2013 (7) TMI 176 - HC - Income Tax

Writing off bad debts - AO add the same on the grounds that these debts were to be written off in the Financial Year 2004-05 relevant to the Assessment Year 2005-06, as the decision with regard to the said debt being bad and was irrecoverable had been taken on 30.3.2005. - Held that - where account books are not closed and not signed by the Board of Directors and not adopted by the shareholders as per the Companies Act, it is legally permissible to make adjustments before they are finally adopted - After audit had taken place and report of the Auditors was accepted, revised return was filed and it is only in the revised return, the debts to the tune of Rs.2 crores and odd had been declared as bad - The ground taken by the Assessing Authority and Appellate Authority for not accepting the said bad debts during the assessment year under consideration is contrary to the provisions of Section 36 (1) (vii) - Following decision of Kerala State Industrial Development Corporation Ltd. versus Commissioner of Income-Tax 2012 (9) TMI 805 - SUPREME COURT - Decided in favour of Assessee.

Summary

Issues:
1. Whether the assessee can keep accounts open for an indefinite period and pass entries at a later stage after the closure of the accounting period?
2. Whether the claim of bad debts by the assessee, written off in the accounts of the relevant period year, was justified despite the decision not being taken in the previous year?

Analysis:

Issue 1:
The High Court considered whether the Income Tax Appellate Tribunal was correct in allowing the assessee to keep accounts open for an indefinite period and pass entries at a later stage. The Tribunal had permitted the bad debts claimed by the assessee during the Assessment Year 2004-05, despite the revenue's contention that the decision to write off bad debt physically and actually was not taken in the relevant previous year by the assessee. The Court analyzed the provisions of Section 36(1)(vii) of the Income Tax Act, emphasizing that the requirement is to write off bad debt in the accounts 'for the previous year,' not necessarily 'in the previous year.' The Court held that if the accounts of the assessee are open and subject to corrections by auditors, as per the Companies Act, writing off bad debts can be done in those account books, even if they were prepared before the end of the financial year. The Court concluded that there was no legal requirement for the writing off to be done in the previous year itself, and adjustments could be made before the accounts are finally adopted.

Issue 2:
Regarding the second issue, the Court examined the claim of bad debts by the assessee, specifically debts from 1987-88 and 1998-99, which were declared bad in the revised return filed after the audit. The Assessing Authority and the Appellate Authority had rejected these bad debts during the assessment year 2004-05, contending that they should have been written off in the financial year 2004-05 relevant to the Assessment Year 2005-06. However, the Court disagreed with this reasoning, citing the provisions of Section 36(1)(vii) and the interpretation that writing off bad debts in the accounts 'for the previous year' suffices, irrespective of when the decision was taken. The Court referred to a Supreme Court case establishing two conditions for claiming bad debts, both of which were satisfied by the assessee in this case. Consequently, the Court upheld the Tribunal's decision to allow the appeal of the assessee, dismissing both Income Tax Appeals filed by the Revenue.

In conclusion, the High Court ruled in favor of the assessee on both issues, emphasizing the legal provisions and interpretations regarding the writing off of bad debts in the accounts 'for the previous year' and the satisfaction of conditions for claiming bad debts as established by the Supreme Court.