2009 (2) TMI 54 - HC - Income Tax

Expression bad debt in Section 36(1)(vii) - Whether as per the existing provisions even after the amendment w.e.f. 1-4-1989 is it obligatory on assessee to prove that the debt written off by him is indeed a Bad Debt for the purpose of allowance u/s36(1)(vii) held that after the amendment it is neither obligatory nor is the burden on the assessee to prove that the debt written off by him is indeed a bad debt as long as it is bona fide and based on commercial wisdom or expediency

Issues Involved:
1. Interpretation of Section 36(1)(vii) of the Income Tax Act post-amendment effective from 1-4-1989.
2. Obligation of the assessee to prove that the debt written off is indeed a bad debt for the purpose of allowance under Section 36(1)(vii).

Detailed Analysis:

1. Interpretation of Section 36(1)(vii) of the Income Tax Act post-amendment effective from 1-4-1989:

The core issue was whether it is obligatory for the assessee to prove that a debt written off is indeed a bad debt to claim a deduction under Section 36(1)(vii). The assessee claimed writing off bad debts totaling Rs. 4,59,60,393/-, which included Rs. 81,44,000/- for Mysore Timber Mart and Rs. 11,52,000/- for Overseas Commercial Pvt. Ltd. The CIT (A) allowed the deduction, stating that, post-amendment, the assessee does not need to prove that the debt has become bad, only that it has been written off during the year. This decision was challenged by the Revenue before the ITAT, which constituted a Special Bench due to differing opinions among its benches.

The majority opinion of the Tribunal held that strict proof of a debt becoming bad is not required under the amended Section 36(1)(vii). It emphasized that writing off a debt in the accounts is sufficient evidence of it being bad, as this decision lies within the personal knowledge of the businessman and should be bona fide. The minority opinion, however, argued that mere writing off is insufficient and the assessee must show prima facie that the debt has become bad.

The High Court, after reviewing the provisions, concluded that the amendment aimed to eliminate disputes regarding the year of deduction and to rely on the commercial wisdom of the assessee. The Court noted that the amendment removed the burden on the assessee to prove that the debt is bad, provided it is written off as irrecoverable in the accounts.

2. Obligation of the assessee to prove that the debt written off is indeed a bad debt for the purpose of allowance under Section 36(1)(vii):

The Court referred to various dictionary definitions and legal interpretations to understand the term "bad debt". It emphasized that the decision to write off a debt must be based on commercial or business judgment and not be whimsical or fanciful. The Court noted that the Assessing Officer (A.O.) could only disallow the debt if it was found that the decision to write off was not bona fide.

The Court also considered the CBDT Circular No. 551 dated 23rd January 1990, which clarified that the deduction for bad debts would be allowed in the year they are written off as irrecoverable. The Court acknowledged that while departmental circulars are not binding on the Court, they reflect the Revenue's understanding and intent behind the provisions.

The Court further reviewed judgments from other High Courts, including the Madras High Court and the Delhi High Court, which supported the view that post-amendment, the assessee is not required to establish that the debt has become bad, only that it has been written off in the books.

Conclusion:

The High Court concluded that after the amendment to Section 36(1)(vii), it is not obligatory for the assessee to prove that a debt written off is indeed a bad debt. The decision to write off must be bona fide and based on commercial wisdom. The appeal was disposed of accordingly, affirming the majority opinion of the Tribunal.

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