2010 (2) TMI 211 - SC - Income Tax

Bad debts Section 36(1)(vii) - Assessment Year 1990-1991 and Assessment Year 1993-1994 - Prior to 1st April, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word established , which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 held that - in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee matter remanded for de novo consideration

Summary

Issues:
1. Interpretation of section 36(1)(vii) of the Income-tax Act, 1961 pre and post-April 1, 1989.
2. Requirement for establishing irrecoverability of bad debt.
3. Assessing Officer's duty to examine write-off in the accounts of the assessee.
4. Remittal of the case for de novo consideration.

Analysis:
1. The Supreme Court addressed the issue of the interpretation of section 36(1)(vii) of the Income-tax Act, 1961, both before and after April 1, 1989. Prior to the amendment, the assessee had to establish that the debt had become irrecoverable. However, post-April 1, 1989, it was sufficient if the bad debt was written off as irrecoverable in the accounts of the assessee.

2. The Court emphasized the requirement for establishing the irrecoverability of bad debt. It was noted that the Assessing Officer failed to examine whether the bad debt or part thereof was actually written off in the accounts of the assessee. The process of debiting the bad debt account and crediting the customer's account to close it was highlighted, especially for companies where the provision is deducted from sundry debtors.

3. Due to the Assessing Officer's failure to conduct the necessary examination, the Court ordered a remittal of the matter for de novo consideration. The remittal was specifically directed towards assessing whether the write-off was done in accordance with the law, emphasizing the importance of this aspect in determining the treatment of bad debts for tax purposes.

4. Additionally, the Court's order in a related case concerning Assessment Year 1994-1995 led to the remittal of the present case to the Assessing Officer for further evaluation. The directive was clear for the Assessing Officer to consider whether the write-off complied with the legal principles outlined in the Court's previous order, ensuring a comprehensive review of the relevant accounts.

Therefore, the judgment provided a detailed analysis of the legal provisions regarding bad debts, highlighted the Assessing Officer's duty to scrutinize write-offs in the accounts of the assessee, and emphasized the need for compliance with the law in such matters, ultimately leading to a remittal for thorough reevaluation.