2012 (5) TMI 29 - HC - Income Tax

Claim of assessee as bad debts written u/s 36(1)(vii) - Revenue stated writing off bad debts of Rs.5.12 crores in one year itself would distort the income of the said year - Held that - The income returned in the year in question was at loss and the income assessed by the Assessing Officer is at a loss of more than Rs.7.94 crores, writing off of bad debts would result in increase in the loss figure - no evidence or material on record to show the deliberate attempt by the assessee to delay writing off the bad debts in the earlier assessment years, which has resulted in understatement of income or short recovery of tax - in most of the earlier years, the assessee had shown taxable income and if bad debts were written off in the said years, it would have resulted in lower taxation or nil taxation - Revenue has not been able to dispute and show that the provisions of Section 36(1)(vii) r.w.s 36(2)(i) are not satisfied in the present case in favour of assessee.

Summary

Issues:
1. Allowance of bad debts written off under Section 36(1)(vii) of the Income Tax Act, 1961.
2. Applicability of Section 36(1) to the case.

Issue 1: Allowance of Bad Debts Written Off
The case involved an appeal by the Revenue against the order of the Income Tax Appellate Tribunal allowing the claim of the respondent-assessee for bad debts written off amounting to 5.12 crores under Section 36(1)(vii) of the Act. The Assessing Officer disallowed the bad debt claim, stating that it would distort the business picture for the year. However, the CIT (Appeals) and the tribunal found in favor of the assessee, emphasizing that the bad debts related to trading transactions and the transportation costs were prohibitive. The tribunal noted that the assessee had provided detailed evidence of the bad debts, including efforts for recovery, and held the claim to be bona fide under Section 36(1)(vii).

Issue 2: Applicability of Section 36(1)
The key question was whether the bad debt claim met the conditions of Section 36(1)(vii) read with Section 36(2)(i) of the Act. The provisions required that the amount be written off in the accounts for the previous year and that it had been taken into account in computing the income of the assessee in the relevant previous year. The tribunal found that the assessee had met these conditions, having made sales to the parties over seven years and providing necessary documentation. The Revenue's argument that writing off 5.12 crores in one year would distort the profit and loss accounts was acknowledged but not examined further due to lack of evidence of deliberate attempts to delay write-offs in earlier years.

In conclusion, the High Court answered both questions in favor of the assessee, upholding the tribunal's decision to allow the bad debt claim under Section 36(1)(vii). The appeal was disposed of without costs.