2023 (5) TMI 702 - AT - Income Tax

Disallowance of bad debts written off - appellant had not written off the same in its books of accounts - assessee has not put any effort into the recovery of such bad debts - CIT(A) concluded that the assessee has not written off bad debts to the tune of Rs. 69,33,446.00 in the books of accounts and therefore, he disallowed the same - HELD THAT - We are not in agreement with the finding of the CIT(A) on the reasoning that the assessee has not written of the bad debts amounting to ₹ Rs. 69,33,446.00 against the provision for the bad debts which has already suffered the tax. Any adjustment made by the assessee on account of the bad debts against the provisions created in the earlier year amounts to actual writing off the bad Debts in the books of accounts. Thus, the assessee cannot be denied the benefit for the bad debts merely on the reasoning that such bad debts were not claimed in the profit and loss account but adjusted against the provision of bad debts. Appeal of the assessee is allowed. Admittedly, the provision was created by the assessee in the earlier year out of the profit and loss account. Thus, any adjustment against such provision for bad and doubtful debts amounts to actual writing off the bad debts. Thus, we set aside the finding of the CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

Summary

Issues:
The judgment involves the confirmation of disallowance of bad debts written off by the assessee amounting to Rs. 69,33,446, based on the reasoning that it was not written off in the books of accounts.

Issue 1: Disallowance of Bad Debts

The assessee claimed a deduction of Rs. 1,06,00,000 on account of bad debts, which included Rs. 69,33,446 written off against the provision for bad debts created in an earlier year. The Assessing Officer (AO) disallowed the deduction as the efforts for recovery were not documented. The CIT(A) partially allowed the claim based on the Supreme Court decision in T.R.F. Limited vs. CIT (2010) 323 ITR 397, stating that writing off bad debts in the accounts is sufficient for claiming the deduction. However, the CIT(A) found that only Rs. 36,75,000 was actually written off in the books, disallowing the balance. The assessee contended that adjusting bad debts against the provision amounts to actual writing off, supported by financial statements.

Analysis and Decision

The Tribunal noted that the AO disallowed the deduction due to lack of recovery efforts, a reasoning the CIT(A) found unsatisfactory. The CIT(A) held that writing off bad debts in the books suffices for claiming the deduction but disallowed Rs. 69,33,446 for not being recorded. However, the Tribunal disagreed, stating that any adjustment against provisions created in earlier years constitutes actual writing off. As the provision was created from the profit and loss account, adjusting against it amounts to valid write-off. Therefore, the Tribunal directed the AO to delete the addition, allowing the appeal of the assessee.

Conclusion

The Tribunal overturned the decision to disallow the deduction for bad debts written off, emphasizing that adjustments against provisions in prior years constitute valid write-offs, contrary to the CIT(A)'s finding. The Tribunal directed the AO to delete the addition, ultimately allowing the appeal of the assessee.