2015 (7) TMI 7 - HC - Income Tax

Expenditure towards warranty claim written off - whether was neither allowable under Section 37 nor under Section 36(1)(vii) - Held that - The assessee company voluntarily recognized and credited warranty expenses of TAFE, PSD in the assessment year 2002-03 and paid taxes on the said amount. In the subsequent year when they were sure that they are not getting any portion of the said amount, they wanted to treat it as a bad debt and write off the said claim. Accordingly, they sought for deduction of the said amount out of the total income. Once the assessee writes off a claim in its books of account treating it as a bad debt under section 36(1)(vii) read with 36(2), the assessee is entitled for deduction of the said amount. However the authorities have proceeded altogether in a different course. They are of the view that the said amount pertains to the previous year. The benefit cannot be given to subsequent year. Secondly, as the said amount is not reflected in the accounts of TAFE, PSD, the assessee is not entitled to the said benefit. In fact, the said facts would support the claim. However in the TAFE and PSD accounts is not shown in their books as due to the assessee. The assessee showing it as due and it is only because the tax is paid in the previous year and in the subsequent year amount not being recovered, it is treated as a bad debt and deduction is claimed. Thus the impugned orders passed by the authorities cannot be sustained. Decided in favour of the assessee.

Summary

Issues:
1. Deduction of bad debt claimed by the assessee.
2. Applicability of Section 36(1)(vii) of the Income Tax Act.
3. Recognition of debt in the books of account.

Issue 1: Deduction of Bad Debt
The assessee, engaged in manufacturing and selling automotive batteries, claimed a sum of &8377; 2,85,75,000/- as a warranty claim being written off. The Tribunal declined this deduction, stating it did not pertain to the year under consideration and was not allowable under Section 36 of the Income Tax Act. The claim was disallowed on the grounds that the expenditure was not recognized as an expense by the party involved. The assessee argued that the amount was treated as a bad debt due to non-recovery in subsequent years, making them eligible for deduction under Section 36(1)(vii). The court found that once the assessee writes off a claim as a bad debt under Section 36(1)(vii), they are entitled to a deduction of the said amount. The authorities' view that the amount pertained to a previous year and was not reflected in the accounts of the other party was deemed incorrect. The court held in favor of the assessee, allowing the deduction of the claimed amount as a bad debt.

Issue 2: Applicability of Section 36(1)(vii) of the Income Tax Act
The Tribunal had held that the expenditure towards the warranty claim written off during the relevant year, which had suffered tax in the preceding year, was neither allowable under Section 37 nor under Section 36(1)(vii) of the Act. The assessee contended that the provisions of Section 36(1)(vii) should apply when a debt due, which suffered tax in the preceding year, is written off during the relevant year. The court agreed with the assessee, stating that if the assessee treats an amount as a bad debt under Section 36(1)(vii), they are entitled to deduction, irrespective of the year in which the tax was paid on that amount. The Tribunal's decision was overturned in favor of the assessee.

Issue 3: Recognition of Debt in the Books of Account
The assessee voluntarily recognized and credited warranty expenses of the other party in a previous assessment year and paid taxes on the said amount. Subsequently, when it became clear that they would not recover any portion of that amount, they sought to treat it as a bad debt and write it off. The authorities contended that since the amount was not reflected in the accounts of the other party, the assessee was not entitled to the deduction. However, the court found that the assessee's treatment of the amount as a bad debt was valid, especially considering that the tax was paid in the previous year and the amount remained unrecovered in subsequent years. The court ruled in favor of the assessee, setting aside the impugned orders and allowing the appeal.

This comprehensive analysis of the judgment highlights the key issues involved and the court's detailed reasoning and decision on each issue, ensuring a thorough understanding of the legal aspects involved.