1990 (11) TMI 348 - HC - Income Tax

Bad Debts Had Been Written off as Irrecoverable in the Accounts of the Assessee for the asst. yr. 1979-80 as required under s. 36(2)(i) of the IT Act 1961.

Summary

Issues:
1. Interpretation of Section 36(2)(i) of the IT Act, 1961 regarding writing off bad debts.
2. Validity of writing off bad debts in the accounts of the assessee.
3. Effect of board approval timing on the allowance of bad debts deduction.
4. Compliance with statutory requirements for writing off irrecoverable debts.

Analysis:

Issue 1: Interpretation of Section 36(2)(i) of the IT Act, 1961
The primary issue in this case was the interpretation of Section 36(2)(i) of the IT Act, 1961, concerning the writing off of bad debts as irrecoverable. The Tribunal had to determine whether the bad debts claimed by the banking company met the requirements under this section for deduction.

Issue 2: Validity of Writing Off Bad Debts
The Income Tax Authorities initially disallowed the claim of bad debts by the banking company, arguing that the debts were not properly written off in the accounts as required by law. The contention was that merely crediting the amounts to the "Bad Debts Suspense Account" and debiting the profit & loss account did not constitute a valid write-off under Section 36(2)(i).

Issue 3: Board Approval Timing
A crucial aspect of the case was the timing of the board approval for writing off the bad debts. The Revenue contended that since the board approval was granted after the close of the accounting period, the deduction claimed by the assessee should not be allowed in the year under reference. This raised the question of whether the timing of board approval affects the eligibility for bad debts deduction.

Issue 4: Compliance with Statutory Requirements
The Tribunal found that the assessee had complied with the statutory requirement for writing off irrecoverable debts. They noted that the entries were made in the profit and loss account and the bad debt reserve account, which was considered sufficient compliance. The Tribunal held that the amounts in question should be allowed as bad debts based on this compliance.

Overall, the High Court upheld the Tribunal's decision, emphasizing that the approval of the board of directors for writing off bad debts is an internal matter of the company. The Court rejected the Revenue's argument that the timing of board approval affected the allowance of bad debts deduction, stating that the accounts become final only after the board's resolution is passed. The judgment clarified the process involved in finalizing accounts and the retrospective effectiveness of board approvals, ultimately ruling in favor of the assessee and allowing the bad debts deduction.