1995 (1) TMI 113 - AT - Income Tax

Summary

Issues:
- Allowance of bad debts as deduction for the assessment year 1989-90.
- Interpretation of the amendment made to section 36(1)(vii) of the Act.
- Discretion of revenue authorities in determining the bad debts.

Analysis:
The judgment pertains to an appeal by the revenue challenging the allowance of bad debts as a deduction amounting to Rs. 2,57,232 for the assessment year 1989-90. The revenue contended that the Commissioner of Income-tax (Appeals) erred in allowing the deduction. The Assessing Officer had initially disallowed the claim, noting that the debts were not bad as the assessee had filed suits against the debtors in the City Civil Court, Hyderabad, and the suits were pending. However, the CIT(A) referred to the amendment made to section 36(1)(vii) of the Act by the Direct Tax Laws (Amendment) Act, 1987, which mandated that if bad debts were written off in the books of account, the claim had to be allowed without the department questioning whether the debts were genuinely bad or not.

The revenue argued that even after the amendment, they had the authority to determine the actual status of the bad debts. However, the Tribunal disagreed, emphasizing the combined effect of the amendments made in 1987 to sections 36(1)(vii) and 36(2)(iii) and (iv). It was clarified that from the assessment year 1989-90, bad debts had to be allowed as a deduction in the year they were written off by the assessee, without the Assessing Officer having the power to question their status in any earlier or later assessment year. The Tribunal highlighted the rationale behind the amendments, as explained by the CBDT in Circular No. 551, which aimed to eliminate disputes and provide clarity regarding the allowability of bad debts.

Additionally, a reference was made to a passage from Sampath Iyengar's Law of Income-tax, supporting the statutory recognition given to the view that in the case of banks, full deduction for bad debts written off should be given without questioning, as banks are better positioned to assess the recoverability of debts. The Tribunal concurred with the CIT(A)'s conclusion, stating that it was well-supported and required no interference. Consequently, the appeal by the revenue was dismissed, affirming the allowance of bad debts as a deduction for the assessment year 1989-90.