2018 (12) TMI 809 - AT - Income Tax

Disallowance of bad debts u/s 36(1)(vii) r.w.s 36(2) - Held that - No doubt, the assessee claimed write off as bed debt but it is equally true that the assessee did explain the sequence of events which prompted it for the said write off. There is no denying that the assessee does not fulfill the conditions mandated in section 36(2) r.w.s 36(1)(vii). It is equally true that the loss of security deposit is business loss in the revenue field because the said security deposit was given in the ordinary course of business of the assessee and since the assessee had to shift the business premises on the wake of the fire, the write off became imminent because the landlord declined to refund the security deposit. The write off has to be considered in the light of provisions of section 28 r.w..s 37 of the Act. We, accordingly, set aside the findings of the CIT(A) and direct the AO to delete the disallowance - Decided in favour of assessee

Summary

Issues: Disallowance of bad debts u/s 36(1)(vii) r.w.s 36(2) of the Income-tax Act, 1961

Analysis:
The appeal pertains to the disallowance of bad debts amounting to ?8,31,852 under section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961 for the assessment year 2009-10. The assessee, engaged in computer software development export, claimed the bad debts in the return of income, which was selected for scrutiny assessment. The Assessing Officer (AO) observed the claim and sought justification from the assessee. The assessee explained that the bad debts arose from a situation where the business premises were destroyed in a fire, rendering them unusable. The premises were rented, and the advance rent paid could not be recovered due to a dispute with the landlord. The AO disallowed the claim, and the Commissioner of Income Tax (Appeals) upheld the decision.

The assessee contended that the amount in question was a security deposit for the rented premises, and due to the fire incident and subsequent inability to utilize the premises, the request for a refund of the security deposit was declined by the landlord. Consequently, the assessee had to write off the security deposit, which should be considered as a legitimate business expenditure under sections 37 and 28 of the Act. The Assessing Officer's decision was supported by the Departmental Representative.

Upon careful consideration, the Tribunal acknowledged that while the claim was initially presented as bad debts, the circumstances leading to the write-off were explained by the assessee. Although the conditions specified in section 36(2) were not met, the Tribunal recognized the loss of the security deposit as a business loss within the revenue field. The security deposit was made in the ordinary course of business, and the inability to recover it due to the fire incident and subsequent refusal by the landlord justified the write-off. Therefore, the Tribunal set aside the CIT(A)'s findings and directed the AO to delete the disallowance of ?8,31,852.

Consequently, the appeal of the assessee was allowed, and the disallowance of bad debts under section 36(1)(vii) read with section 36(2) was overturned.