2005 (2) TMI 745 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of bad debt under section 36(1)(vii) of the Income-tax Act.
2. Eligibility of the bad debt as a business loss under section 28 of the Income-tax Act.

Detailed Analysis:

1. Disallowance of Bad Debt under Section 36(1)(vii):
The core issue is whether the bad debt of Rs. 13,23,598 written off by the assessee is allowable under section 36(1)(vii) of the Income-tax Act. The Assessing Officer (AO) disallowed the claim on the grounds that the amount was not accounted for as income in any previous year and part of the amount was recovered during the year, indicating that it was not a bad debt.

The CIT(A) confirmed the AO's disallowance, stating that the debt was recoverable since part of it was received during the year, and thus, the write-off was not justified. The CIT(A) also noted that for a running account, write-off cannot be made.

Upon appeal, the Tribunal examined the facts and provisions of section 36(1)(vii) and section 36(2)(i). The Tribunal noted that the assessee was engaged in the business of financing and had offered income from financial charges for taxation in earlier years. The Tribunal found that the debt pertained to a sharafi loan given in 1986, and despite efforts, including a civil suit, the assessee could not recover the full amount. The Tribunal emphasized that the amendment to section 36(1)(vii) by the Finance Act, 1987, removed the requirement for the assessee to establish that the debt had become bad. The Tribunal concluded that the assessee's prudent judgment to write off the debt, after exhausting all recovery efforts, complied with the provisions of section 36(1)(vii).

2. Eligibility of the Bad Debt as a Business Loss under Section 28:
The assessee alternatively claimed the bad debt as a business loss under section 28 of the Income-tax Act. The Tribunal, however, primarily focused on the allowability under section 36(1)(vii) and did not delve deeply into the alternative claim under section 28. Given the Tribunal's decision to allow the bad debt under section 36(1)(vii), the alternative claim under section 28 became redundant.

Conclusion:
The Tribunal allowed the appeal, directing the AO to allow the assessee's claim for bad debts amounting to Rs. 13,23,598. The Tribunal held that the assessee's write-off of the debt was justified under section 36(1)(vii) as the debt represented money lent in the ordinary course of the assessee's financing business, and the write-off was a prudent business decision after all recovery efforts failed. The Tribunal's decision emphasized the legislative intent behind the amendment to section 36(1)(vii), which aimed to simplify the process for claiming bad debts by removing the burden of proof from the assessee.