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2009 (11) TMI 3 - HC - Income TaxBad Debts obligation to prove that the debt written off by him is indeed a bad deft for the purpose of allowance u/s 36(1)(vii) power of AO to question the veracity of bad debts - business of developing and printing of photos held that - 1.4.1989 the words any bad debt, or part thereof, which is established to have become, a bad debt in the previous year were used and after the amendment w.e.f. 1.4.1989, same has been substituted by any bad debt or part thereof which is written off as irrecoverable in the account of assessee for the previous year - All the judgment, which have been cited at the Bar, genuineness of entries, have never been doubted therein - Under Section 143(2) of the Act, Assessing Officer is empowered to require the assessee to produce the evidence in support of the return - , that said debt was arising out of trading activity, there was relationship of debtor or creditor, same was irrecoverable AO has power to examine the genuineness ITAT order set aside
Issues Involved:
1. 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) of the Income Tax Act, 1961. 2. The impact of the amended provisions of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961, effective from 1.4.1989, on the Assessing Officer's ability to question the veracity of the debt written off. Detailed Analysis: Issue 1: Obligation of the Assessee to Prove Bad Debt The primary contention revolves around whether the assessee is required to prove that the debt written off is indeed a bad debt for the purpose of allowance under Section 36(1)(vii) of the Income Tax Act, 1961. The Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee, relying on the decision in Dy. CIT Vs. Oman International Bank SAOG, which held that post-amendment effective from 1.4.1989, it is not obligatory for the assessee to prove that the debt written off is indeed a bad debt. The Tribunal emphasized that the assessee only needs to write off the debt as irrecoverable in its accounts. However, the High Court scrutinized this position by examining various judgments, including the case of Commissioner of Income Tax, Meerut Vs. Sri Ram Gupta and Kamla Cotton Co. Vs. CIT. These judgments highlighted that while the assessee is not required to provide infallible proof of the debt becoming bad, there must be some semblance of genuineness and truthfulness in the claim. The Court noted that the Assessing Officer is empowered to make inquiries to ensure the entries are not fictitious and are genuinely irrecoverable. Issue 2: Impact of Amended Provisions of Section 36(1)(vii) and Section 36(2) The amended provisions of Section 36(1)(vii) effective from 1.4.1989, changed the requirement from establishing that the debt had become bad to merely writing it off as irrecoverable in the accounts of the assessee. The High Court acknowledged that the amendment simplified the process for the assessee, as they no longer needed to prove the debt had become bad. However, the Court also clarified that the Assessing Officer retains the authority to verify the genuineness of the entries made by the assessee. The Court referenced the judgment in Commissioner of Income Tax Vs. Girish Bhagwat Prasad, which supported the view that the genuineness of the claim must not be in doubt and that the mere writing off of the debt is sufficient for claiming deduction under Section 36(1)(vii). Additionally, the Court cited the Madhya Pradesh High Court's decision in Commissioner of Income Tax Vs. Nai Duniya, which reiterated that unless the books of account are found to be unreliable, the Assessing Officer should accept the assessee's claim of bad debt. Conclusion: The High Court concluded that while the amendment to Section 36(1)(vii) reduced the burden on the assessee to prove the debt had become bad, it did not eliminate the Assessing Officer's power to inquire into the genuineness of the entries. The Court emphasized that the Assessing Officer must ensure that the entries are not fictitious and are genuinely irrecoverable, aligning with the legislative intent to prevent misuse of the provision. The Court quashed the ITAT's order and directed the Assessing Officer to re-evaluate the case, considering any additional information provided by the assessee. The appeal was allowed, with the High Court underscoring the necessity of harmonizing the provisions of Section 143(2) and Section 36(1)(vii) to ensure compliance with the Income Tax Act. Final Judgment: The High Court set aside the ITAT's order and remanded the case back to the Assessing Officer for a fresh decision, ensuring that the assessee is given an opportunity to provide the required details to substantiate the claim of bad debt. The appeal was allowed with no order as to costs.
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