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TMI Blog2005 (2) TMI 745X X X X Extracts X X X X X X X X Extracts X X X X ..... ,598 (being business debt) be allowed under section 28 of the Income-tax Act." 2. Rival contentions have been heard and record perused. In the course of assessment under section 143(3), the Assessing Officer observed that the assessee has claimed a sum of Rs. 13,23,598 as bad debts in the Profit Loss Account. This amount pertains to loans and advances made to Chintan Poly Yarns Pvt. Ltd. Since the assessee is not a scheduled/non-scheduled bank, public financial institutions, State Financial Corporation or State Industrial Investment Corporation, the amount given as loans and advances should not be written off as that of bad debts. 3. The Assessing Officer observed that as per the provision of section 36(2)( i ) the assessee is entitled to claim bad debts only when the amount subsequently accounted for as income in any of earlier year or during the previous year in which such account has been written off. Since this amount has not been accounted for as income in any of the earlier years, the assessee is not eligible for deduction under section 36(1)( vii ) read with section 36(2) of the Income-tax Act. 4. The Assessing Officer further observed that in the balance sheet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us years. He further submitted that assessee has taken all the steps for recovery of debts and even filed civil suit in the court of law and nothing was materialized and therefore, the assessee was compelled to write off of amount for which proper entry was passed in the books of account, which is pre-requisite for claiming deduction under section 36(1)( vii ) of the Income-tax Act. 9. On the other hand, the learned DR vehemently argued that the lower authorities were justified in disallowing assessee s claim for bad debts, insofar as the deduction claimed under section 36(1)( vii ) is subject to provision of section 36(2) which clearly stipulates that no such deductions can be allowed unless the said debt or part thereof have been taken into account in computing income of the assessee of the previous year in which the account of such debt or part thereof is written off or of a earlier previous year. He submitted that this amount of advance had never been accounted for by the assessee in the income of any of the previous year, and, therefore, the lower authorities perfectly justified in declining the assessee s claim for bad debts in view of provisions of section 36(2)( i ). As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the CIT(A) has attained finality. Now only grievance of the Assessing Officer which remains for disallowance of the assessee s claim of bad debt is that as per the provisions of section 36(2)( i ), the amount of debt has not been accounted for as income in the previous year. In respect of these observations of the Assessing Officer, the CIT(A) hold that the department has accepted the financing activity in the assessee s case and has taxed the financial charges as business income in the past. However, ultimately, the CIT(A) has confirmed the disallowance on the plea that during the accounting year itself, some of the amount was recovered by the assessee which means, the amount which was claimed as bad debts is recovered and since the claim of bad debts is against the actual nature of bad debts, the claim of the assessee is not acceptable. He further stated that for a running account, write off cannot be made. 11. Thus, it is clear from the order of the CIT(A) that he has confirmed disallowance only on the ground that outstanding debt debited to the profit loss account was not actually bad during the year in view of some of the amounts received by the assessee pertaining to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 36(2)( i ) that in the case of assessee engaged in money-lending business, the deduction shall be allowed if the amount of debt represents the money lend in the ordinary course of business of money-lending carried on by the assessee. We, therefore, do not find any merits in the action of the lower authorities for declining the assessee s claim for bad debts in respect of money advanced in the course of its money-lending business, the financing income arisen out of which have already been found and accepted by the department to be credited to the profit loss account as its business income in the earlier years and offered for taxation. 13. Going to the Assessing Officer s observation regarding the amount of debt not having become bad in view of part of the amount having been received during the year under consideration. Here, it is pertinent to note that the provisions of section 36(1)( vii ) have been amended by the Finance Act, 1987 with effect from 1-4-1989. Before the amendment the words used were "any debt or part thereof, which is established to have become a bad debt in the previous year". The words "any bad debts or part thereof which is written off as irrevoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nserted, the assessee to prove that debt has become bad during the relevant previous year. If the assessee prudently decided as a businessman that there is no hope of realization of the debt and decided to write off, would be sufficient compliance for claiming deduction under section 36(1)( vii ). It is pertinent to mention here that in various judgments, it has been held that even filing of the suit also not necessary to claim debt as bad debts. 14. For this purpose, reliance may be placed on the judgment of Hon ble Calcutta High Court in A.W. Figgis Co. (P.) Ltd. v. CIT [2002] 254 ITR 63 , ITAT order Presswell Engg. Works v. ITO [1983] 17 TTJ (Bom.) 204, Shriram Pistons Rings Ltd. v. Inspecting Asstt. Commissioner [1991] 39 TTJ (Delhi) 132 and ITO v. Vigyan Chemical Industries [1991] 40 TTJ (Delhi) 81. Similarly it has been held in various cases that pendency of suit or legal proceedings does not disentitle the assessee to claim bad debts as has been held in ITAT orders at Hindustan Commercial Bank Ltd. v. ITO [1983] 16 TTJ (All.) 65, V.D. Swami Co. Ltd. v. Dy. CIT [1993] 44 ITD 91 (Mad.) and Sutlaj Cotton Mills Ltd. v. Asstt. CIT [1998] 96 T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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