2016 (2) TMI 628 - AT - Income Tax

Disallowance u/s 36(1) - denial of claim of bad debts - Held that - We are of the view that assessee has complied with the requirement of the provisions of Section 36(1)(vii) of the Act and therefore the amount is allowable as deduction as bad debts and therefore we direct the A.O. to allow the same. - Decided in favour of assessee

Summary

Issues: Appeal against order of CIT(A)-VI for A.Y. 2006-07 regarding disallowance of bad debts and prior period expenses.

Analysis:
1. The appeal filed by the Assessee was against the order of CIT(A)-VI for A.Y. 2006-07. The Assessee, a company engaged in textiles, declared nil income in its return. The assessment under section 143(3) determined the total income at Rs. Nil after disallowing bad debts and prior period expenses. The Assessee's appeal was dismissed by CIT(A), leading to the current appeal.

2. The first ground raised by the Assessee was the CIT(A)'s order being bad in law for not considering the facts of the case. The second ground was the disallowance of the claim for deduction of bad debts. The third ground related to the disallowance of Prior Period Expenditure. The Assessee withdrew the third ground due to the small amount involved.

3. The issue of bad debts arose when the Assessee claimed bad debts of &8377;34,27,583. The Assessing Officer (A.O) disallowed the claim, stating that the debts were not written off in the accounts of debtors and not demonstrated as bad. The CIT(A) upheld the disallowance based on non-compliance with the requirement to write off debts in the accounts of debtors.

4. The Assessee argued that the bad debts were written off in the Profit and Loss account, complying with Section 36(1)(vii) requirements. The Assessee cited relevant court decisions to support their claim. The A.O and CIT(A) maintained their disallowance stance, requiring the Assessee to establish the debts as bad for deduction.

5. The ITAT, after considering the submissions and relevant case laws, held in favor of the Assessee. They noted that the Assessee had indeed written off bad debts in the Profit & Loss account, meeting the legal requirements post-1989. Citing precedents, including the TRF Ltd. case, the ITAT directed the A.O to allow the deduction for bad debts. The appeal was partly allowed based on this decision.

6. The judgment highlighted the importance of complying with legal provisions and established case laws in determining the allowability of bad debts. The Assessee's compliance with the law and relevant court decisions led to a favorable outcome in this case.