2022 (10) TMI 73 - AT - Income Tax

Disallowance of bad debt written off - AO in view of the above finding was of the opinion that assessee knowing to fact that its business going to discontinue from immediate subsequent year deliberately written off good debtor as bad debt in the books to reduce the tax liability which is nothing but a colourable device - HELD THAT - The provisions of section 36(1)(vii) read with section 36(2) of the Act deals with the deduction of the bad debts. As per the provisions Section 36(1)(vii) any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year, is deductible subject to the condition prescribed under subsection 2 to section 36. The provision of section 36(2) prescribe that, no deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee in the year of write off or in an earlier previous year. And it must represent the amount due from the party for supplies made (goods or services) or represents money lent in the ordinary course of the business of banking or money lending carried on by the assessee. As the facts of the present case are peculiar in the sense that it was alleged by the authorities below that the assessee has adopted colorable device to escape the tax liability by manipulating the provisions of law. The Hon ble Supreme Court in the case of McDowell Co. Ltd. 1985 (4) TMI 64 - SUPREME COURT has held that the colorable device adopted by the assessee in order to avoid the payment of tax is not permissible. If the assessee was to avail the benefit of the provisions of law by using the colorable device, the same cannot be allowed to the assessee. In the given facts of the case, admittedly the assessee has closed down the business and there was no information available on record what treatment has been given by the assessee with respect to the subsequent recovery of the bad debts, if any. In the absence of any contrary information available on record, we do not find any defect in the order of the learned CIT-A. Accordingly, the ground of appeal of the assessee is hereby dismissed.

Summary

Issues:
1. Disallowance of bad debt written off by the assessee.
2. Interpretation of provisions of section 36(1)(vii) and section 36(2) of the Income Tax Act, 1961.
3. Allegation of adopting a colorable device by the assessee to reduce tax liability.

Analysis:
1. The appeal was against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of bad debt written off by the assessee for an amount of Rs. 20,12,651. The assessee, a partnership firm engaged in cotton ginning and pressing, claimed to discontinue business from 1st April 2013. The Assessing Officer (AO) questioned the nature of debtors and details of efforts made for recovery. The AO found discrepancies in the write-offs, stating that bad debts must arise out of the ordinary course of business and be genuinely irrecoverable after recovery efforts.

2. The AO discovered that the assessee had written off debts that were actually regularly paid by debtors during the year. Additionally, notices sent to debtors under section 133(6) of the Act revealed that some debtors denied any write-offs in their accounts. The AO concluded that the assessee had written off good debts as bad debts to reduce tax liability, resembling a colorable device as per legal precedents. Consequently, the AO disallowed the claim of the assessee.

3. The learned CIT(A) partly allowed the appeal, sustaining the disallowances of bad debts for specific parties where the debts were not genuinely irrecoverable. The CIT(A) analyzed ledger accounts and transactions to determine the validity of the write-offs. The appellate tribunal upheld the decision of the CIT(A), emphasizing that bad debts must be genuinely irrecoverable and not a result of a colorable device to avoid tax liability. The tribunal referred to legal precedents to support the decision, highlighting the importance of honest tax payment without resorting to dubious methods.

4. The tribunal dismissed the appeal of the assessee, asserting that the assessee failed to provide evidence of genuine irrecoverability of the debts written off. The tribunal emphasized the need for compliance with tax laws and the prohibition of colorable devices to reduce tax liability. Ultimately, the tribunal upheld the disallowance of bad debts, citing the lack of information on subsequent recovery efforts by the assessee and the potential misuse of tax provisions.

In conclusion, the tribunal's judgment focused on the genuine irrecoverability of bad debts, adherence to tax laws, and the prohibition of colorable devices to reduce tax liability. The decision highlighted the importance of honest tax payment and compliance with legal provisions to prevent misuse of tax laws.