2006 (2) TMI 61 - HC - Income Tax

Bad debt AO contended that assessee is not entitle for deduction u/s 36(1)(iv) of ITA in respect to the bad-debt Held that AO contention was not correct and allowed deduction

Summary

Issues:
Appeal by Revenue against Tribunal's order allowing deduction for bad debts under section 36(1)(vii) of the Income-tax Act, 1961.

Analysis:
The appeal raised the substantial question of law regarding the justification of allowing the deduction amounting to Rs. 4,13,108 as bad debts under section 36(1)(vii) of the Income-tax Act. The respondent contended that the question of whether a debt is bad and at what point it becomes bad is a pure question of fact, citing the decision in Travancore Tea Estates Co. Ltd. v. CIT. The court acknowledged this argument and upheld it, relying on the precedent that the determination of bad debt is a factual matter. The court highlighted that the law allows the respondent to raise this issue during the appeal hearing, even if a substantial question was framed earlier.

The core issue in the appeal revolved around certain debts declared as bad debts by the assessee and subsequently written off in the books of account. The Tribunal considered the amendment in section 36(1)(vii) brought by the Direct Tax Laws (Amendment) Act, 1987, applicable from April 1, 1989. The Tribunal found that the debts in question had been written off in the accounts of the assessee and had entered the income of the assessee, meeting the requirements of the amended law. As the Revenue failed to controvert these claims, the disallowance of bad debts was deemed unjustified and was deleted. The court emphasized that unless the Assessing Officer had valid reasons to reject the assessee's declaration of bad debt, such declarations should be accepted, considering commercial expediency and the nature of the transaction.

Ultimately, the court concurred with the Tribunal's findings and dismissed the appeal, citing the precedent set by the Supreme Court regarding the factual nature of determining bad debts. Consequently, the appeal was rejected on all grounds, with no costs imposed.