2009 (1) TMI 56 - HC - Income Tax

Deduction claimed on account of a bad debt u/s 36(1)(vii)- condition precedent for allowance - it is for the assessee to demonstrate that the deduction he desires to seek is on account of a bad debt, secondly, that the debt was written off as irrecoverable, and thirdly, it should have been written off as an irrecoverable debt in the previous year since there is no evidence that transaction was the same as to earlier one, principle of res judicata cannot be applied

Summary

Issues:
1. Assessment of interest component for tax.
2. Application of the principle of res judicata.
3. Interpretation of Section 36(1)(vii) of the Income Tax Act, 1961.

Analysis:

1. The judgment concerns the assessment of an interest component of Rs.26,09,621 for tax purposes during the assessment year 1997-98. The respondent-assessee argued that the interest was not taxable as it was meant to pressure debtors for payment and was not accepted by them. The Assessing Officer disagreed and included the interest in the assessee's income.

2. The Commissioner of Income Tax (Appeals) accepted the respondent-assessee's appeal, citing the rule of res judicata. The issue was whether a similar income reflected as interest in previous years was considered in determining the tax payable. The Income Tax Appellate Tribunal also upheld this decision.

3. The appellant contended that the issue cannot be decided under res judicata as each loan must be analyzed based on its terms. The deduction claimed by the respondent-assessee under Section 36(1)(vii) of the Income Tax Act was also challenged. The appellant argued that the debt must be proven bad, irrecoverable, and written off in the previous year for the deduction to be allowed.

4. The respondent-assessee maintained that the interest was a claim, not income, as it was not accepted by debtors. However, the Commissioner of Income Tax (Appeals) did not assess the issue on its merits but based the decision on past assessments. The court noted that the previous deduction was not under the same contract or terms as the present case, leading to a remand for reconsideration.

5. The court set aside previous orders and directed parties to appear before the Assessing Officer for further consideration. Regarding the deduction under Section 36(1)(vii), the court emphasized the need to demonstrate the debt as bad, irrecoverable, and written off in the previous year for the deduction to be valid. The judgment concluded with these observations, disposing of the appeal.