2020 (3) TMI 343 - HC - Income Tax

Allowance of bad debts on account of inter corporate debt and advances u/s 36(1)(vii) read with Section 36(2) - assessee company is not a banking company or engaged in the business of money lending? - HELD THAT - Comparing the provision of Section 36(1)(vii), pre 1.4.1989 and post 1.4.1989, Supreme Court held that the position in law has become well settled. After 1.4.1989, it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. This Court in CIT Vs. Shreyas S. Morakhia 2012 (3) TMI 103 - BOMBAY HIGH COURT also considered a claim of share broker assessee to deduction by way of bad debts under Section 36(1)(vii). This Court referred to the decision of the Supreme Court in T.R.F. Ltd (supra) and held that under Section 36(1)(vii) of the Act, the amount of any bad debt or any part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year is to be allowed as deduction in computing income under Section 28 of the Act. Thus, it is a settled position in law that after 1.4.1989, it is not necessary for the assessee to establish or prove that the debt has in fact become irrecoverable but it would be sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee. This is because, as held by this Court, decision to treat a debt as a bad debt is a commercial or business decision of the assessee. Recording of a debt as a bad debt in his books of accounts by the assessee prima facie establishes that it is a bad debt. If the Assessing Officer disputes that the onus would be on him to prove otherwise. Tribunal recorded from the materials on record that admittedly, the debt in question had been written off as irrecoverable in the accounts of the assessee. If that be the position, then there is compliance to the requirement of Section 36(1)(vii) of the Act and the amount covered by the bad debts would be entitled to be deducted vide computing income under Section 28 of the Act. Further, it is not necessary, rather there is no requirement under the Act that the bad debt has to accrue out of income under the same head i.e 'income from business or profession' to be eligible for deduction. This is not a requirement of law. All that is required is that the debt in question must be written off by the assessee in its books of accounts as irrecoverable. - Decided against revenue

Summary

Issues:
Allowance of bad debts by the Tribunal for assessment years 2001-02 and 2003-04 under the Income Tax Act, 1961.

Analysis:
1. The High Court of Bombay heard two Income Tax Appeals concerning the same assessee for the assessment years 2001-02 and 2003-04. The primary issue revolved around the Tribunal's decision to allow bad debts claimed by the assessee, which were initially disallowed by the Assessing Officer and the first appellate authority.

2. The Revenue raised two substantial questions of law challenging the Tribunal's decision. Firstly, whether the Tribunal's order was based on relevant facts for the assessment years, and secondly, whether bad debts on inter corporate debt and advances were wrongly allowed under Section 36(1)(vii) of the Act, despite the assessee not being a banking company or engaged in money lending.

3. The Assessing Officer disallowed the bad debts claimed by the assessee for the assessment year 2001-02, citing that the debts must be incidental to the business and there should be an admitted debt to be allowed as bad debt when written off. The first appellate authority affirmed this decision, leading to the appeal before the Tribunal.

4. The Tribunal, relying on the Supreme Court's decision in T.R.F. Ltd case, held that after 1.4.1989, it was sufficient if bad debts were written off as irrecoverable in the accounts of the assessee, without the need to establish the debt as irrecoverable. The Tribunal set aside the previous decisions and allowed the claim of bad debts, prompting the Revenue's appeal before the High Court.

5. The High Court analyzed the provisions of Section 36(1)(vii) of the Act both before and after 1.4.1989, as interpreted by previous judgments. It reiterated that after the said date, it was not mandatory for the assessee to prove the debt as irrecoverable, but only necessary to write it off as irrecoverable in the accounts.

6. The Court emphasized that the decision to treat a debt as bad debt is a commercial or business decision of the assessee, and once recorded as such, it prima facie establishes it as a bad debt unless proven otherwise by the Assessing Officer. In the present case, the Tribunal found that the debts were written off as irrecoverable, meeting the requirements of Section 36(1)(vii) of the Act.

7. Consequently, the High Court upheld the Tribunal's decision, stating that there was no error or infirmity in allowing the bad debts claimed by the assessee. The appeal filed by the Revenue was dismissed, and no costs were awarded. As a result, Income Tax Appeal No. 1469 of 2017 was also dismissed in line with the decision for the assessment year 2001-02.