2023 (4) TMI 738 - AT - Income Tax

Addition of bad debts / debts written off u/s 37 - pre-condition to claim any amount of bad debts on revenue account - As per the AO, the amount has never been taken into account in computing the income of previous year in which such debt or part has become irrecoverable, so he disallowed the same - HELD THAT - We note that assessee has credited brokerage into income and the total bad debt in this year includes brokerage and part of the amount of transaction owe to the assessee. We note that Hon ble Delhi High Court in the case of CIT vs. Bonanza Portfolio Ltd. 2009 (8) TMI 636 - DELHI HIGH COURT hold that the money receivable from the client has to be treated as debt and since it became bad, it was rightly considered as bad debt and claimed as such by the assessee in the books of account. Since this bad debt occurred in the year in question, it was shown by the assessee in that manner. Since the brokerage payable by the client is a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in sub-section (2) of section 36 read with section 36(1 )(vii) stand satisfied in this case. Thus when the debt included brokerage and amount receivable otherwise, Hon ble High Court has expounded if the entire debt becomes bad the same is allowable as bad debt. Decide the issue in favour of the assessee.

Summary

Issues:
The appeal challenges the order of the ld. CIT (Appeals)-27, New Delhi for AY 2016-17 regarding the addition made by the Assessing Officer on account of bad debts / debts written off u/s 37 of the Income Tax Act.

Summary:

Issue 1: Addition made on account of bad debts
The assessee, a company engaged in brokerage services, faced a situation where a client's trading activities led to a substantial unrecovered debt. The Assessing Officer disallowed the claim of bad debts, stating it was not considered in previous income calculations. The CIT (A) upheld this decision. However, the assessee argued that the entire bad debt should be allowable as it included brokerage amounts, citing a Delhi High Court case. The Tribunal, following the precedent, allowed the appeal, emphasizing that when the debt comprises brokerage and other amounts, the entire debt can be treated as bad debt.

In conclusion, the Tribunal allowed the appeal, setting aside the decisions of the lower authorities and ruling in favor of the assessee based on the interpretation of relevant legal provisions and precedents.

End of Summary