2009 (7) TMI 707 - HC - Income Tax

Bad debt- The respondent-assessee, which is a private limited company, filed its return of loss declaring total loss of Rs. 8,24,734. It had claimed bad debt of Rs. 6,27,735 on the ground that major shareholding of the respondent-assessee was with M/s. RPH Ltd. and most of the activities by the assessee-company were for the said shareholder. The assessee had taken plant and machinery on lease from the said shareholder company. A sum of Rs. 6,27,735 was lying under the head Sundry debtors which the company was not able to realise as this money was due and payable by M/s. N. B. Enterprises. The assessee had sent several letters directing the debtor to pay the amount but the debtor did not even acknowledge the same. The Assessing Officer disallowed the claim on the ground that the debts have become bad and further the conditions for allowances of the bad debt as provided under section 36(2)(i) have not been clearly brought out. However, the Commissioner of Income-tax (Appeals) has allowed the claim on the ground that the Assessing Officer has not pointed out that this debt has not been taken into account in computing the income in any earlier or previous year, which order has been upheld by the Tribunal. Held that- it was the specific case of the assessee that the amount represented the sales effected to NB but because of the fact that there was no documentary evidence in support of the claim as also the acknowledgements of the letters, the amount was written off. The assessing authority did not find any material on record to show that the amount had not been taken into account in computing the income of any previous years, hence the amount was deductible as bad debts.

Summary

Issues:
1. Disallowance of bad debts claimed by the assessee.
2. Justification of conditions under section 36(1)(vii) of the Income-tax Act, 1961.

Issue 1: Disallowance of Bad Debts Claimed by the Assessee

The respondent-assessee, a private limited company, filed its return of loss declaring a total loss and claimed bad debt on the grounds that it was unable to realize a sum of money due from M/s. N. B. Enterprises. The Assessing Officer disallowed the claim stating that the debts had become bad and the conditions for allowance under section 36(2)(i) were not met. However, the Commissioner of Income-tax (Appeals) allowed the claim, emphasizing that the debt had not been taken into account in previous years. The Tribunal upheld this decision. The appellant argued that the onus was wrongly placed on the authority to prove that the amount was not claimed as a deduction in previous years. Upon review, it was found that the respondent-assessee had provided a specific case that the amount represented sales to M/s. N. B. Enterprises, but lacked documentary evidence. The Assessing Officer did not address this issue and relied solely on section 36(2)(i) without proving that the amount was accounted for in previous years. The High Court agreed with the Commissioner of Income-tax (Appeals) that there was no evidence to show the amount was considered in previous income computations. Therefore, the Tribunal's decision to uphold the deletion of the bad debt claim was deemed correct.

Issue 2: Justification of Conditions under Section 36(1)(vii) of the Income-tax Act, 1961

The second substantial question of law revolved around whether the conditions of section 36(1)(vii) of the Income-tax Act, 1961 were met in the assessee's case. The Tribunal confirmed the Commissioner of Income-tax (Appeals)'s findings in favor of the assessee. The appellant argued that the Tribunal's decision was not legally justified. However, upon thorough consideration of the case, the High Court found that the Commissioner of Income-tax (Appeals) had correctly observed that the assessing authority did not provide evidence to show that the amount had been considered in previous income calculations. Therefore, the Tribunal's decision to confirm the findings of the Commissioner of Income-tax (Appeals) regarding the conditions of section 36(1)(vii) was upheld as legally sound. Consequently, the appeal was dismissed.

This detailed analysis of the judgment from the Allahabad High Court highlights the issues of disallowance of bad debts claimed by the assessee and the justification of conditions under section 36(1)(vii) of the Income-tax Act, 1961. The court's decision was based on a thorough review of the facts and legal provisions, ultimately upholding the Tribunal's decision in favor of the respondent-assessee.