2018 (12) TMI 218 - HC - Income Tax

Allowability of bad debts - carried forward and set off of loss as claimed by the assessee for the current assessment year - Revenue to contest the claim of the assessee even after passing of the order under Section 171 cannot be accepted - Held that - The reason for entering into a family arrangement was with the hope to avoid all future disputes and litigations inter se between the members of the HUF. It is for this reason, the family arrangement was entered into. Therefore, it cannot be said that it is a colorable device and, therefore, the allowance should not be granted to the assessee. Both the authorities were right in holding that the amount claimed as bad debts to an extent of ₹ 6,03,08,000 should be treated as bad debts. Insofar as the Circular is concerned, we are of the view that the contentions of the Revenue cannot be accepted. The Circular clearly suggests that all pending appeals should be withdrawn. Merely relying on the first sentence of the Circular, that it pertains only with regard to filing of appeals on the issue of allowability of bad debts that are written off as irrecoverable cannot be accepted. The matter pertains to grant of disallowance with regard to bad debts. Hence, even insofar as the Circular is concerned, the appeal would have to be dismissed.

Summary

Issues involved:
1. Disallowance of bad debts claimed by the assessee for Assessment Year 2003-2004.
2. Appeal filed by the Revenue challenging the decision of the CIT (Appeals) and Tribunal.
3. Interpretation of provisions of Section 36(1)(vii) of the Income Tax Act regarding bad debts.
4. Validity of family arrangement and partition for writing off bad debts.

Issue 1: Disallowance of bad debts claimed by the assessee for Assessment Year 2003-2004:
The assessee, a private limited company, claimed a sum as bad debts written off in the return of income for the Assessment Year 2003-2004. The Assessing Officer disallowed the claim, stating that future disputes among family members do not constitute grounds for bad debts. The CIT (Appeals) allowed the claim, highlighting that bad debts can be written off by the creditor in exceptional circumstances. The Tribunal also upheld the decision. The Revenue challenged this, alleging the family arrangement was a ruse to avoid tax.

Issue 2: Appeal filed by the Revenue challenging the decision of the CIT (Appeals) and Tribunal:
The Revenue contended that the family arrangement was a created document and the debt could not be written off in the same year it became due. However, the respondent argued that the bad debts were reflected in the books of accounts, citing Section 36(1)(vii) of the Income Tax Act. The Circular No.12 of 2016 by CBDT supported the admissibility of bad debt claims if written off as irrecoverable in the books of accounts.

Issue 3: Interpretation of provisions of Section 36(1)(vii) of the Income Tax Act regarding bad debts:
The judgment analyzed Section 36(1)(vii) of the Act, emphasizing that bad debts written off as irrecoverable in the accounts of the assessee are allowable deductions. The CIT (Appeals) and Tribunal correctly applied the law, granting relief to the assessee based on compliance with the provisions of the Act.

Issue 4: Validity of family arrangement and partition for writing off bad debts:
The family arrangement and partition were entered into to avoid future disputes among family members who were also shareholders of the company. The judgment referred to legal precedents to support the validity of such arrangements and held that the family arrangement was not a colorable device to avoid tax liability. The judgment dismissed the Revenue's appeal, upholding the decisions of the CIT (Appeals) and Tribunal in favor of the assessee.

This detailed analysis of the judgment addresses the issues raised in the case, focusing on the disallowance of bad debts, interpretation of relevant legal provisions, and the validity of the family arrangement for writing off bad debts.