2005 (2) TMI 51 - HC - Income Tax

Whether the allowance of claim of Rs. 1,84,375 as bad debt out of the dues shown at Rs. 6,61,723 in the books of account could be justified under section 36(1)(vii) read with section 36(2) - No collusion between the assessee and its debtor has since been established or found by any of the authorities. Therefore, the irrecoverability cannot be questioned and as such the irrecoverable part excluded in the award, having regard to the facts and circumstances of the case, satisfies the ingredients of section 36(2) and is a bad debt allowable for deduction under section 36(1)(vii). - We answer the question in the affirmative, in favour of the assessee and hold that the assessee is entitled to allowance of the claim of Rs. 1,84,375.

Summary

Issues:
Allowance of bad debt under section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961.

Analysis:
The case involved the question of whether the allowance of a claim of Rs. 1,84,375 as bad debt out of the dues shown at Rs. 6,61,723 in the books of account could be justified under section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961. The Department contended that the assessee had waived or forgone its claim by accepting the award of the arbitrator without attempting to recover the difference between the claim and the award. On the other hand, the Assessee argued that the decision to accept the award was made after exhausting all avenues for recovery, satisfying the provision contained in section 36(2). The Assessee further pointed out that the analogy used by the Tribunal was not acceptable as the dues existed but could not be realized despite efforts to recover through legal methods.

Regarding the failure to recover through arbitration and whether it constitutes a bad debt under section 36(2), the Court noted that once an award is passed by an arbitrator, parties are bound by it, subject to challenge in appropriate proceedings. The Court emphasized that accepting an award does not imply waiving the claim, especially when it is done with ordinary commercial expedience after trying to recover the amount through legal means. The Court highlighted that the irrecoverability of the amount, reflected in the books of account and subject to taxation in earlier years, satisfied the requirements of section 36(2) as it became unrecoverable after exhausting all legally recognized methods of recovery.

In the conclusion, the Court distinguished between giving up a claim and failing to recover it, emphasizing that failure to recover does not equate to waiving the claim. The Court found no collusion between the assessee and its debtor, affirming that the irrecoverable part excluded in the award satisfied the conditions of section 36(2) and was deemed a bad debt allowable for deduction under section 36(1)(vii). Consequently, the appeal was allowed, the Tribunal's order was set aside, and the Commissioner of Income-tax (Appeals) order was affirmed, granting the assessee the entitlement to the allowance of the claim of Rs. 1,84,375.