2006 (12) TMI 106 - HC - Income Tax

Addition on account of bad debts written off - bad debts u/s 36(1)(vii) read with section 36(2) - money-lending by way of inter-corporate deposits (ICDs) - The Tribunal in the impugned order has deleted the disallowance of the amount treating it to be irrecoverable. It further held that since the principal is not recoverable there is no reason or justification to charge interest on this sum - HELD THAT - A conjoint reading of section 36(2) and section 36(1)(vii) makes it clear that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular Number 551. Thus In our view that the Circular Number 551 leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year which had generated enormous litigation on the question of allowability of bad debt in a particular year. The circular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as a bad or irrecoverable no sooner it was written off in the books of the assessee concerned. In these circumstances no substantial question of law arises in the present case. Dismissed.

Summary

Issues:
1. Treatment of bad debts by the assessed company under the Income Tax Act.
2. Interpretation of Section 36(1)(vii) and Section 36(2) regarding bad debts.
3. Legal actions taken by the assessed against the debtor.
4. Assessment of the honesty of the opinion formed by the assessed regarding bad debts.
5. Application of Circular Number 551 dated 23.1.1990 in determining the allowability of bad debts.
6. Comparison with previous judicial decisions on the treatment of bad debts under the Income Tax Act.

Analysis:

1. The case involves the treatment of bad debts by an assessed company engaged in money lending. The Assessing Officer noted the writing off of Rupees Six Crores as bad debts, leading to a detailed hearing focusing on a specific transaction with Shithir Housing and Construction (P) Ltd. The assessed company emphasized its extensive lending activities and the relatively small portion of bad debts written off.

2. Various High Courts' decisions were cited to establish that the assessed company must make an honest judgment on the recoverability of debts. The interpretation of Section 36(1)(vii) and Section 36(2) was crucial in determining the allowability of bad debts, emphasizing the need for debts to be established as irrecoverable and written off in the accounts.

3. Legal actions taken by the assessed against the debtor, including issuing legal notices, filing a Winding-up Petition, and initiating arbitration proceedings, were presented to demonstrate efforts to recover the debt, supporting the claim of irrecoverability.

4. The Assessing Officer added back the bad debts, questioning the honesty of the opinion formed by the assessed. However, the Tribunal disagreed, highlighting the assessed company's proactive legal actions and the lack of previous dealings with the debtor as factors supporting the decision to write off the bad debts.

5. Circular Number 551 dated 23.1.1990 clarified the conditions for the allowability of bad debts, emphasizing that debts can be treated as bad or irrecoverable once written off in the assessed company's accounts. This circular played a significant role in determining the deductibility of bad debts in the case.

6. The judgment compared with previous judicial decisions, particularly the Gujarat High Court's rulings, to support the conclusion that the assessed company's actions aligned with the provisions of the Income Tax Act and Circular Number 551. The court emphasized the elimination of disputes regarding the timing of bad debt allowance through the circular's provisions, leading to the dismissal of the case without any substantial question of law.