2015 (12) TMI 843 - AT - Income Tax

Claim of writing off of bad debts - CIT(A) allowed the claim - main contention of the Department is that the assessee has written off the debts of Kinetic Motor Co. Ltd. a group concern, to reduce the profits of the assessee company and thereby reducing the tax liability - Held that - A perusal of the facts clearly shows that Kinetic Motor Co. Ltd. was in financial distress and it could pay only part of its debts. Since, the assessee in its books of account had written off bad debts, the assessee was not required to establish that debts were in fact irrecoverable. The Hon ble Supreme Court of India in the case of TRF Limited Vs. CIT (2010 (2) TMI 211 - SUPREME COURT ) has held that after the amendment of section 36(1)(vii) of the Act w.e.f. 1st April,1989 it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Both the companies i.e. the assessee as well as Kinetic Motor Co. Ltd. are separate legal entities and the assessee have been able to show that Kinetic Motor Co. Ltd. is a loss making company. Thus, we reject the contention of the ld. DR that the assessee and the debtor company are the part of same group, writing off of bad debts is a colourable device to set off the profits of one group company from the loss of other group companies being devoid of merit. - Decided against revenue

Summary

Issues:
- Appeal against order of Commissioner of Income Tax (Appeals) for assessment year 2010-11 regarding writing off of bad debts.

Analysis:
1. Facts of the Case: The appeal was filed by the Revenue against the order of Commissioner of Income Tax (Appeals) for the assessment year 2010-11, primarily challenging the acceptance of the claim of writing off bad debts by the assessee.

2. Contentions of the Department: The Department argued that the debts written off were in relation to a group concern, Kinetic Motor Co. Ltd., and were not proven to be actually bad and irrecoverable. It was alleged that the debts were written off to manipulate income and reduce tax liability.

3. Assessee's Defense: The assessee contended that it was not mandatory for the Department to establish the irrecoverability of debts written off as bad debts. The assessee highlighted the financial distress of Kinetic Motor Co. Ltd., a group concern, and its inability to recover debts due to the company's financial crisis.

4. Judicial Analysis: The Commissioner of Income Tax (Appeals) accepted the appeal of the assessee after considering the financial status of Kinetic Motor Co. Ltd. and its one-time settlement with various creditors, including banks. The Commissioner held that the debts were written off due to irrecoverability, not group considerations.

5. Legal Precedents: The Tribunal referred to the Supreme Court's decision in TRF Limited Vs. CIT, stating that it is sufficient for bad debts to be written off in the accounts of the assessee without proving actual irrecoverability. The Tribunal distinguished the case from Embassy Classic P. Ltd. Vs. ACIT, where debts were recovered before filing returns, and South India Surgical Co. Ltd. Vs. ACIT, involving debts due from the government.

6. Conclusion: The Tribunal dismissed the Revenue's appeal, rejecting the argument that writing off bad debts was a colorable device to set off profits. It upheld the Commissioner's decision, emphasizing that both companies were separate legal entities, and Kinetic Motor Co. Ltd. was a loss-making entity, justifying the writing off of bad debts.

This comprehensive analysis outlines the key arguments, judicial considerations, and the final decision of the Tribunal in the appeal against the order of the Commissioner of Income Tax (Appeals) regarding the writing off of bad debts for the assessment year 2010-11.