2006 (1) TMI 111 - HC - Income Tax

Deduction under section 36(1)(vii) bad debt it was an admitted fact that there is nothing on record which might show that all these debtors were either financially not in a position to pay the debt or have ever refused or expressed a desire not to pay. On the contrary, the assessee was still carrying on business with all these debtors and receiving payments. It was the unilateral act on the part of the assessee to write off all these amounts as bad debts, without there being any material to show that the amounts are not recoverable. - Tribunal is right in law in holding that the debt claimed by the appellant as bad had not become bad and thus is not allowable as deduction under section 36(1)(vii)

Summary

Issues:
1. Disallowance of claim related to exchange rate variation.
2. Disallowance of claim for bad debts under section 36(1)(vii).

Issue 1: Disallowance of claim related to exchange rate variation

The case involved tax appeals against the Tribunal's order disallowing claims under section 80-IA of the Income-tax Act for the assessment year 1996-97. The Assessing Officer disallowed amounts for exchange fluctuations, bad debts, and under section 43B. The Commissioner of Income-tax (Appeals) allowed the claim under section 43B but confirmed disallowances for exchange fluctuations and bad debts. The Tribunal upheld the Commissioner's decision. The first question of law regarding exchange rate variation disallowance was not pressed by the assessee during the hearing. Consequently, it was not considered by the court.

Issue 2: Disallowance of claim for bad debts under section 36(1)(vii)

Regarding the second question of law on bad debts, the assessee contended that the debts were over three years old, written off, and therefore should be considered bad debts. The Tribunal, however, reasoned that the debts were recoverable from the Government and had not become bad merely due to delayed payments. The court examined relevant case law, emphasizing that the assessee must honestly believe the debt is irrecoverable based on the debtor's financial position and circumstances. The court cited various judgments to establish that the onus is on the assessee to prove the debt is genuinely bad. In this case, the court found that the hospitals owed money to the assessee, and the debts were not proven to be genuinely irrecoverable. The court concluded that the assessee's decision to write off the debts as bad was not based on honest judgment but rather a convenient one. Therefore, the Tribunal's decision to disallow the bad debt claim under section 36(1)(vii) was upheld, and the appeal was dismissed.

This detailed analysis of the judgment highlights the issues of disallowance of claims related to exchange rate variation and bad debts under section 36(1)(vii). The court's decision was based on legal principles, case law, and the factual circumstances of the case, ultimately upholding the Tribunal's decision regarding the bad debt claim.