2012 (8) TMI 642 - AT - Income Tax

Disallowance on account of bad debts - undisclosed income - Held that - Assessee not writing off of any bad debt in the accounts for any previous year and on the basis of the seized material and records quantum of undisclosed income was determined and according to the reply of assessee, the assessee made a claim of bad debt as per the accounts prepared on the basis of the seized material. Therefore, the same could not be treated that the assessee has written off the bad debt as irrecoverable in the accounts maintained for - plea of the assessee was not accepted because the seized documents found during the course of search could not be treated as regular books of account and on the basis of the seized material, cash book and ledger was prepared to find out the quantum of undisclosed income, thus whatever books of account maintained by the assessee in the regular course of business did not have mention of any loan and advance - against assessee.

Issues Involved:
1. Disallowance of Rs. 4,22,000 on account of bad debts.
2. Compliance with conditions under Section 36(1)(vii) and 36(2) of the Income Tax Act.
3. Validity of books of account and seized documents as regular books of account.

Detailed Analysis:

Issue 1: Disallowance of Rs. 4,22,000 on Account of Bad Debts
The assessee challenged the disallowance of Rs. 4,22,000 on account of bad debts made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO rejected the claim of bad debts written off, leading to an assessed undisclosed income of Rs. 8,35,250, which, after including the regular income, amounted to Rs. 10,23,820.

Issue 2: Compliance with Conditions under Section 36(1)(vii) and 36(2) of the Income Tax Act
The CIT(A) noted that for bad debts to be allowable under Section 36(1)(vii), the debts must be written off as irrecoverable in the accounts of the assessee for the previous year. Additionally, under Section 36(2), the debts must have been taken into account in computing the income of the assessee for the previous year or earlier years. The CIT(A) found that the debts in question were not reflected in the regular books of account and thus did not satisfy these conditions. The CIT(A) also referenced case law to emphasize that the onus is on the assessee to prove that the debts have genuinely become bad.

Issue 3: Validity of Books of Account and Seized Documents as Regular Books of Account
The AO and CIT(A) both determined that the seized documents could not be treated as regular books of account. The assessee had prepared a second set of accounts based on seized documents, but these were not part of the regular books of account. The AO noted that the undisclosed loans and advances were not recorded in the regular books, and thus the bad debt claim was not valid under the regular accounting principles.

Conclusion:
The Tribunal upheld the findings of the AO and CIT(A), stating that the essential conditions for claiming bad debts under Section 36(1)(vii) and 36(2) were not met. The Tribunal noted that the seized documents used to prepare the second set of accounts could not be considered regular books of account. Consequently, the claim of bad debts was disallowed, and the appeal of the assessee was dismissed.

Judgment:
The appeal of the assessee is dismissed.

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