2019 (2) TMI 331 - HC - Income Tax

Disallowance u/s 36(1)(vii) and the other u/s 37 - dis-allowance of bad debts especially when the assessee had not taken any steps to recover the said debts and had merely stated it to be bad debts which were again receivable from a subsidiary company - Held that - As the words existing prior to 01.04.1989, there as an obligation on the assessee to establish the bad debt claimed for the previous year, whereas by the amendment any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year is eligible for deduction. Hence, the legislature has cautiously left it to the prudence of the assessee to determine whether the debt is bad or not. We see that the Tribunal has looked at the financial figures as available in the previous year of the assessee-company as also the subsidiary company. The subsidiary company was in absolute financial stringency and there was no possibility of any recovery from that company. We do not see any question of law arising from the aforesaid issue, since the Tribunal had looked into the facts and found that the claim of bad debts cannot be said to be one which is made merely for absolving the tax liability. The financial figures on the subject year of the assessee-company and the subsidiary company commend such declaration of bad debts. We also do not agree with the AO s finding that the advance amounts was in pursuance of a financial transaction. The assessee had made the advance to the subsidiary company for execution of job works, which is permissible under Section 37. - Decided in favour of the assessee

Summary

Issues:
1. Disallowance under Section 36(1)(vii) of the Income Tax Act, 1961.
2. Disallowance under Section 37 of the Income Tax Act, 1961.

Analysis:
1. The first issue revolves around the disallowance made under Section 36(1)(vii) of the Income Tax Act, 1961, concerning bad debts. The Tribunal reversed the disallowance, prompting the Revenue to appeal. The main contention was whether the Tribunal had the authority to reverse the disallowance when the assessee had not taken any steps to recover the bad debts, merely declaring them as such. The Assessing Officer found no business expediency in declaring the debt as bad and noted the continuous relationship between the assessee and the subsidiary company, questioning the existence of bad debt. The Tribunal considered the amendments by the Finance Act and the financial circumstances of both companies. Ultimately, the Court upheld the Tribunal's decision, emphasizing the prudence of the assessee in determining bad debts and the financial constraints of the subsidiary company.

2. The second issue pertains to the disallowance under Section 37 of the Income Tax Act, 1961, amounting to ?17,37,048. The Revenue denied the claim, arguing that the assessee was not engaged in money lending and had no grounds for the advance. However, the Tribunal reversed the disallowance. The Senior Counsel for the Government of India contended that the assessee should have taken recovery proceedings before declaring bad debts and that the advance could not be claimed under Section 37. Conversely, the assessee's Counsel argued that the subsidiary company's financial distress led to the bad debts declaration, and the advances were for specific job works, not financial assistance. The Court agreed with the assessee, stating that the advances were permissible under Section 37 and that the financial circumstances justified the bad debts declaration.

In conclusion, the High Court of Kerala upheld the Tribunal's decision, dismissing the Revenue's appeal and ruling in favor of the assessee. The Court found no legal issues with the Tribunal's assessments regarding the bad debts and advances, emphasizing the prudence of the assessee's actions and the financial constraints faced by the subsidiary company.