2015 (4) TMI 836 - HC - Income Tax

Debt written off - Whether can be allowed to be deducted either in the assessment year 1980-81 or during the year 1984-85 as claimed by the assessee? - Held that - Considering the assessment in the year 1980-81 is also open in the sense that the reference is pending before us, we think proper course would be to permit the bad debt in the assessment year 1980-81 itself. Any other view would involve the assessee in unnecessary prejudice. As of date, nobody can doubt the debt had become bad in the assessment year 1980-81. The assessee did not have any doubt when he wrote it off. We find that Reserve Bank of India has also, subsequent to the aforesaid assessment year, permitted the assessee to write off the amount. When law permits the assessee to get the deduction, there is no reason why the assessee should not be given the deduction in the assessment year 1980-81 itself. Any other course would involve the assessee in the liability for payment of further tax and interest.

Summary

Issues:
- Deduction of bad debt written off during assessment year 1980-81
- Interpretation of relevant provisions under Section 36 of the Income Tax Act
- Application of legal precedents on bad debt deductions
- Justification for allowing bad debt deduction in the assessment year 1980-81

Deduction of Bad Debt Written Off During Assessment Year 1980-81:
The case involved an assessee who had been trading with a foreign company and faced non-payment issues leading to the write-off of a substantial debt. The assessee claimed a deduction on account of bad debt during the assessment year 1980-81, but it was disallowed due to failure in establishing the debt as irrecoverable. Subsequently, in the assessment year 1984-85, the same deduction was claimed again, which was also rejected. The central issue was whether the debt written off during the assessment year 1980-81 could be allowed as a deduction either in that year or during the year 1984-85 as per the assessee's claim.

Interpretation of Relevant Provisions under Section 36 of the Income Tax Act:
The judgment delved into the provisions of Section 36 of the Income Tax Act, specifically focusing on Clause (iii) of Sub-section 2, which allows for the deduction of a debt that has been previously written off as irrecoverable in the accounts of an earlier year. It was highlighted that the requirements under Clause (vii) of Sub-section 1 of Section 36, necessitating the writing off of the debt and establishing it as irrecoverable, are relaxed by the provisions of Clause (iii) of Sub-section 2. This interpretation played a crucial role in determining the eligibility of the assessee for the bad debt deduction.

Application of Legal Precedents on Bad Debt Deductions:
The judgment referenced a case from the Bombay High Court to draw parallels in the treatment of bad debts. The case highlighted the dilemma faced by assessee under income tax laws concerning bad debts and emphasized the need for a sympathetic view by the Department when a debt genuinely becomes irrecoverable. The legal precedent underscored the evolving stance towards bad debt deductions and the importance of considering the practical implications faced by the assessee in such situations.

Justification for Allowing Bad Debt Deduction in the Assessment Year 1980-81:
Ultimately, the Court decided to allow the bad debt deduction in the assessment year 1980-81 itself, despite the possibility of claiming it in a subsequent period as per Clause (iii) of Sub-section 2. The decision was based on the clear establishment that the debt had become bad in the assessment year 1980-81, as evidenced by the write-off and subsequent actions by the Reserve Bank of India. The judgment prioritized preventing unnecessary prejudice to the assessee and ensuring fair treatment in tax liabilities and interest payments.

In conclusion, the judgment resolved the issue by permitting the bad debt deduction in the assessment year 1980-81, aligning with the provisions of Section 36 and considering the practical implications and timing of the debt becoming irrecoverable.