2015 (6) TMI 1179 - AT - Income Tax

Addition of bad debts u/s 36(1)(vii) - proof of debt was incurred in ordinary course of business and corresponding amount has gone into the computation of the assessee s income - HELD THAT - We are not in agreement with the findings of the CIT( Appeals) in allowing the claim of the assessee as bad debt. CIT(Appeals) wrongly observed that the assessee is complied with the conditions as stipulated in sec.36(1)(vii) read with sec.36(2) - legal requirement is that the amount of bad debt must have gone into the computation of the assessee s income. Thus, in the case of a trader, if the sales have been made on credit and corresponding debt becomes irrecoverable, the said debt can be allowed as bad debt, as sales have gone into the computation of the assessee s income. In the instant case, there is no material to suggest that the debt was incurred in ordinary course of business and corresponding amount has gone into the computation of the assessee s income and the assessee has not established beyond any doubt that the debt was incurred in normal course of business carried on by the assessee and the method followed by the assessee in writing off debt is not correct. - Decided in favour of revenue

Summary

Issues:
1. Addition of bad debts disallowed by the Assessing Officer.

Analysis:
The appeal before the Appellate Tribunal ITAT Chennai concerned the disallowance of bad debts amounting to Rs. 12,06,942 by the Assessing Officer. The Commissioner of Income-tax(Appeals) had directed the Assessing Officer to delete this addition, which was the primary ground of contention raised by the Revenue in the appeal. The facts of the case revealed that the assessee had claimed bad debts of Rs. 14,79,035 in the assessment year 2005-06. However, the Assessing Officer allowed only Rs. 2,72,093 as bad debt for the subsequent assessment year 2006-07, disallowing the remaining amount as not outstanding as bad debt as of 31.3.2006. The assessee's method of accounting involved not writing off doubtful debts directly to the profit and loss account but transferring them to the capital account, which was consistently followed each year. This method was accepted by the Commissioner of Income-tax(Appeals) in allowing the claim of the assessee, leading to the Revenue's appeal before the Tribunal.

The Tribunal examined the method of accounting employed by the assessee and found it to be unconventional. The Revenue argued that the debts were not actually written off but treated as personal debts by debiting the drawings account and crediting the outstanding customers' account, which did not meet the legal requirements for deduction as bad debt. The Tribunal emphasized the conditions to be satisfied for allowing such deductions under section 36(1)(vii) of the Income Tax Act, stating that the debt must be written off as irrecoverable in the accounts, and the amount must have been taken into account in computing the assessee's income. It was noted that the assessee's method of showing debts as drawings vis-`a-vis capital account and crediting in the party's account was not an accepted accounting practice. The Tribunal disagreed with the Commissioner of Income-tax(Appeals) and held that the debt must have been incurred in the ordinary course of business and reflected in the computation of the assessee's income, which was not established in this case. Therefore, the findings of the Commissioner of Income-tax(Appeals) were reversed, and the appeal of the Revenue was allowed.

In conclusion, the Tribunal ruled in favor of the Revenue, disallowing the deduction claimed by the assessee for bad debts. The judgment highlighted the importance of adhering to recognized accounting practices and meeting legal requirements for claiming deductions, emphasizing that the debt must be incurred in the ordinary course of business and reflected in the computation of income to qualify as a bad debt for deduction purposes.