2014 (7) TMI 719 - AT - Income Tax

Bad debts written off u/s 36(1)(viii) Held that - It is the own prudence of the businessman while conducting the business to decide as to whether the debited amount has become non recoverable or not - If he is of the bonafide view that the debt has become bad and thus he has written off the same, even though, he continues to contest the suit/complaint for recovery of the said debt, it does not mean that his decision was not bonafide Relying upon Jethabhai Hirji and Jethabhai Ramdas vs. CIT 1977 (11) TMI 11 - BOMBAY High Court - There may be so many reasons for a businessman which may require him to withdraw the criminal complaint against the debtor taking into consideration the associated facts and circumstances and his commercial prudence & wisdom - Mere withdrawing of a complaint does not in any manner prove that the assessee had received the payment or the debt had not become bad - The filing of a criminal complaint against the debtor is a fact which proves that the amount was not recoverable otherwise and the assessee in the normal course of business was not supposed to make rounds of the court for the recovery of the amount from the debtor - there was no infirmity in the order of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Addition of bad debts under section 36(1)(viii) by Assessing Officer
2. Claim of bad debts made by the assessee
3. Decision of Commissioner of Income Tax (Appeals) to delete the addition
4. Appeal filed by the Revenue against the decision of CIT(A)

Analysis:
1. The primary issue in this case revolves around the addition made by the Assessing Officer (AO) under section 36(1)(viii) on account of bad debts written off by the assessee amounting to Rs. 45,54,306. The AO observed that the debtor had not denied the payment due to the assessee and that the debtor had agreed to pay the amount, leading to the disallowance of the claimed bad debts.

2. The assessee, a proprietor of a business, had debited the amount as bad debts in the P&L account after the debtor failed to honor a cheque and a complaint was filed in court. The assessee contended that the debt had become non-recoverable, justifying the write-off. However, the AO argued that the debt had not become bad during the relevant year as the complaint was withdrawn after the year-end.

3. The Commissioner of Income Tax (Appeals) relied on precedents and held that the decision to write off the amount as bad debt was bona fide since it had become non-recoverable. The CIT(A) referred to the decision of the Bombay High Court and other High Courts to support the deletion of the addition made by the AO, emphasizing the commercial prudence of the assessee in determining the bad debt.

4. The Appellate Tribunal upheld the decision of the CIT(A) and dismissed the appeal of the Revenue. The Tribunal emphasized that the businessman's prudence in deciding the non-recoverability of a debt is crucial, even if legal actions were taken against the debtor. The Tribunal highlighted that withdrawing a complaint does not necessarily indicate the debt's recoverability, and the decision to write off bad debts is a business judgment.

In conclusion, the Tribunal affirmed the CIT(A)'s decision, emphasizing the commercial prudence of the assessee in writing off the bad debts. The judgment highlights the importance of assessing the bonafide intention of the businessman in determining the non-recoverability of debts, even in the presence of legal proceedings.