2022 (7) TMI 1163 - HC - Income Tax

Deduction on account of bad debts - amounts claimed as bad debts had been taken into account in computing the income of the Assessee in the previous year and offered for taxation and the unrecovered amounts had been written off in the books of account - HELD THAT - This Court is of the view that Section 36(1)(vii) r/w Section 36(2) of the Act provides that in order to claim deduction on account of bad debts, two conditions have to be met by the Assessee i.e. (i) the bad debts must have been taken into account in computing the income of the Assessee of previous year or of an earlier/previous year and; (ii) the bad debts should have been written off in the accounts of the Assessee. In the present case, CIT(A) has given a finding of fact that the amounts claimed as bad debts had been taken into account in computing the income of the Assessee in the previous year and offered for taxation and the unrecovered amounts had been written off in the books of account and, consequently, the claim of the Assessee was duly allowable. This Court is also in agreement with the contention of learned counsel for the Respondent that as M/s Max New York Life Insurance Company had considered Respondent s invoices as not payable , the amount claimed as bad debts by the Appellant was legal and justified. In any event, in the appeal filed by the Department, it has not been averred that the Respondent has received any payment from M/s Max New York Life Insurance Company against the alleged bad debts in the last seven Assessment Years.

Summary

Issues:
Challenge to ITAT order on bad debts written off.

Analysis:
The appeal was filed to challenge the ITAT order dated 04th July 2019 regarding the addition of Rs.4,07,53,938 made by the Assessing Officer on account of bad debts written off and seeking restoration of the Assessing Officer's order. The Appellant argued that the debtor, M/s Max New York Life Insurance Company, had shown the amount as a liability in its books of accounts and that the Respondent had not closed the account of the company. The Appellant relied on the Remand Report filed by the Assessing Officer before the CIT(A) to support their contention.

The Respondent, on the other hand, stated that business transactions with M/s Max New York Life Insurance Company were limited to the Financial Year 2007-08 and 2008-09, and no further transactions took place thereafter. The Respondent emphasized that the Assessee company had not entered into any transactions with M/s Max New York Life Insurance Company following the mentioned years. The Respondent relied on submissions filed before the CIT(A) to support their argument.

The Court examined the provisions of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, which require two conditions to be met by the Assessee to claim deduction for bad debts. These conditions are that the bad debts must have been taken into account in computing the Assessee's income of the previous year or an earlier year, and the bad debts should have been written off in the Assessee's accounts. The CIT(A) found that the amounts claimed as bad debts had been considered in computing the Assessee's income in the previous year and had been written off in the books of account, making the claim allowable.

The Court agreed with the Respondent's argument that since M/s Max New York Life Insurance Company considered the Appellant's invoices as 'not payable', the amount claimed as bad debts was justified. Additionally, it was noted that the Department did not allege that the Respondent had received any payment against the alleged bad debts in the last seven Assessment Years. Consequently, the Court dismissed the appeal, affirming the decision regarding the bad debts written off.