2004 (11) TMI 85 - HC - Income Tax

Bad debt - Whether the amount of Rs. 3,51,178 which was written off in the previous year of the assessee should not be treated as a debt for the purpose of section 36(2)(i) of the Income-tax Act? - Revenue contended that the debt in question is not a debt but it is a bogus transaction between the assessee and the company. It was his submission that the transaction in question was at best in the nature of advance and hence, the same does not fall in section 36 ibid Held that we do not agree to this submission - Held that the amount in question is in the nature of debt and the same having been written off in the earlier previous years by the assessee in her accounts, a case for deduction under section 36(2)(i) ibid, is made out.

Summary

Issues:
1. Appeal filed under section 260A of the Income-tax Act, 1961 against Tribunal's order.
2. Interpretation of section 36(2)(i) of the Income-tax Act regarding bad debt deduction.
3. Dispute over whether the amount written off by the assessee should be treated as a debt.

Issue 1:
The appeal was filed by the assessee under section 260A of the Income-tax Act against the Tribunal's order dated February 18, 1999. The High Court initially dismissed the appeal on October 16, 2000, stating that no substantial question of law was found. However, the Supreme Court later allowed the appeal and remanded the case back to the High Court for deciding the substantial question of law for considering the appeal on its merits.

Issue 2:
The primary issue revolved around the interpretation of section 36(2)(i) of the Income-tax Act concerning the deduction for bad debts. The court analyzed the provisions of section 36(2)(i) which require that a debt must be written off in the previous year to be eligible for deduction. The court emphasized the necessity for the assessee to demonstrate that the debt was declared as written off in the previous year to claim the deduction under this section.

Issue 3:
The dispute centered on whether the amount of Rs. 3,51,178, written off by the assessee, should be considered as a debt for the purpose of section 36(2)(i) of the Act. The assessee argued that the amount was indeed a bad debt and satisfied the requirements of section 36(2)(i) for claiming a deduction. The court examined the documents, including the order of the BIFR and the statement of accounts, which indicated that the amount in question was given as a loan and subsequently written off in previous years, supporting the assessee's claim for deduction.

In conclusion, the High Court allowed the appeal, setting aside the Tribunal's order, and held that the assessee was entitled to claim a deduction for the written-off amount as a bad debt under section 36(2)(i) of the Income-tax Act. The court rejected the Revenue's argument that the transaction was a bogus one, emphasizing that the documents supported the claim of the amount being a debt written off in previous years, thereby fulfilling the conditions for deduction.