2013 (10) TMI 70 - HC - Income Tax

Allowability of Bad-debts u/s 36(1)(vii) of the Income Tax Act - Onus to prove that deduction as bad-debts is allowable Held that - The only objection raised by the department is that the debt has not become bad as there is still hope to recover the amount. The said approach in view of the peculiar facts of the present case is not justified - Assessee took out the proceedings to recover the amount by sale of the properties of the debtors unsuccessfully is indicative of the fact that the debt has become bad in absence of any plea of collusion or bad fate of the assessee. Other ground taken by the Tribunal is that the assessee has not proceeded against the guarantors - One of the guarantors is Sri Anand Srivastava. The guarantee was invoked through a letter to the District Magistrate, Bareilly. However, Sri Anand Srivastava could not be located and was not traceable. The theory that Sri Anand Srivastava is not traceable was discarded as he happened to be son of Sri G.P. Srivastava, an IAS officer of U.P. cadre. There is nothing on record to show that the outstanding dues could have been recovered from the guarantors or the guarantors were available. If the assessee corporation which is State owned corporation in its wisdom resolved to write off the debt treating it as a bad debt, in view of its inability to recover the amount from the District Authorities, there is sufficient compliance of section 36(1) (VII) of the Act - There is sufficient evidence on record to hold that the outstanding dues have become bad debts and it cannot be realised Decided in favor of Assessee.

Summary

Issues:
1. Disallowance of deduction for bad debts under section 36(1)(vii) of the Income Tax Act.
2. Allowability of deduction under section 37(1) of the Income Tax Act for premium paid to LIC.

Issue 1: Disallowance of deduction for bad debts under section 36(1)(vii) of the Income Tax Act:

The case involved a dispute regarding the disallowance of a deduction claimed by the assessee for bad debts totaling Rs.63,62,810 for the Assessment Year 1985-1986. The assessee corporation, a U.P. Government undertaking, had claimed the deduction for loans given to two parties. The Tribunal disallowed the claim, stating that the assessee had not proven that the debts had become irrecoverable in the relevant previous year. The Tribunal's decision was based on the pre-amendment version of section 36(1)(vii) of the Income Tax Act.

The High Court analyzed the facts of the case, noting that the assessee had taken legal steps to recover the debts by auctioning properties but was unsuccessful. The Tribunal's view that there was still hope for recovery was deemed unjustified by the High Court. The Court emphasized that the assessee had made efforts to realize the loans and had written off the amounts as bad debts after failed attempts at recovery. Citing legal precedents, the Court highlighted that the objective determination of a debt as bad debt does not require legal proceedings against the debtor.

The Court further discussed the conditions for granting allowance under section 36(1)(vii) and addressed the department's objection that there was still hope for recovery. The Court concluded that the outstanding dues had become bad debts and were irrecoverable, especially considering the efforts made by the assessee and the lack of recovery from the district authorities. The Court found the Tribunal's decision to be perverse and ruled in favor of the assessee, allowing the deduction for bad debts.

Issue 2: Allowability of deduction under section 37(1) of the Income Tax Act for premium paid to LIC:

The second issue pertained to the allowability of a deduction under section 37(1) of the Income Tax Act for a premium paid to LIC securing insurance against liabilities under the Payment of Gratuity Act, 1972. The Court noted that the same question had been decided against the assessee in a previous assessment year. The Court, therefore, answered the second question against the assessee and in favor of the Revenue.

In conclusion, the High Court ruled in favor of the assessee regarding the disallowance of the deduction for bad debts under section 36(1)(vii) of the Income Tax Act. However, the Court decided against the assessee on the issue of the deduction for the premium paid to LIC under section 37(1) of the Act.