2006 (9) TMI 150 - HC - Income Tax

Disallowance on claim of bad debt - survey and search conducted - HELD THAT - Assessing Officer as well as the appellate authority have examined the claim of the assessee that the debt has actually become irrecoverable during the previous assessment year 1999-2000 and have also held that the assessee has failed to prove that debts in question had actually become irrecoverable during the previous year in question. The material circumstances relied on in this connection are that the assessee only furnished a list of debts but the details of three years of such account have not been furnished because the same has been lying with the Assessing Officer. These findings were affirmed by the Tribunal. The bad debts have been disallowed by considering the material on record by finding as a fact that the debt has not been recoverable during the previous year relevant to the assessment year in question and this is a finding of fact and in that view of the matter other questions, even if held to be questions of law, become of academic importance, not affecting the result, it cannot be treated as substantial questions of law. Hence, this appeal cannot be entertained. The appeal, therefore, fails and is hereby dismissed.

Summary

Issues:
1. Deduction of bad debt not allowed due to failure to write off debt in books of account.
2. Seizure of books of accounts by Income-tax Department affecting the ability to comply with statutory conditions.
3. Interpretation of provisions regarding deduction of bad debts under section 36 of the Income-tax Act, 1961.
4. Failure to provide details of debts to establish irrecoverability during the previous assessment year.

Analysis:

Issue 1: Deduction of bad debt not allowed due to failure to write off debt in books of account
The appellant contended that the claim for deduction of bad debt was not allowed because the debt was not written off in the books of account for the relevant assessment year, as required by statute. However, the court found that this contention was not substantiated after reviewing the assessment order, the Commissioner's order, and the Tribunal's decision. The appellant's argument that the seizure of books of accounts prevented compliance with the statutory condition was rejected, as the search took place after the financial year ended, and no entries were made as bad debts until then.

Issue 2: Seizure of books of accounts by Income-tax Department affecting the ability to comply with statutory conditions
The appellant argued that the seizure of books of accounts by the Income-tax Department hindered compliance with the statutory condition of writing off bad debts. However, the court emphasized that the requirement to establish the condition under section 36(2) of the Income-tax Act is necessary even if a debt is written off in the books of account. The court held that the absence of such entries in the books of account hinders the process of examining the claim for deduction of bad debts.

Issue 3: Interpretation of provisions regarding deduction of bad debts under section 36 of the Income-tax Act, 1961
The court clarified that merely writing off a debt as bad in the books of account does not automatically result in deducting that sum for tax purposes. The provisions of section 36 require specific conditions to be met, including the debt being written off in the account of the assessee for the previous year. The court emphasized that the process of examining the claim for deduction begins only when the debt is written off in the books of account.

Issue 4: Failure to provide details of debts to establish irrecoverability during the previous assessment year
The appellant failed to provide details of debts to prove their irrecoverability during the previous assessment year. The court noted that the Assessing Officer and the appellate authority found that the appellant did not prove the debts had become irrecoverable during the relevant year. The Tribunal affirmed these findings, concluding that the debts were not recoverable during the relevant assessment year, making the appeal untenable.

In conclusion, the court dismissed the appeal, stating that the failure to establish the irrecoverability of debts during the previous assessment year led to the disallowance of bad debts deduction.