Act.
Therefore, if by Explanation to Section 36(1)(vii) a provision for doubtful debt is
kept out of the ambit of the bad debt which is written off then, one has to take into
9
 (2010) 2 SCR 380.
9
account the said Explanation in computation of total income under the IT Act
failing which one cannot ascertain the real profits. This is where the concept of
“add back” comes in. In our view, a provision for NPA debited to P&L Account
under the 1998 Directions is only a notional expense and, therefore, there would
be add back to that extent in the computation of total income under the IT Act.
39. One of the contentions raised on behalf of NBFC before us was that in this case
there is no scope for “add back” of the Provision against NPA to the taxable
income of the assessee. We find no merit in this contention. Under the IT Act, 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
assessed under the IT Act have got to be Real Profits which have to be computed
on ordinary principles of commercial accounting. In other words, profits have got
to be computed after deducting Losses/ Expenses incurred for business, even
though such losses/ expenses may not be admissible under Sections 30 to 43D of
the IT Act, unless such Losses/ Expenses are expressly or by necessary implication
disallowed by the Act. Therefore, even applying the theory of Real Income, a debit
which is expressly disallowed by Explanation to Section 36(1)(vii), if claimed, has
got to be added back to the total income of the assessee because the said Act seeks
to tax the “real income” which is income computed according to ordinary
commercial principles but subject to the provisions of the IT Act. Under Section
36(1)(vii) read with the Explanation, a “write off” is a condition for allowance.”
14. It is thus evident that merely stating a bad and doubtful debt as an
irrecoverable write off without the appropriate treatment in the accounts, as well as
non-compliance with the conditions in Section 36(1)(vii), 36(2), and Explanation to
Section 36(1)(vii) would not entitle the assessee to claim a deduction. This position
was reiterated again in Catholic Syrian Bank (supra):
“5. The language of Section 36(1)(vii) of the Act is unambiguous and does not admit
of two interpretations. It applies to all banks, commercial or rural, scheduled or
unscheduled. It gives a benefit to the Assessee to claim a deduction on any bad debt
or part thereof, which is written off as irrecoverable in the accounts of the Assessee
for the previous year. This benefit is subject only to Section 36(2) of the Act. It is
obligatory upon the Assessee to prove to the assessing officer that the case satisfies
the ingredients of Section 36(1)(vii) on the one hand and that it satisfies the
requirements 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 into operation only when the case of the Assessee is one which falls squarely
under Section 36(1)(viia) of the Act. We may also notice that the explanation to
Section 36(1)(vii), introduced by the Finance Act, 2001, has to be examined in
conjunction with the principal section. The explanation specifically excluded any
provision for bad and doubtful debts made in the account of the Assessee from the
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ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in
the accounts of the Assessee'. Thus, the concept of making a provision for bad and
doubtful debts will fall outside the scope of Section 36(1)(vii) simplicitor. The
proviso, as already noticed, will have to be read with the provisions of Section 36(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 bad debt is written off as irrecoverable in the accounts of the assessee.
However, in the present case, the Assessing Officer has not examined whether the
debt has, in fact, been written off in accounts of the assessee. When bad debt occurs,
the bad debt account is debited and the customer’s account is credited, thus, closing
the account of the customer. In the case of Companies, the provision is deducted
from Sundry Debtors. As stated above, the Assessing Officer has not examined
whether, in fact, the bad debt or part thereof is written off in the accounts of the
assessee. This exercise has not been undertaken by the Assessing Officer. Hence,
the matter is remitted to the Assessing Officer for de novo consideration of the
above-mentioned aspect only and that too only to the extent of the write off.”
16. This court did not examine the impact of Section 36(2) and the condition of
write off, in the accounts of the assessee during the previous year, in T.R.F Ltd.
(supra). However, the judgments in Southern Technologies (supra), and Catholic
Syrian Bank (supra) spelt out the conditions subject to which an assessee could write
off a bad and doubtful debt. Interestingly, Kapadia, C.J was a party to T.R.F and
Catholic Syrian Bank; he in fact authored the judgment in Southern Technologies.
