2011 (5) TMI 18 - AT - Income Tax

Dis allowance - Bad Debts written off - Purchase of debts - Held that the bad debt was purchased from a third party and had not arisen during the course of business from the ordinary trading transactions of the assessee. Therefore, the conditions prescribed u/s.36(2) for claim of bad debt are not fulfilled. Hence, the claim for bad debt has been rightly rejected by the ld. CIT A .

Summary

Issues:
Claim of bad debts written off in Profit & Loss Account disallowed by AO and confirmed by CIT(A) - Whether claim allowable under sec.36(1)(vii) or as business loss under sec.37(1).

Analysis:
The appellant raised a ground challenging the disallowance of a sum of Rs.10,85,000/- being Bad Debts written off in the Profit & Loss Account. The AO disallowed the claim as it was not originally accounted for and not money lent in the ordinary course of business. The CIT(A) upheld the disallowance stating that the debt was not a trading debt and did not fulfill the conditions specified under sec.36(1)(vii) r.w.s. 36(2). The CIT(A) also rejected the alternative claim of allowing the write off as a business loss under sec.37(1), stating it was a capital expenditure and not incurred for the purpose of business, being a colorable device to reduce business profit.

The appellant conceded that the amount cannot be claimed as bad debt since it was not routed through the profit & loss account earlier. The appellant argued for the allowance of the amount as a business loss. However, the Tribunal noted that the bad debt was purchased from a third party and did not arise from the ordinary trading transactions of the assessee, thus not fulfilling the conditions under sec.36(2). The Tribunal also observed that since no specific ground was taken for the claim of business loss, that issue could not be entertained.

The appellant contended that under Rule 27 of the Appellate Tribunal Rules, she could support the CIT(A)'s order on any ground decided against the assessee. However, the Tribunal clarified that Rule 27 applied to the respondent, and since the appeal was by the assessee, specific grounds challenging the decision of the CIT(A) should have been taken. As the appellant did not pursue this further, the contention was dismissed. Ultimately, the Tribunal dismissed the assessee's appeal, upholding the disallowance of the claim of bad debts written off in the Profit & Loss Account.

In conclusion, the Tribunal found that the claim for bad debts was rightly rejected as it did not meet the statutory requirements, and the claim for business loss was not entertained due to the lack of specific grounds. The appellant's attempt to rely on Rule 27 was dismissed, leading to the dismissal of the appeal.