2020 (6) TMI 572 - HC - Income Tax

Disallowance of the bad debts written off u/s 36(1)(vii) read with Section 36(2) - income was not offered to tax and there was no subsisting debt perverse - whether debt which was written off during the relevant year was offered to income in Previous year or earlier years? - HELD THAT - Supreme Court dealt with Section 36(1)(vii) of the Act, which was amended with effect from 01.04.1989 in SOUTHERN TECHNOLOGIES LTD. VS. JT. CIT 2010 (1) TMI 5 - SUPREME COURT it was inter alia held that after 01.04.1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii) of the Act. Further held that if an assessee debits an amount of doubtful debt to profit and loss account and credits the asset account like sundry debtors account, it would constitute a right of an actual debt. However, if an assessee debits provision for doubtful debit to profit and loss account and makes a corresponding credit to current liabilities and provisions on the liabilities side of the balance sheet then it would constitute a provision for doubtful debt. It was thus held that in the latter case the assessee would not be entitled to deduction after 01.04.1989. The aforesaid decision was referred to with approval in VIJAYA BANK 2010 (4) TMI 46 - SUPREME COURT . From the close scrutiny of the orders passed by the assessing officer, Commissioner of Income Tax (Appeals) as well as Income Tax Appellate Tribunal, we find that aforesaid aspect of the matter has not been examined. Therefore, the impugned orders are quashed and the matter is remitted to the assessing officer to ascertain twin questions viz., (i) whether debt which was written off during the relevant year was offered to income in Previous year or earlier years, (ii) whether the assessee has debited the amount of doubtful debt to profit and loss account and has reduced the same from the asset side of the balance sheet. The matter is remitted to the assessing officer for de novo consideration of the aforementioned aspect.

Summary

Issues:
1. Disallowance of bad debts written off under Section- 36(1)(vii) of IT Act
2. Finding of Tribunal that relevant income was not offered to tax and there was no subsisting debt

Analysis:
Issue 1: The appellant, a private limited company, filed an appeal under Section 260A of the Income Tax Act, 1961, regarding the disallowance of bad debts written off under Section- 36(1)(vii) of the Act for the Assessment year 2014-15. The assessing officer disallowed bad debts written off amounting to &8377; 11,45,33,140/-, stating that the provision for doubtful debts cannot be allowed as a deduction. The Commissioner of Income Tax (Appeals) upheld this decision, leading to the appeal before the Income Tax Appellate Tribunal. The tribunal dismissed the appeal, emphasizing that the debt should have been offered to tax in the earlier assessment year for it to qualify as bad debt. The appellant argued that it complied with the provisions by debiting the amount of doubtful debt to the profit and loss account and crediting the asset account, and that the debtor was under liquidation. The court noted that the aspect of whether the debt was offered to income in previous years was not examined properly and remitted the matter to the assessing officer for further consideration.

Issue 2: The tribunal also noted that the debtor had debited the account of recoveries made towards statutory levies during the relevant year, but it was unclear whether this amount was offered to tax. The tribunal held that the amounts written off were not due from the party and did not qualify as subsisting debt for bad debt write-off. The court referred to relevant case law and highlighted the importance of correctly debiting the amount of doubtful debt to the profit and loss account and reducing it from the asset side of the balance sheet. As the assessing officer, Commissioner of Income Tax (Appeals), and the tribunal did not adequately examine these aspects, the court quashed the impugned orders and remitted the matter to the assessing officer for a fresh determination.

In conclusion, the court did not answer the substantial questions of law framed, as the matter was remitted for further consideration by the assessing officer. The appeal was disposed of accordingly.