2008 (4) TMI 537 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of bad debts written off.
2. Timing of writing off bad debts in the books of account.
3. Interpretation of section 36(1)(vii) of the Income-tax Act, 1961.

Summary:

1. Disallowance of bad debts written off:
The assessee, a State Government Undertaking, claimed bad debts of Rs. 2,13,50,967.28 in the revised return for the financial year ending 31-3-2004. The Assessing Officer disallowed the claim, stating that the debts were written off only on 30-3-2005, relevant to the financial year 2004-05, and thus could not be considered for the assessment year 2004-05. The CIT(A) upheld this disallowance.

2. Timing of writing off bad debts in the books of account:
The assessee argued that the accounts for the financial year 2003-04 were unaudited and not finalized by the Board of Directors by 31-3-2004. Therefore, adjustments, including writing off bad debts, could be made before the accounts were finalized and signed. The Department contended that adjustments could not be made after the close of the accounting period, and the bad debts should be written off in the financial year 2004-05.

3. Interpretation of section 36(1)(vii) of the Income-tax Act, 1961:
The Tribunal examined section 36(1)(vii), which requires bad debts to be written off "in the accounts of the assessee for the previous year." The Tribunal noted that the provision does not mandate writing off bad debts "in the previous year" but "for the previous year." Therefore, if the accounts are open and subject to audit, writing off can be done in those books. The Tribunal held that the assessee could write off bad debts in the books of account for the relevant previous year, even if the decision was taken after the financial year-end but before the accounts were finalized and adopted.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the claim for bad debts was allowable as it was written off in the books of account for the relevant previous year, despite the decision being taken after the financial year-end. The Tribunal emphasized that the interpretation favorable to the assessee should be adopted, supported by various Supreme Court decisions.