2005 (12) TMI 56 - HC - Income Tax

Whether Tribunal is justified in holding that the claim of bad debts in respect of Vanchinad Leathers Limited was not legally sustainable and allowable? - the profit and loss account of the assessee had made only a provision for bad debt and doubtful debt and had not written it off as bad debts, consequently the Tribunal is justified in holding that the claim of bad debt was not legally sustainable and allowable. We, therefore, answer the question in favour of the Revenue and against the assessee

Issues:
1. Deduction of bad debts in respect of a company.
2. Compliance with the provisions of section 36(2)(i)(b) of the Income-tax Act, 1961.
3. Burden of proof on the assessee to establish irrecoverability of debt.
4. Interpretation of "irrecoverable" under section 36(2)(i)(b).
5. Comparison with relevant case laws for deduction of bad debts.

Analysis:
1. The issue in this case revolves around the deduction claimed by the assessee, a corporation wholly owned by the Government of Kerala, for bad debts in respect of a joint sector company named Vanchinad Leathers Limited. The claim for deduction of Rs. 55,70,949 as provision for bad debts was disallowed by the Tribunal on the grounds of lack of reasonable steps for debt recovery and non-compliance with the provisions of the Income-tax Act, 1961.

2. The key contention was whether the assessee had fulfilled the conditions under section 36(2)(i)(b) of the Act, which requires that a debt must be written off as irrecoverable in the accounts of the assessee for the relevant previous year in order to claim a deduction for bad debts. The Tribunal held that the assessee failed to prove that the debt had become irrecoverable during the previous year, thus denying the deduction.

3. The burden of proof to establish the irrecoverability of the debt during the relevant previous year was placed entirely on the assessee. The Tribunal emphasized that the assessee had not taken adequate steps to recover the debt and had not provided sufficient evidence to demonstrate that the debt had indeed become irrecoverable within the stipulated timeframe.

4. The interpretation of the term "irrecoverable" under section 36(2)(i)(b) was crucial in determining the eligibility for claiming a deduction for bad debts. The court clarified that the provision for bad and doubtful debts in the profit and loss account did not constitute the writing off of bad debts as required by the Act. The court highlighted that the expression "provision for bad and doubtful debts" did not meet the criteria of irrecoverability under the relevant section.

5. The court referred to various case laws, including the decision of the Gujarat High Court in Sarangpur Cotton Manufacturing Co. Ltd.'s case and the decisions of the Kerala High Court and the apex court in Travancore Tea Estates Co. Ltd.'s case, to establish the legal principles governing the deduction of bad debts. These precedents emphasized the necessity for the debt to be proven bad in the previous year and to be genuinely irrecoverable for claiming a deduction under the Act.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the Revenue and against the assessee, as the claim for bad debts was deemed not legally sustainable and allowable due to the failure to meet the statutory requirements for writing off irrecoverable debts. The judgment serves as a reminder of the stringent criteria and burden of proof imposed on taxpayers seeking deductions for bad debts under the Income-tax Act, 1961.

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