1992 (1) TMI 345 - HC - Income Tax

Summary

Issues:
1. Interpretation of provisions of section 36(2) of the Income-tax Act, 1961 regarding allowance of bad debts.
2. Determination of whether debiting of 'profit and loss account' and crediting 'provisions for doubtful debts account' amounts to writing off the debts as irrecoverable.

Detailed Analysis:

Issue 1:
The Tribunal referred two questions of law regarding the allowance of bad debts under section 36(2) of the Income-tax Act, 1961. The assessee, a company, claimed bad debts of a specific amount in its profit and loss account, which was not allowed by the Income-tax Officer initially. The Commissioner (Appeals) also upheld the disallowance, stating that the conditions of section 36(2) were not satisfied. However, the Tribunal observed that as per accounting principles, writing off denotes charging the amount in the profit and loss account, and if this principle was applied, the assessee had indeed written off the debts. The Tribunal allowed the claim based on this reasoning, citing relevant case law and judgments.

Issue 2:
The crux of the issue is whether debiting the 'profit and loss account' and crediting 'provisions for doubtful debts account' constitutes writing off bad debts as irrecoverable. The revenue contended that actual writing off in the books of account is necessary to claim the benefit of section 36(2). On the other hand, the respondent argued that by debiting the profit and loss account, the assessee had indicated the bad debt as irrecoverable, thereby complying with the section. The respondent emphasized that the amount no longer formed part of the asset and had been treated as a provision for bad and doubtful debt. The Court held that the Tribunal's view aligned with accounting practices and declined to interfere, ultimately ruling in favor of the assessee on both questions.

In conclusion, the High Court of Calcutta upheld the Tribunal's decision, emphasizing the importance of complying with the terms and conditions of section 36 for claiming deductions on bad and irrecoverable debts. The judgment highlighted the significance of accounting practices in determining the writing off of bad debts and affirmed the Tribunal's reasonable interpretation of the matter.