2016 (5) TMI 239 - AT - Income Tax

Disallowance of bad debts - Held that - Section 36(1)(vii) was amended w.e.f. 1.4.1989 and as per the amended provision of clause (vii) of section 36(1) of the Act subject to the provisions of sub-section (2) of section 36 the amount of any bad debts or part thereof which is written off as bad debts as irrecoverable in the accounts of the assessee the provisions shall be allowed. Hence the basis of disallowance adopted by the AO is perverse and misconceived and against the letters and spirit of relevant provisions of section 36(1)(vii) of the Act which is not sustainable and the same was rightly dismissed by the ld. CIT(A). In the light of the proposition laid down in the case of TRF Limited 2010 (2) TMI 211 - SUPREME COURT the claim of the assessee pertaining to bad debts the ld. CIT(A) was correct in granting relief to the assessee as the assessee had written off the claimed amount in bad debts in its books of account during the previous year and there was no requirement to establish this fact that the debts have become bad debts in the previous year after 1.4.1989 there was no requirement to show and efforts of recovery and to establish that the debts have become debts despite of sincere and all possible efforts of the assessee. - Decided in favour of assessee

Summary

Issues:
Addition of bad debts - Disallowance by AO and deletion by CIT(A)

Analysis:
The appeal before the Appellate Tribunal ITAT Delhi involved the Revenue challenging the deletion of an addition of Rs. 2,80,82,006 made by the Assessing Officer (AO) on account of bad debts, which was subsequently deleted by the Commissioner of Income Tax (Appeals) [CIT(A)]. The case pertained to the assessment year 2010-11. The AO disallowed the bad debts claimed by the assessee, stating that no efforts were made to recover them. However, the CIT(A) allowed the appeal of the assessee by deleting the addition. The Revenue contended that such a huge amount as bad debts cannot be allowed when no recovery efforts were made. On the other hand, the assessee relied on legal precedents to argue that writing off bad debts in the accounts is sufficient, and no further proof of irrecoverability is required post-1.4.1989.

The Tribunal carefully considered the arguments presented by both sides. The Revenue emphasized the lack of recovery efforts by the assessee, while the assessee relied on legal judgments to support the write-off of bad debts in the books of accounts. The CIT(A) had granted relief to the assessee based on the arguments and evidence provided. The Tribunal observed that the AO failed to establish contrary evidence to the claim of bad debts made by the appellant. Furthermore, the Tribunal noted that post-1.4.1989, it is not necessary for the assessee to prove the debts have become irrecoverable; rather, writing off in the accounts is sufficient.

The Tribunal referred to the amendment in Section 36(1)(vii) of the Income-tax Act, 1961, effective from 1.4.1989, which allows the write-off of bad debts as irrecoverable in the accounts of the assessee. The Tribunal found the basis of disallowance adopted by the AO to be misconceived and against the provisions of the Act. It upheld the decision of the CIT(A) to grant relief to the assessee, as the write-off of bad debts in the books of account sufficed post the specified date. Therefore, the Tribunal dismissed the appeal of the Revenue, affirming the decision of the CIT(A) to delete the addition of bad debts.

In conclusion, the Tribunal upheld the decision of the CIT(A) and dismissed the appeal of the Revenue, emphasizing that the write-off of bad debts in the accounts was in compliance with the relevant legal provisions post-1.4.1989. The judgment was pronounced on 18.03.2016 by the Tribunal.