2017 (7) TMI 955 - HC - Income Tax

Deduction on account of bad debts u/s 36 (1) disallowed - Held that - The Supreme Court in TRF Limited Vs. Commissioner of Income Tax (2010 (2) TMI 211 - SUPREME COURT) has ruled that for claiming deduction under Section 36 (1) (vii) of the Act the appellant assessee has only to establish that the bad debts were written off and it is not necessary to establish that the debts have become irrecoverable. The appellant assessee for the assessment year 2010-11 pursuant to the resolution of the Board of Directors of the Company taken during the financial year 2009-10 has actually written off the amount of ₹ 4520.19 lacs as bad debts. In other words, when a conscious decision is taken on consideration of the various factors that particular amount has become unrecoverable that is sufficient enough to write off the same as bad debt even though for some reason it may subsequently be recovered. That being the position, we are of the opinion that the tribunal has taken a very casual approach in dismissing the appeal of the assessee appeal on the above score by refusing to allow deduction under Section 36 (1) (vii) of the Act. Accordingly, we answer the above question in favour of the assessee

Summary

Issues:
Deduction of bad debts under Section 36(1)(vii) of the Income Tax Act, 1961 for the assessment year 2010-11.

Analysis:
The appellant assessee claimed a deduction on account of bad debts under Section 36(1)(vii) of the Income Tax Act, 1961, for the assessment year 2010-11. The amount in question was &8377; 4,520.19 lacs. However, the deduction was disallowed by the assessing officer, CIT (Appeals), and the tribunal, leading to the appeal before the High Court.

The appellant assessee, engaged in manufacturing and dealing with Pumps and Compressors, faced situations where customers only partially paid for goods supplied due to alleged defects. A Committee was formed to assess unrecoverable bad debts, resulting in the write-off of &8377; 4,520.19 lacs during the financial year 2009-10. Despite providing evidence and explanations, the tribunal disallowed the deduction, citing improper write-off in the books of accounts.

The central question raised in the appeal was whether the tribunal was justified in denying the deduction under Section 36(1)(vii) of the Act, and if its order was flawed due to non-consideration of relevant evidence. Section 36(1)(vii) allows deduction for bad debts written off as irrecoverable, provided the specified conditions are met.

The High Court referred to relevant Supreme Court judgments, emphasizing that the mere provision of bad debt is insufficient post-April 1989 unless the debts are actually written off in the account books. It was clarified that establishing irrecoverability is not a prerequisite for claiming deduction under Section 36(1)(vii).

The High Court found that the appellant had validly written off the bad debts based on a conscious decision by the Board of Directors, indicating unrecoverability. Criticizing the tribunal's dismissal of the appeal, the High Court held that the refusal to allow the deduction was unjustified. Consequently, the High Court ruled in favor of the assessee, setting aside the tribunal's order and directing a fresh consideration of the appeal on its merits in accordance with the law.

In conclusion, the High Court allowed the appeal, emphasizing the importance of proper consideration of evidence and compliance with legal provisions regarding the deduction of bad debts under Section 36(1)(vii) of the Income Tax Act, 1961.