2013 (6) TMI 311 - HC - Income Tax

Bad debts - provisions of section 36(1)(vii) and section 36(2)(i) - onus to prove - held that - under section 36(1)(vii) of the Income-tax Act it was not necessary for the assessee to give reasons and writing off the amount itself was sufficient. - In view of the settled position in the case of T.R.F. Ltd. 2010 323 ITR 397 the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal have rightly set aside the addition made by the Assessing Officer in so far as it relates to the bad debt claimed by the assessee - Decided in favor of assessee. Loss on account of rejection of goods - held that - Goods which were unfit for human consumption in Ukraine will remain unfit for human consumption in India also. - claim of deduction allowed - Decided in favor of assessee.

Summary

Issues:
- Deletion of addition of Rs. 24,59,783 on account of bad debts and Rs. 20,19,600 for quality rejection
- Interpretation of provisions under section 36(1)(vii) and section 36(2)(i) of the Income-tax Act
- Assessment of whether bad debts were rightly written off as irrecoverable
- Evaluation of the authenticity of quality rejection expenses and their deduction

Analysis:
The appeal challenged an order by the Income-tax Appellate Tribunal dismissing the Department's appeal regarding the deletion of additions for bad debts and quality rejection expenses. The appellant contended that the provisions of section 36(1)(vii) were not applicable, and the additions were rightly made under section 36(2)(i). The original return of income for the assessment year 2003-04 led to additions by the Assessing Officer, which were later challenged before the Commissioner of Income-tax (Appeals). The Commissioner found that no cogent reasons were given for the additions and held that under section 36(1)(vii), it was not necessary for the assessee to provide reasons for writing off bad debts, relying on legal precedents such as T.R.F. Ltd. v. CIT.

Regarding the addition of Rs. 20,19,600 for quality rejection, the Commissioner found that the rejection was substantiated by correspondence and documents, which were not challenged by the Assessing Officer. The Income-tax Appellate Tribunal, after reconsideration, upheld the Commissioner's decision based on precedents and the authenticity of the rejection. The Tribunal also referred to various High Court judgments and the T.R.F. Ltd. case to support its decision on bad debts and quality rejection expenses.

The provisions of section 36(1)(vii) and section 36(2)(i) were crucial in determining the validity of claiming bad debts. The apex court's decision in T.R.F. Ltd. clarified that after April 1, 1989, it was not necessary to prove the irrecoverability of debts; writing off in the accounts was sufficient. The court emphasized the importance of examining whether bad debts were actually written off in the accounts. In line with the legal position established by T.R.F. Ltd., the Commissioner and the Tribunal rightly set aside the additions made by the Assessing Officer for bad debts.

The concurrent findings by the Commissioner and the Tribunal regarding the quality rejection in Ukraine and its implications for human consumption in India were upheld. The goods deemed unfit in Ukraine were considered unfit for consumption in India as well, leading to the dismissal of the appeal without any substantial question of law. The judgment reinforced the significance of legal provisions and precedents in tax assessments, ensuring accurate interpretation and application of the law.