2013 (9) TMI 958 - HC - Income Tax

Allowance of Bad-debts u/s 36(1)(vii) of the Income Tax Act Evidence to be presented before A.O. - The assessee has turnover of more than Rs.19 crores, and had filed return of income, declaring income of Rs. 1,64,80,293/-. The amount of Rs. 11,52,901/-, which has been written off as bad debt, and could not be recovered was mostly from departments, which are government/semi government entities Held that - There is no requirement to establish that debts has become irrecoverable in the accounts of the assessee for the previous year. Sub section (vii) of Section 36 (1) of the Act provides for allowing deductions subject to provisions of sub-section (2), the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. There is no requirement under sub section (2) of Section 36 of the Act that assessee should produce evidence before the AO that he has made sufficient effort to recover the amount. As a prudent business man in carrying out business and maintaining accounts, the reasons for which the amount, which was actually written off as irrecoverable, is not subject to scrutiny by the AO, unless and until there was some material, which could suggest that writing off debt as irrecoverable was not for bonafide purpose or that the assesee was in fact suppressing the income to be taxed Decided against the Revenue.

Summary

Issues:
1. Disallowance of bad debts written off by the appellant-department.
2. Interpretation of Section 36(1)(vii) of the Income Tax Act, 1961 regarding the allowability of bad debts.
3. Requirement of evidence to prove bad debts becoming irrecoverable.
4. Compliance with the provisions of Section 36(1)(vii) for deduction of bad debts.
5. Applicability of exceptions under Section 36(1)(vii) and (2) for writing off bad debts.

Detailed Analysis:
1. The appellant-department filed an Income Tax Appeal against the order of the Income Tax Appellate Tribunal regarding the disallowance of Rs.11,52,901/- for bad debts written off. The department contended that the Tribunal unjustly deleted the disallowance without proper substantiation from the assessee.

2. The assessee, engaged in telecom equipment manufacturing, claimed the allowance of bad debts amounting to Rs. 11,52,901/-, which was written off in their accounts. The Assessing Officer (AO) found no documentary evidence to prove the bad debts had actually become irrecoverable, as required by Section 36(1)(vii) of the Act.

3. The Commissioner of Income Tax (Appeals) held that under the amended provisions of Section 36(1)(vii), the assessee was not obligated to prove the bad debts had become irrecoverable. The CIT (A) allowed the claim of bad debts based on substantial compliance with the provisions, without requiring further evidence of recovery efforts.

4. The ITAT dismissed the department's appeal, citing that post-amendment to Section 36(1)(vii), the assessee only needed to write off the debt as irrecoverable in their accounts, without the burden of proving efforts to recover the amount. The Tribunal referred to case laws supporting this interpretation, emphasizing that the amendment shifted the burden from proving bad debt to writing it off as irrecoverable.

5. The judges noted that the amended Section 36(1)(vii) did not necessitate the assessee to demonstrate recovery efforts to the AO. The turnover and income declared by the assessee, along with the nature of the bad debts, primarily from government/semi-government entities, supported the allowance of the bad debts written off. The exceptions under Section 36(1)(vii) and (2) did not impose an evidence burden on the assessee for claiming deduction on bad debts.

In conclusion, the High Court dismissed the Income Tax Appeal, affirming that the assessee's writing off of bad debts as irrecoverable complied with the provisions of Section 36(1)(vii) post-amendment, without the need for additional evidence of recovery efforts. The judgment emphasized the shift in the burden of proof from demonstrating bad debt to writing it off as irrecoverable, aligning with the legislative intent of the amended provisions.