2020 (12) TMI 830 - HC - Income Tax

Deduction of bad debts - Tribunal denying the benefit of claim of Bad debts when the amounts which has been claimed by the appellant as bad debts have been offered and assessed to tax in earlier assessment years and the claim is after fulfilling the conditions as envisaged under the provisions of section 36 (1)(vii) r.w.s. 36(2) - HELD THAT - The assessee had exported bags to foreign customers in the past and had incurred unforeseen additional costs on certain imported raw material. In order to recover the additional costs incurred, the assessee had raised debit notes on the foreign customers and credited the amount due from them, raised by way of debit notes as income in its books of accounts and had offered the same to tax in earlier years. The customers of the assessee refused to make payment and therefore, the assessee had written off the amount as not recoverable. It is pertinent to mention that Section 36(1)(vii) of the Act mandates that in order to claim bad debts, the assessee has to write off the same in its books of accounts and assessee is not required to prove that the debt as irrecoverable. See VIJAYA BANK 2010 (4) TMI 46 - SUPREME COURT The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX 1991 (11) TMI 2 - SUPREME COURT has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. For this reason also, in the facts of the case, a different view cannot be taken. - Decided in favour of the assessee.

Summary

Issues involved:
1. Denial of deduction of bad debts under Section 36(1)(vii) of the Income Tax Act, 1961.
2. Compliance with conditions under Section 36(2) of the Act for claiming bad debts.
3. Dispute regarding existence of debt and applicability of Section 36(1)(vii) of the Act.
4. Alleged error in not granting deduction for bad debts.
5. Failure to follow a previous decision by the Tribunal in a similar case.
6. Scope of the issue and violation of principles of natural justice.
7. Dismissal of Miscellaneous petition under Section 254(2) of the Act.

Detailed Analysis:

1. The appeal involved the denial of deduction for bad debts amounting to ?3,33,79,971 under Section 36(1)(vii) of the Income Tax Act, 1961. The Tribunal disallowed the claim, leading to the appellant challenging the decision based on the substantial questions of law raised regarding the justification of the denial and the perceived perversity in the order.

2. The compliance with conditions under Section 36(2) of the Act was a crucial aspect of the case. The revenue argued that the assessee did not meet these conditions, justifying the disallowance of the deduction under Section 36(1)(vii). The Tribunal's finding of non-compliance with Section 36(2) was a key point of contention in the appeal.

3. The dispute revolved around the existence of debt and the applicability of Section 36(1)(vii) of the Act. The Tribunal held that there was no debt in the books, leading to a challenge by the appellant based on the acceptance of similar claims in previous assessment years and compliance with the provisions of the Act.

4. An additional issue raised was the alleged error in not granting a deduction for bad debts amounting to ?46,08,525. The appellant contended that this denial was unjustified and constituted a perverse order by the Tribunal.

5. The failure to follow a previous decision by the Tribunal in a similar case for the assessment year 2009-10 was highlighted as a ground for appeal. The appellant argued that the Tribunal should have applied the same reasoning and decision in this case, leading to inconsistency in the treatment of bad debts.

6. The scope of the issue and the alleged violation of principles of natural justice were significant concerns. The appellant raised objections to the Tribunal's enlargement of the issue beyond the department's grounds and the denial of a reasonable opportunity of hearing on certain unargued grounds, alleging a violation of natural justice.

7. Lastly, the dismissal of the Miscellaneous petition under Section 254(2) of the Act was contested by the appellant. The failure to appreciate the facts of the case and the understanding of the appellant's position were cited as reasons for challenging the dismissal of the petition.

In conclusion, the High Court ruled in favor of the appellant, quashing the Tribunal's decision to disallow the claim for deduction on account of bad debts. The judgment emphasized compliance with the provisions of the Act, previous decisions, and principles of natural justice in arriving at the decision.