2022 (10) TMI 907 - HC - Income Tax

Additions for recovery of bad debts u/s 41 - As per appellant as recovered the bad debts of the companies, which got amalgamated with the appellant company, and, therefore, they are not taxable in the hands of the appellant and that the appellant was not the assessee for the purpose under Section 41 - whether the bad debt recovered by the appellant, which was written off by the amalgamating company, which got amalgamated, can be taxed in the hands of the appellant or not ? - HELD THAT - Section 41 has to be considered as a complete Code by itself, as far as profit is chargeable to tax. Section 41 (1) cannot be read in isolation with Section 41 (4). The assessment contemplated under Section 41 (1) is the same as the assessment contemplated under Section 41 (4). Therefore, merely because there is no corresponding amendment in sub-clause (4), it would not mean that the provisions of Section 41 (1) will not apply. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, it is difficult to accept that the same right should not be recognised in the transferee. We are of the view that the order of the Appellate Tribunal, confirming the order of the lower authority, is well reasoned and it requires no interference. Decided against assessee.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal disallowing claim for protection under Section 41 of the Income Tax Act, 1961 for Assessment Years 2004-05 and 2005-06.

Analysis:
1. The appellant contested the Income Tax Appellate Tribunal's order disallowing the claim for protection under Section 41 of the Income Tax Act, 1961. The appellant argued that the recovered bad debts of amalgamated companies should not be taxable in their hands as they were not the assessee for the purpose under Section 41 of the Act. The appellant relied on precedents like Commissioner of Income Tax v. P.K.Kaimal and Saraswathi Industrial Syndicate Ltd. to support their case.

2. The appellant highlighted that despite attempts to amend Section 41 of the Act post the decision in Saraswathi Industrial Syndicate Ltd., there was no corresponding amendment to sub-clause (4) of Section 41. Therefore, they argued that the bad debts recovered by the appellant, which belonged to the amalgamated companies, should not be taxed. The Revenue opposed the appeals, stating that the orders of the Assessing Officer and the Appellate Tribunal were well-reasoned and should not be interfered with.

3. The Revenue argued that the decisions cited by the appellant pre-date the amendment to Section 41 of the Act by the Finance Act, 1992. The court noted that Section 41 should be considered a complete Code by itself regarding taxable profits. It emphasized that Section 41(1) should not be read in isolation with Section 41(4) and that both sections should be considered together for assessment purposes.

4. The court deliberated on whether the bad debt recovered by the appellant, previously written off by the amalgamating company, could be taxed in the appellant's hands. It concluded that the right to claim a deduction for irrecoverable debts should be recognized in the transferee, as the law allows the transferor to do so. Therefore, the court upheld the order of the Appellate Tribunal, dismissing the appeals and ruling against the appellant on the substantial questions of law raised.

5. In the final judgment, the court held that the order of the Appellate Tribunal, which affirmed the decision of the lower authority, was well-reasoned and required no interference. Consequently, the court answered the substantial questions of law against the appellant and dismissed the appeals without costs.