Furthermore, Catholic Syrian Bank (supra) is by a bench of three judges, whereas
the other decisions are by benches of two Judges. In the circumstances, this Court
has to accord primacy to Southern 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 the previous year;
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(ii) Such bad debt or part of it written-off as irrecoverable in the
accounts of the assessee cannot include any provision for bad and
doubtful debts made in the accounts of the assessee;
(iii) No deduction is allowable unless the debt or part of it “has been
taken into account in computing the income of the assessee of the
previous year in which the amount of such debt or part thereof is
written off or of an earlier previous year”, or represents money lent
in the ordinary course of the business of banking or money-lending
which is carried on by the assessee;
(iv) The assessee is obliged to prove to the AO that the case satisfies the
ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act.
18. In the present case, the record shows that the accounts of the assessee nowhere
showed that the advance was made by it to M/s C. Bhansali Developers Pvt. Ltd. in
the ordinary course of business. Its primary argument was that the amount of ₹ 10
crores was given for the purpose of purchasing constructed premises. However, the
amount was written-off on 28.03.2009. As noted by the CIT(A), there was no
material to substantiate this submission, in respect of payment of the amount, the
time by which the constructed unit was to be given to it, the area agreed to be
purchased, etc. Equally, in support of its other argument that the amount was given
as a loan, the assessee nowhere established the duration of the advance, the terms
and conditions applicable to it, interest payable, etc. The assessee conceded that it
had received interest income for the relevant assessment year. However, it could not
establish that any interest was paid (or shown to be payable in its accounts) for the
sum of ₹ 10 crores. Furthermore, there is nothing on record to suggest that the
requirement of the law that the bad debt was written-off as irrecoverable in the
assessee’s accounts for the previous year had been satisfied. Another reason why the
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amount could not have been written-off, is that the assessee’s claim was that it was
given to M/s Bhansali Developers Pvt. Ltd. for acquiring immovable property – it
therefore, was in the nature of a capital expenditure. It could not have been treated
as a business expenditure. In A.V. Thomas and Co. Ltd., Alleppey v. The
Commissioner of Income Tax, (Bangalore) Kerala10 this court held as follows:
“16. Now, a question under s. 10(2)(xi) can only arise if there is a bad or doubtful
debt. Before a debt can become bad or doubtful it must first be a debt. What is
meant by debt in this 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 is a debt that would
have come into the balance sheet as a trading 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 a good
debt, would not have come in to swell the profits.”
17. A debt in such cases is an outstanding which if recovered would have swelled
the profits. It is not money handed over to someone for purchasing a thing which
that person has failed to return even though no purchase was made. In the section
a debt means something more than a mere advance. It means something which is
related to business or results from it. To be claimable as a bad or doubtful debt it
must first be shown as a proper debt…”
19. In view of the above discussion, it is held that the assessee’s claim for
deduction of ₹ 10 crore as a bad and doubtful debt could not have been allowed. The
findings of the ITAT and the High Court, to the contrary, are therefore, insubstantial
and have to be set aside.
20. The second issue relates to the admissibility of an expenditure as a deduction,
which does not fall within the provisions of Sections 28 to 43, and is not capital in
nature, but is laid out or spent exclusively for the purpose of business, under Section
37 of the Act. A similar provision existed under the old Income Tax Act, 1922 as in
the case of provision for bad debts, by Section 10(2)11. This aspect was considered
10 [1963] Supp (1) SCR 776.
11 Section 10(2): [S]uch profits or gains shall be computed after making the following allowances, namely :-
13
by this court in The Commissioner of Income Tax v. The Mysore Sugar Co., Ltd.
12
The assessee there was engaged in production of sugar. It used to advance monies
to cane growers in consideration of supply of sugarcane. Due to drought, the cane
growers could not repay amounts advanced. The assessee claimed the outstanding
to be bad debts, and sought to write them off. This was not allowed; the Income Tax
Officer held the expenditure to be capital in nature. The High Court however, set
aside that determination. This court confirmed the view of the High Court. However,
the court also examined the argument whether in such eventualities, the expenditure
could be claimed to be exclusively laid out for the purpose of business (under the
provision corresponding to Section 37(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 profits or gains
of any business, etc. carried on by him. Under sub-s. (2), these profits or gains are
computed after making certain allowances. Clause (xi) allows deduction of bad and
doubtful business debts. It provides that when the assessee’s accounts in respect of
any part of his business 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 the his business is
deductible but not exceeding the amount actually written off as irrecoverable in the
books of the assessee. Clause (xv) allows any expenditure not included in cls. (i) to
(xiv), which is not in the nature of capital expenditure or personal expenses of the
assessee, to be deducted, if laid out or expanded wholly and exclusively for the
purpose of such business, etc. The clauses expressly provided what can be
deducted; but the general scheme of the section is that profits or gains must be
calculated after deducting outgoings reasonably attributable as business
expenditure but so as not to deduct any portion of an expenditure of a capital
nature. If an expenditure comes within any of the enumerated classes of allowances,
the case can be considered under the appropriate class; but there may be an
***
(xi) When the assessee's accounts in respect of any part of his business, profession or vocation 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, and in the case of an assessee carrying on a banking or money lending business such sum in
respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be
irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee :
***
(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and
not being in the nature of capital expenditure or personal expenses) laid out or expended wholly and exclusively for
the purpose of such business, profession or vocations".
