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2005 (3) TMI 700 - AT - Income TaxDisallowance of written off - Bad debt - HELD THAT - From the facts it is seen that M/s. Vinayaka Enterprises firstly defaulted in honouring the first agreement. A fresh contract was entered into and the debtor also agreed to pay compensation. The compensation was to be paid in the year 1998. After 31-8-1999 nothing was paid till October 2002. In between several cheques issued by the debtor bounced. There were more than 24 such instances of bouncing of cheques. During this period there was a general recession in property market. This can lead the assessee to believe that the debt has become bad. The position has to be looked into as on the date of write off and not on the possibility of recovery at a subsequent uncertain date. Even till date of filing return of income nothing was received nor any hope revived. The initiation of legal proceedings is not a condition precedent for claim of bad debt. At the same time there is no prohibition for initiation of legal proceedings subsequent to write off. The decision has to be arrived at on the common sense and as to what a prudent business man will arrive at. The civil proceedings were only to restrain the debtor from alienating its property. However it was not subject to charge by the assessee. Series of events like 24 in number can lead any reasonable man of ordinary prudence to believe that the debt has become bad. We accordingly hold that when the assessee wrote off the sum he was under a bona fide belief and hence the debt written off as bad debt is allowable. The principal sum is allowable as loss u/s 28/37 of the Act. The compensation and interest component is allowable u/s 36(1)( vii ) read with section 36(2) of the Act. In the result the appeal is allowed.
Issues Involved:
1. Disallowance of bad debt claim. 2. Charge of interest under section 234B. Detailed Analysis: 1. Disallowance of Bad Debt Claim: The primary issue revolves around the disallowance of a bad debt claim amounting to Rs. 19,24,09,280 by the appellant, a partnership firm engaged in property development. The amount was due from M/s. Vinayaka Enterprises, which failed to honor its commitments. The breakdown of the amount includes the principal sum, compensation, and interest accrued. Assessing Officer's Grounds for Disallowance: - The principal amount was not considered in computing the income of the assessee in any previous years. - The compensation and interest had not become bad, and the claim was considered premature. - No legal action was initiated prior to the write-off. - The debtor was not declared insolvent. - Payments were made after initiating legal action, indicating the debt had not become irrecoverable. Appellant's Argument: The appellant argued that the write-off was justified due to the debtor's inability to pay, evidenced by dishonored cheques and subsequent criminal proceedings under section 138 of the Negotiable Instrument Act. The appellant had also filed civil suits and criminal complaints post write-off. The appellant contended that the write-off was a bona fide decision based on the debtor's financial condition and market depression. CIT(A)'s Findings: - The write-off must be of a bad debt to be allowable under section 36(1)(vii). - Payments made by the debtor before and after legal actions indicated the debtor was not insolvent as of 31-3-2001. - The appellant did not initiate proceedings before the write-off, questioning the bona fides of the write-off. - The debt was fully secured by land, and the debtor acknowledged the debt. - The write-off was perceived as a strategy to defer tax liability due to the appellant's significant income. Tribunal's Analysis: - The amendment to section 36(1)(vii) effective from 1-4-1989 allows the write-off in the books as sufficient compliance without proving the debt became bad in that year. - The appellant's action was considered bona fide due to the debtor's repeated defaults and dishonored cheques. - The principal sum advanced in the course of business was allowed as a loss under section 28/37. - The compensation and interest components were allowed under section 36(1)(vii) read with section 36(2). Conclusion on Bad Debt: The Tribunal concluded that the appellant's decision to write off the debt was bona fide, and the bad debt claim was allowable. The principal amount was allowed as a business loss, while the compensation and interest were allowable as bad debts. 2. Charge of Interest under Section 234B: The appellant contested the charge of interest under section 234B, arguing that the return of income declared a loss, and thus, there was no obligation to pay advance tax. Tribunal's Decision: The Tribunal agreed with the appellant, stating that since the appellant was under a bona fide belief of incurring a loss, there was no liability to pay advance tax under section 208. Consequently, interest under section 234B was not leviable. Conclusion on Interest under Section 234B: The Tribunal deleted the interest charged under section 234B, allowing the appeal in favor of the appellant. Final Judgment: The appeal was allowed, with the Tribunal accepting the bad debt claim and deleting the interest charged under section 234B.
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