2007 (5) TMI 235 - HC - Income Tax

Tribunal allowed deduction to the Assessee on account of bad debts u/s 36(1)(vii) As per Section 36(1)(vii) as amended w.e.f. 1.4.89 the Assessee was not required to establish that the concerned debt has actually become bad; hence order of tribunal is justified Question that whether the Tribunal was correct in law in allowing deduction of remuneration paid by the Assessee to Shri. Neeraj Kanwar is a question of law hence it had to be considered by the HC

Summary

Issues:
1. Deduction of bad debts under Section 36(1)(vii) of the Income Tax Act, 1961.
2. Deduction of remuneration paid to an individual without proof of services rendered.

Issue 1: Deduction of Bad Debts
The first issue raised by the Revenue was whether the Income Tax Appellate Tribunal (ITAT) correctly allowed a deduction of Rs.10,92,750 as bad debts under Section 36(1)(vii) of the Income Tax Act. The Assessing Officer initially disallowed the claim, alleging that the debts were not genuinely bad and were fictitiously recorded to reduce tax liability. However, the Commissioner of Income Tax (Appeal) later allowed the deduction, stating that the debts were genuinely bad. The Tribunal upheld this decision, emphasizing that the Assessee had properly written off the bad debts in its books of accounts, making it eligible for the deduction. The High Court concurred with the Tribunal's reasoning, stating that the Assessee had fulfilled the requirements of Section 36(1)(vii) by writing off the bad debts in its accounts, and thus dismissed the Revenue's appeal on this issue.

Issue 2: Deduction of Remuneration
The second issue pertained to the deduction of remuneration amounting to Rs.4,52,833 paid by the Assessee to an individual, Shri. Neeraj Kanwar, without establishing the services rendered for the business. The Assessing Officer disallowed this claim due to the lack of evidence supporting the payment. However, the Commissioner of Income Tax (Appeal) allowed the deduction, citing the educational profile of Shri. Neeraj Kanwar as justification. The Tribunal upheld this decision, leading the Revenue to challenge it before the High Court. The High Court identified a substantial question of law regarding whether the deduction of remuneration was justified without proof of services rendered by Shri. Neeraj Kanwar for the business purposes of the Assessee company. This issue remains open for further consideration by the Court.

In conclusion, the High Court upheld the Tribunal's decision regarding the deduction of bad debts under Section 36(1)(vii) of the Income Tax Act, finding the Assessee eligible for the deduction based on proper write-offs. However, the issue of allowing the deduction of remuneration without proof of services rendered remains under scrutiny, awaiting a detailed examination by the Court.