2007 (5) TMI 221 - HC - Income Tax

Deduction u/s 36 - held that the amount written off as bad debts should be allowed as deduction, even though the approval from the Reserve Bank of India has been received subsequent to the previous year relevant to the assessment year under consideration moreover, Assessing Officer has himself allowed the claim for the balance amount, even though approval has been received after the close of the previous year - Tribunal was right in deleting addition made by AO

Summary

Issues:
- Whether the Income-tax Appellate Tribunal was correct in deleting the addition of Rs. 31,62,238 made by the Assessing Officer regarding the deduction claimed for bad debts under section 36(1)(vii) of the Income-tax Act, 1961.

Analysis:
1. The appellant, engaged in the business of garment exports, filed a return claiming bad debts amounting to Rs. 1,25,36,852 for the assessment year 1997-98. The Reserve Bank of India permitted Rs. 90,36,518 to be written off in the books of account. However, the Assessing Officer disallowed the remaining Rs. 31,62,238 deduction due to lack of evidence from the assessee.

2. In the appeal, the Commissioner of Income-tax (Appeals) observed that the Rs. 31,62,238 had indeed been written off during the year, and even though the Reserve Bank of India's approval came later, it should be allowed as a deduction. The Commissioner held that the Reserve Bank's approval is not mandatory for writing off bad debts under the Act. Consequently, the Rs. 31,62,238 addition was deleted.

3. The Revenue challenged the Commissioner's order, and the Tribunal, in its order dated August 25, 2006, dismissed the Revenue's appeal. The Revenue contended that merely writing off debts in the books is insufficient for claiming a deduction under section 36(1)(vii), and the burden lies on the assessee to prove the irrecoverability of the debts.

4. The record revealed that the Reserve Bank of India had approved the write-off of Rs. 90,36,518 after the relevant previous year. The Tribunal noted that the Assessing Officer should have considered the write-off of the remaining Rs. 31,62,238, as both approvals were post the relevant previous year. Section 36(1)(vii) mandates writing off bad debts during the relevant previous year.

5. Consequently, the Tribunal's decision to delete the Rs. 31,62,238 addition by the Assessing Officer was deemed correct. The High Court found no legal issue substantial enough for consideration, leading to the dismissal of the appeal.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the importance of complying with the provisions of section 36(1)(vii) while allowing deductions for bad debts and highlighting the significance of writing off bad debts during the relevant previous year.