2018 (9) TMI 1961 - AT - Income Tax

Disallowance of bad debts written off - AO had accepted the debt to be bad but had disallowed the claim deeming it to be premature - HELD THAT - It is clear that debt arose on account of trading in commodities in the exchange and not due to sale of any capital assets. It is clear that once a debt is written off as irrecoverable in the accounts of the assessee it has to be allowed. It is not required that debt should have arose on account of transactions in any preceding years. Once a debt is claimed as bad and written off in the accounts it has to be allowed. No doubt if the assessee at a later point of time recovers any money against any sum it is bound to show it as income. Considering the judgment in the case of T.R.F. Ltd 2010 (2) TMI 211 - SUPREME COURT we are of the opinion that the claim of the assessee had to be allowed. Orders of the lower authorities on this issue are set aside. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of bad debts of B2,02,42,194/- written off by the assessee.
2. Nature of the debt - capital loss or bad debt eligible for deduction.

Issue 1: Disallowance of Bad Debts:
The appeal was against the disallowance of bad debts of B2,02,42,194/- written off by the assessee, as directed by the Commissioner of Income Tax (Appeals). The Assessing Officer required an explanation for the claim of bad debt, as it was not made in the preceding assessment year. The assessee explained that the bad debts arose from trading in National Spot Exchange Ltd (NSEL) through a broker, Sugal Commodities Brokers Pvt Ltd. However, the Assessing Officer found no evidence to prove the debt had become bad and deemed the claim premature due to information received from NSEL about the trading halt and debt settlement process. The Commissioner of Income Tax (Appeals) upheld the disallowance, considering the claimed amount as part of the capital employed by the assessee and not a bad debt eligible for deduction under the Income Tax Act, 1961.

Issue 2: Nature of the Debt - Capital Loss or Bad Debt:
The authorized representative of the assessee argued that the claim should be allowed based on the judgment of the Hon'ble Apex Court in T.R.F. Ltd vs. CIT, stating that after April 1, 1989, it was sufficient for a bad debt to be written off in the books without proving irrecoverability. The representative contended that the debt was no longer recoverable, justifying its classification as a bad debt. On the contrary, the Departmental Representative supported the Commissioner's decision, stating the debt was a capital loss, not a bad debt. The Tribunal noted that the debt arose from commodity trading in NSEL and not the sale of capital assets. Referring to the T.R.F. Ltd judgment, the Tribunal concluded that once a debt is written off as irrecoverable in the accounts, it must be allowed, regardless of when it arose. Therefore, the Tribunal set aside the lower authorities' orders and allowed the assessee's appeal.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the claim for bad debts of B2,02,42,194/- to be written off. The judgment emphasized the importance of recording bad debts in the accounts and highlighted that once a debt is deemed irrecoverable and written off, it should be allowed as a deduction, irrespective of when it originated.