2012 (9) TMI 805 - SC - Income Tax

Deduction u/s 36(1)(vii) - bad debts - period prior to 1st April, 1989 - Held that - Deduction for bad debts required satisfaction of two conditions at the relevant time, namely, that (a) bad debt must be established to have become bad in that year; and (b) bad debt should have been written off in the books of account of that year. In present case, appellant satisfied both the conditions for claiming deduction for bad debt u/s 36(1)(vii) r.w.s.36(2)(i)(b). Firstly, the appellant is a State Public Sector Undertaking; and secondly, the appellant was the promoter of M/s. V Ltd. Assessee in the course of business of promoting industrial development in the State of Kerala, had promoted M/s. V Ltd. As a promoter, it was in a position to find out whether M/s. V Ltd was in a position to carry on business in future. Thirdly, M/s. V Ltd was a typical Public/Private partnership(PPP). None of these aspects have been considered by the Tribunal as well as by the High Court. Lastly, the Reference Application was made in February, 1988; declaration was made in February, 1988, by BIFR that M/s. V Ltd has become a sick Company. Till the end, the Company could not even be revived. It has been wound up. In the circumstances, applying the commercial test and business exigency test, we are of the view that both the conditions u/s 36(1)(vii) r.w.s. 36(2)(i)(b) are satisfied. Deduction thus allowed - Decided in favor of assessee

Summary

Issues:
Claim of deduction for bad debt under Section 36(1)(vii) of the Income Tax Act, 1961 for Assessment Year 1988-1989 - Satisfaction of conditions.

Analysis:
The appellant, a State Public Sector Undertaking, claimed deduction for bad debt under Section 36(1)(vii) of the Income Tax Act, 1961 for the Assessment Year 1988-1989. The two conditions required to be satisfied were that the bad debt must be established to have become bad in that year and that the bad debt should have been written off in the books of account of that year. The primary question was whether the appellant's claim fulfilled both these conditions.

The appellant, being a State Industrial Development Corporation Limited, had provided loans/credit facilities to a joint sector company, M/s. Vanchinad Leathers Limited, which faced financial difficulties and eventually became a sick company. The appellant, as the promoter of M/s. Vanchinad Leathers Limited, was in a position to assess the company's financial viability. Despite the company's closure and huge liabilities, the appellant did not pursue recovery proceedings, indicating the debt had turned bad. The Tribunal and High Court focused on the failure to initiate recovery proceedings, leading to the disallowance of the deduction for bad debt. However, the Supreme Court found that both conditions for claiming the deduction were met.

The Supreme Court emphasized that the appellant's status as a State Public Sector Undertaking and its role as the promoter of M/s. Vanchinad Leathers Limited were crucial factors overlooked by the lower courts. The Court highlighted the commercial and business exigency tests, concluding that the appellant had satisfied the conditions under Section 36(1)(vii) read with Section 36(2)(i)(b) of the Act. Additionally, the Court referred to past judgments and legislative amendments to support its decision, clarifying the treatment of provisions for bad debts pre and post 1st April 1989.

Ultimately, the Supreme Court allowed the civil appeal, granting the appellant the claim for deduction of bad debt under Section 36(1)(vii) read with Section 36(2)(i)(b) of the Act. The judgment was based on a detailed analysis of the appellant's circumstances and the legal framework applicable up to the relevant Assessment Year, 1988-1989.