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TMI Blog2022 (7) TMI 963X X X X Extracts X X X X X X X X Extracts X X X X ..... id amounts to the suppliers of the equipment on behalf of the lessee. The first installment of the lease amount was received by the assessee. Further installments due were also accounted for in view of the mercantile system of accounting followed by the assessee. The depreciation was also claimed by the assessee on the equipment which was not disallowed by the AO. The legal dispute between the assessee and the lessee was pending in the Bombay High Court. It is recorded in the order of the Commissioner of Appeals that the lessee company had become a sick company. Obviously, the prospects of recovery of lease rentals were quite bleak and the assessee considering that the same could not be recovered in the foreseeable future decided to write off a debt as bad debt during the previous year relevant to the Assessment Year 1991-92. It is nobody s case that the assessee had not complied with the provisions of Section 36(2) - The assessee took a business decision to write off the debt as a bad debt. Wise businessman would not want to spend good money in litigating for a bad bargain especially in the light of the facts noted above. Having taken the commercial decision to write off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w framed in this Appeal is accordingly answered in favour of the Appellant Assessee - INCOME TAX APPEAL NO. 70 OF 2004 - - - Dated:- 18-7-2022 - DHIRAJ SINGH THAKUR ABHAY AHUJA, JJ. Ms. Dinkle Hariya a/w Ms.Rashmi Vyas i/b. Mr.Vipul B. Joshi for the Appellant. Mr. Vikas T. Khanchandani for the Respondent. JUDGMENT : (PER ABHAY AHUJA, J.) 1. This is an Appeal, filed under Section 260A of the Income Tax Act, 1961 ( the Act ) by M/s. L.K.P. Merchant Financing Ltd., being aggrieved by an order dated 28th July, 2003, passed by the Income Tax Appellate Tribunal, Mumbai in Income Tax Appeal No.5403/M/97 for Assessment Year 1991-92. 2. The Appeal came to be admitted on 29th November, 2004 on the following substantial question of law: Whether, in the facts and circumstances of the case and in law, the order of the Tribunal confirming the action of the Assessing Officer in rejecting the claim of the appellant for deduction of bad debt written off u/s. 36(i) (vii) of the Act, is bad in law? 3. The Appellant statedly is a Public Limited Company registered as a Non Banking Finance Company engaged in the business inter alia of lease finance. 4. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndency of the dispute of the assessee before the High Court, the assessee had not foregone its right to claim the lease rentals and that the write off was premature. 8. The assessee filed an Appeal before the Commissioner of Income Tax (Appeals) and vide order dated 21st May, 1997, the Commissioner of Income Tax (Appeals) partly allowed the Appeal of the assessee directing the Assessing Officer to allow deduction of an amount of Rs.20,69,805/- to be written off by the assessee in its books of account for the Assessment Year 1991-92 observing that the lease rentals offered as income on mercantile basis can be definitely said to have become bad from the business point of view of the assessee and the assessee s subsisting right to recover the amount and the pendency of the matter before the High Court were not valid grounds to postpone writing off of the amounts in question which had been offered for taxation in the earlier years. 9. Aggrieved by the said order, the Revenue carried the order of the Commissioner of Income - Tax (Appeals) II, Mumbai in appeal, before the Income Tax Appellate Tribunal, Mumbai. The Income Tax Appellate Tribunal allowed the Revenue s Appeal and rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be seen from the language of the said provision. In support of his contention, learned Standing Counsel refers to a decision of this Court in the case of Director of Income Tax V/s. Oman International Bank SOAG [2009(5) Bom.C.R.416]. He however fairly states that notwithstanding the aforesaid objection, the requirement of Section 36(1)(vii) of the Act after the amendment only requires the writing off of the bad debt as irrecoverable as it is not necessary for the assessee to establish that in fact the debt has become irrecoverable. 13. We have heard Ms.Dinkle Hariya, learned Counsel for the Appellant and Mr.Vikas Khanchandani learned Standing Counsel for the Revenue and with their able assistance, we have perused the papers and proceedings in the matter. 14. Facts being undisputed, the only issue that arises for our consideration is whether the Tribunal was right in rejecting the claim of the assessee for deduction of bad debt written off under Section 36 (1)(vii) of the Act. 15. Section 36(1)(vii) of the Act is quoted as under: Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Commissioner of Income-tax (supra) is apt and is quoted as under: 4. This position in law is 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. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off. 17. This Court in the case of Director of Income Tax V/s. Oman International Bank SOAG (supra) had the occasion to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad debt and not any debt . The consequences of the amendment are mainly three: (ii) The assessee cannot arbitrarily, irrationally or mala fide treat a good debt as bad write it off in his accounts., (iii) Where the assessee has acted bona fide and reasonable, the Assessing Officer cannot substitute his own subjective judgment, but must accept the assessee s decision, as to the quality of the debt. (iv) The assessee is not obliged to write off and claim the debt in the very year in which it becomes bad. He can write it off and claim it in a subsequent year in which the debt continues to remain bad. 11. All this would indicate that when the assessee treats the debt as a bad debt in his books the decision which has to be a business ors commercial decision and not whimsical or fanciful. The decision must be based on material that the debt is not recoverable. The decision must be bona fide. The difference between the position, pre-amendment and post amendment would be that the burden is no longer on the assessee and can be claimed in the year it is written off in the books of account irrecoverable. The A.O. if he is to disallow the debt as a bad debt must arrive at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tigating for a bad bargain especially in the light of the facts noted above. Having taken the commercial decision to write off the debt as a bad debt based on the material, cannot lead to a conclusion that the decision was not bona fide. The lease rentals of Rs.20,69,805.30/- offered as income by the Appellant on mercantile basis had become bad and the Appellant decided to write it off and did write off the same in its books of accounts in the previous year in relation to A.Y. 1991-92 in terms of the amended Section 36(1) (vii). In our view, no fault can be found with the same. 20. Coming to the issue of reversal of lease rentals totaling to Rs.20.69 lakhs, that may be a change of the method of accounting by the assessee from mercantile to cash and may even be a breach of the accounting principles. However, that in our view is not a requirement of Section 36(1)(vii) of the Income Tax Act for allowing a debt as a bad debt. In fact, what emerges from Note-5 of making a special mention is that a prudent practice has been adopted by a limited company of informing its shareholders about the remote possibility of recovery of the said amounts and the decision to reverse and that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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