2022 (5) TMI 54 - HC - Income Tax

Claim of bad debt/ trading loss of the amount advanced by assessee in the course of its money leading activity - ITAT rejected the claim - Substantial question of law or fact - HELD THAT - We find that the claim of bad debts made by the appellant / assessee was found unacceptable by the Tribunal, inasmuch as for treating a debt as having turned bad, it is necessary to make an objective decision on the facts as to the impossibility of collection/recovery of the debt, such an opinion must be honest and ought to be made after taking into account all the relevant factors, whereas the opinion of the appellant was not honest nor objective, keeping in view the relevant factors. Therefore, the Tribunal rejected the plea of the assessee and confirmed the order of the Commissioner of Income Tax (Appeals). Whether a debt turned bad is a question of fact, which would clear from the Judgment of the Supreme Court in Travancore Tea Estates Co. Ltd. v. CIT 1997 (12) TMI 10 - SC ORDER wherein held as well settled that whether a debt has become bad or the point of time when it became bad are pure questions of fact We find no reason to interfere with the concurrent findings of the Authorities below inasmuch as whether a debt is bad, being essentially a question of fact. As the appellant has not made out any question of law much less substantial question of law, this tax case appeal deserves to be dismissed and is accordingly, dismissed.

Issues:
1. Rejection of bad debt/trading loss claim by the Tribunal
2. Justification for disallowance of bad debt without considering debtor's ability to pay
3. Lack of reasoning in confirming disallowance of bad debt/trading loss
4. Comparison of the case with precedents from Madras High Court and Gujarat High Court
5. Applicability of a previous decision by the Madras High Court to the current case

Issue 1: Rejection of bad debt/trading loss claim by the Tribunal
The appellant, engaged in money-lending activities, claimed bad debts as a set-off in the block assessment period 1988-89 to 1998-99. The assessing officer disallowed the claim as the debts were not written off in the books as per Section 36(1)(vii) of the Income Tax Act. On appeal, the Commissioner of Income Tax (Appeals) remanded the matter for examination of the claim as a trading loss. However, the claim related to an advance of Rs.12.5 lakhs to a debtor named Mani was rejected, citing the debtor's substantial income and lack of written-off status by the appellant's family or firm. The Tribunal upheld the decision, emphasizing the need for an honest judgment on the debtor's inability to pay, following a precedent from the Madras High Court.

Issue 2: Justification for disallowance of bad debt without considering debtor's ability to pay
The Tribunal, in confirming the disallowance of bad debt/trading loss, highlighted the importance of an honest judgment by the appellant regarding the debtor's financial position. The Tribunal stressed that the appellant must establish the debtor's inability to pay based on relevant facts, rather than mere difficulties in debt recovery. The decision was based on an assessment of the debtor's pecuniary position, commitments, and the supervening impossibility to pay. The Tribunal referenced the judgment in the South India Surgical Co. Ltd case to support the rejection of the bad debt claim due to lack of honest judgment by the appellant.

Issue 3: Lack of reasoning in confirming disallowance of bad debt/trading loss
The Tribunal's decision to confirm the disallowance of bad debt/trading loss was based on the appellant's failure to provide an honest and objective judgment regarding the debtor's financial situation. The Tribunal emphasized the need for a factual assessment of the debtor's ability to pay, which the appellant failed to establish convincingly. The decision was in line with the Commissioner of Income Tax (Appeals)'s observations, which highlighted the significance of considering the debtor's financial status in evaluating bad debt claims.

Issue 4: Comparison of the case with precedents from Madras High Court and Gujarat High Court
The appellant argued that the Tribunal should have allowed the bad debt/trading loss claim based on precedents set by the Madras High Court and the Gujarat High Court in specific cases. However, the Tribunal found that the facts of the current case did not align with the cited precedents, particularly the South India Surgical Co. Ltd case. The Tribunal emphasized the need for a factual assessment of each case concerning bad debt claims, rather than relying solely on previous judgments that may not directly apply to the current circumstances.

Issue 5: Applicability of a previous decision by the Madras High Court to the current case
The Tribunal's decision to reject the bad debt/trading loss claim was based on the appellant's failure to provide an honest and objective judgment regarding the debtor's inability to pay. The Tribunal referenced a judgment from the Madras High Court to support its decision, emphasizing the need for a thorough evaluation of the debtor's financial position before considering a debt as bad. The Tribunal's decision aligned with legal precedents emphasizing that the determination of bad debts is a question of fact, requiring a comprehensive assessment of all relevant circumstances.

In conclusion, the High Court upheld the Tribunal's decision to reject the appellant's bad debt/trading loss claim, emphasizing the importance of an honest and objective judgment regarding the debtor's financial status. The Court highlighted that the assessment of bad debts is a question of fact, requiring a detailed evaluation of the debtor's ability to pay based on relevant factors. The Court dismissed the appeal, stating that no substantial question of law was established, and upheld the concurrent findings of the lower authorities.

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