2012 (3) TMI 255 - HC - Income Tax

AO allowed the claim of bad debt out of the total bad debt being the lease amount to be received from Madhya Pradesh State Transport Corporation and the assessee had written off bad debts as per section 36(1)(vii) of the Act - contention of assessee is that the AO on examination of the case and going through the facts held that the claim of bad debt is justifiable in law as the same is written off as irrecoverable in the accounts. Even in the reply to the show-cause notice, it was brought to the notice of the Commissioner of Income-tax about the debt being written off as irrecoverable However, the Tribunal in its order had stated that the Assessing Officer has not discussed anywhere in the order that the assessee has written off the bad debts in their accounts. Further, the Tribunal held that the Madhya Pradesh State Road Transport Corpo- ration Ltd., was fully owned, controlled and managed by the Government therefore, it cannot be said that the said amount would be written off as irrecoverable - Held that - set aside the order of the Income-tax Appellate Tribunal with a direction to rehear the matter afresh after giving opportunity to both parties to sub- stantiate their case and decide the matter in the light of the apex court judgment in the case of T. R. F. Limited v. CIT (2010 -TMI - 76626 - SUPREME COURT) - the respondent not to take any recovery proceedings against the assessee in respect of tax collection till the matter was disposed of by the Tribunal

Summary

Issues:
1. Whether the Tribunal erred in upholding the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, based on a mere change of opinion and audit objection?
2. Whether the Tribunal erred in rejecting the claim for bad debts on the ground that the amounts were borrowed by a state entity allegedly managed by the State?

Issue 1:
The appellant, a company engaged in hire purchasing and leasing, filed an appeal against the Income-tax Appellate Tribunal's order under section 260A for the assessment year 2006-07. The Assessing Officer allowed a bad debt claim of Rs. 7,39,52,514 out of a total of Rs. 8,46,14,046 owed by the Madhya Pradesh State Transport Corporation. However, the Commissioner of Income-tax issued a show-cause notice under section 263, setting aside the assessment order, stating the Assessing Officer did not consider the material properly. The Tribunal dismissed the appeal, citing the principle from a previous court judgment. The appellant contended that the bad debt claim was validly written off and relied on a Supreme Court judgment. The Revenue argued that the Tribunal correctly followed the previous court judgment.

Issue 2:
The Supreme Court clarified in the case of T. R. F. Limited that it is sufficient for a bad debt to be written off as irrecoverable in the accounts of the assessee, without the need to establish the debt's actual irrecoverability. The Tribunal, however, did not find evidence of the debt write-off in the accounts of the appellant, leading to a remittance of the matter to the Assessing Officer for reevaluation. The Tribunal also considered the nature of the debtor, the Madhya Pradesh State Road Transport Corporation, as a government-controlled entity. The Court directed a rehearing based on the Supreme Court judgment, emphasizing the need for both parties to present their case and expedite the process within three months.