2021 (11) TMI 133 - AT - Income Tax

Disallowance of 50% of bad debts - addition towards disallowance of bad debts u/s.36(1)(vii) r.w.s. 36(2) on the ground that the assessee has failed to file any evidences to show debts really become bad and has made sufficient efforts to recover the outstanding debts - HELD THAT - Assessee has not placed any evidences to prove that income pertains to debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee. On the other hand, the AO had also not examined the issue in light of provisions of Section 36(1)(vii) r.w.s. 36(2) because the AO has made adhoc disallowance of 50% debt The issue needs to go back to the file of the AO to decide the issue afresh in accordance with provisions of Section 36(1)(vii) r.w.s 36(2) of the Act. We further direct the AO while deciding the issue, he must take into account the ratio laid down in the case of T.R.F. Limited 2010 (2) TMI 211 - SUPREME COURT where it has been clearly held that once debt has been written off in books of accounts as irrecoverable, then the assessee need not to prove that said debt become really bad debts. Accordingly, we set aside the issue to the file of the AO and direct him to reconsider in light of our observations given herein above. Appeal allowed for statistical purpose.

Summary

Issues:
1. Validity of reopening proceedings under Section 147
2. Disallowance of bad debts

Issue 1: Validity of reopening proceedings under Section 147

The appellant contested the validity of the reopening proceedings under Section 147, arguing that the Assessing Officer lacked jurisdiction to reopen the assessment and failed to dispose of objections properly within a reasonable time. The appellant claimed that the proceedings were invalid as the Assessing Officer dismissed objections mechanically and delayed the process. Additionally, it was argued that the assessment order based on the Section 148 notice was invalid since the issue had been ruled in favor of the appellant in earlier assessment years. The CIT(A) upheld the reopening, citing reasons provided by the AO and legal precedents. The appellant chose not to press this ground further during the appeal.

Issue 2: Disallowance of bad debts

The appellant challenged the 50% disallowance of bad debts, contending that once debts were written off in the books of accounts, there was no need to prove they had become bad. The appellant referenced legal provisions and a Supreme Court decision to support this argument. The CIT(A) upheld the disallowance, stating that the appellant failed to demonstrate compliance with conditions prescribed under section 36(2) of the Act. The AO disallowed 50% of the debts without proper examination. The Tribunal found that the issue required further review by the AO in accordance with Section 36(1)(vii) r.w.s 36(2) of the Act and directed the AO to reconsider the matter, emphasizing the Supreme Court's ruling on the treatment of bad debts written off in the books of accounts.

In conclusion, the Tribunal partially allowed the appeals for the assessment years 2007-08 and 2008-09, directing a fresh examination of the disallowance of bad debts by the Assessing Officer in line with the provisions of the Income Tax Act and the Supreme Court's decision on the treatment of such debts.