12 1963 (2) SCR 976
14
expenditure which, though not exactly covered by any of the enumerated classes,
may have to be considered in finding out the true assessable profits or gains. This
was laid down by the Privy Council in Commissioner of Income-tax v. Chitnavis
I.L.R. (1932) IndAp 290 and has been accepted by this Court. In other words, s.
10(2) does not deal exhaustively with the deductions, which must be made to arrive
at the true profits and gains.
8. To find out whether an expenditure is on the capital account or on revenue, one
must consider the expenditure in relation to the business. Since all payments reduce
capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss
capital. But this is not true of all losses, because losses in the running of the
business cannot be said to be of capital. The questions to consider in this connection
are : for that was the money laid out? Was it to acquire an asset of an enduring
nature for the benefit of the business, or was it an outgoing in the doing of the
business? If money be lost in the first circumstances, it is a loss of capital, but if
lost in the second circumstances, it is a revenue loss. In the first, it bears the
character of an investment, but in the second, to use a commonly understood
phrase, it bears the character of current expenses.
21. It is apparent that this court was satisfied that the disallowance of the amount,
on account of bad and doubtful debt, did not preclude a claim for deduction, on the
ground that the expenditure was exclusively laid out for the purpose of business. The
court applied the test of whether the expense was incurred for business, or whether
it fell into the capital stream. In the facts of the case, the tests were satisfied – the
expenditure was for the purpose of business, and did not fall in the capital stream.
22. The assessee had relied on a few High Court judgments which have ruled that
even if a claim for deduction under Section 36(1) is not allowed, the possibility of
its exclusion under Section 37 cannot be ruled out. This court is of the opinion that
as a proposition of law, that enunciation is unexceptional, since the heads of
expenditure that can be claimed as deduction are not exhaustive – which is the
precise reason for the existence of Section 37. Therefore, in a given case, if the
expenditure relates to business, and the claim for its treatment under other provisions
are unsuccessful, application of Section 37 is per se not excluded.
15
23. This court is of the opinion however, that in the facts of this case, the judgment
in Southern Technologies (supra) on this issue (where the claim of bad and doubtful
debt was disallowed) is appropriate, and applicable. The relevant extract of the said
judgment is as follows:
“44. As stated above, Section 36(1)(vii) after 1.4.1989 draws a distinction between
write off and provision for doubtful debt. The IT Act deals only with doubtful debt.
It is for the assessee to establish that the provision is made as the loan is
irrecoverable. However, in view of Explanation which keeps such a provision
outside the scope of “written off” bad debt, Section 37 cannot come in. If an item
falls under Sections 30 to 36, but is excluded by an Explanation to Section 36 (1)
(vii) then Section 37 cannot come in. Section 37 applies only to items which do not
fall in Section 30 to 36. If a provision for doubtful debt is expressly excluded
from Section 36 (1) (vii) then such a provision cannot claim deduction under
Section 37 of the IT Act even on the basis of “real income theory” as explained
above.”
24. In view of the foregoing discussion, the Revenue’s appeal has to succeed. The
impugned judgment of the High Court and the order of ITAT are hereby set aside.
The appeal is allowed, in the above terms, without order on costs.

.....................................................J.
 [UDAY UMESH LALIT]
.....................................................J.
 [S. RAVINDRA BHAT]
.....................................................J.
 [SUDHANSHU DHULIA]
New Delhi,
August 25, 2022

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