2015 (11) TMI 626 - AT - Income Tax

Disallowance of bad debts - Held that - The assessee was carrying out commission business and having business dealings with farmers which is not disputed by the lower authorities. As held by the hon ble Supreme Court in the case of T. R. F. Ltd. v. CIT 2010 (2) TMI 211 - SUPREME COURT if the assessee has written off bad debts as irrecoverable in the accounts of the assessee, the claim is to be allowed under section 36(1)(vii). The fact that the same were outstanding for last 3-6 years has not been disputed. It has not been disputed that the nature of business of the assessee is such that the assessee was required to give advance to farmers. Therefore, the debts are connected with the business income earned by the assessee. The same is allowable under section 36(1)(vii). Alternately, it is allowable under section 37 also. In view thereof, allow the assessee s claim as the assessee is eligible to claim bad debt. - Decided in favour of assessee.

Summary

Issues:
Disallowance of bad debts amounting to Rs. 2,20,870 by the Assessing Officer.

Analysis:
The appellant, a commission agent in agricultural goods, appealed against the disallowance of bad debts by the Assessing Officer. The appellant gave advances to farmers to maintain relationships and ensure goods were sold through him. The Assessing Officer disallowed the claim as the appellant failed to prove the debts had become bad, despite being outstanding for 3-6 years. The Commissioner of Income-tax (Appeals) upheld the disallowance under sections 36(1)(vii) and 37, stating the appellant did not prove the debts had actually become bad. The appellant, in the second appeal, argued that the business model was not disputed, and the debts genuinely became bad. Both lower authorities denied the claim, citing lack of evidence and non-qualification as a money lender under section 36(2).

The appellant relied on Circular No. 551, which states that bad debts are allowable in the year they are written off as irrecoverable. Citing various judgments, including T. R. F. Ltd. v. CIT, the appellant argued that no onus was on them to prove the debts had become bad. Regarding section 36(2), it was argued that for non-money lending businesses, section 36(1)(vii) prevails. The advancing of loans to farmers was deemed intrinsic to the appellant's business, as debts outstanding for 3-6 years indicated their irrecoverability. The Tribunal found merit in the appellant's contentions, noting the business nature and the Supreme Court's stance on bad debt claims. The Tribunal allowed the claim under section 36(1)(vii) or alternatively under section 37, as the debts were connected to the business income. Consequently, the appellant's appeal was allowed, overturning the previous disallowance of bad debts.

In conclusion, the Tribunal's judgment favored the appellant, allowing the claim for bad debts disallowed by the lower authorities. The decision was based on the appellant's business nature, the irrecoverability of debts, and the applicability of sections 36(1)(vii) and 37. The Tribunal emphasized that the appellant's advances to farmers were integral to their business, justifying the allowance of bad debts.