Court Dismisses Revenue Appeal on Bad Debt Deduction Criteria (1)(vii)

The appeal filed by Revenue challenging the deletion of an addition of Rs. 14,00,000 representing bad debts written off was dismissed. The Court found that the conditions under section 36(1)(vii) for claiming bad debt deduction were fulfilled, including the debt being in respect of the business carried on by the assessee and becoming bad. The Court accepted that claiming bad debt in the year it became bad is not mandatory and can be done in later years. Citing precedent, the Court held that amounts not recoverable and written off in money lending business are allowable as bad debts, leading to the dismissal of the appeal.

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Issues involved: Appeal filed by Revenue regarding deletion of addition of Rs. 14,00,000 representing bad debts written off without specific finding on nature of loan and income, fulfillment of conditions u/s 36(1)(vii) for claiming bad debt deduction, acceptance of money lending business by AO, and applicability of precedent regarding claiming bad debt in later years.

1. Deletion of addition of bad debts:
The appeal was filed by Revenue challenging the deletion of an addition of Rs. 14,00,000 representing bad debts written off without a specific finding on the nature of the loan and any income derived from it. The Tribunal was approached by the Revenue after an order passed by the CIT(A) regarding the bad debts written off during the relevant previous year. The facts revealed that the amount was outstanding in the account of a borrower and was written off as unrecoverable. Despite efforts, including legal action against the borrower, the amount could not be recovered, leading to the decision to write off the debt as bad.

2. Fulfillment of conditions u/s 36(1)(vii) for claiming bad debt deduction:
The conditions mentioned in section 36(1)(vii) were found to be fulfilled by the assessee for claiming the bad debt in the return of income for the assessment year 2005-06. The AO disallowed the claim initially due to the absence of a certified copy of the order of the Metropolitan Magistrate. However, the CIT(A) accepted the position that the conditions for claiming the bad debt deduction had been met, including the debt being in respect of the business carried on by the assessee, the debt becoming bad, and the amount being written off as irrecoverable in the accounts for the relevant accounting year.

3. Acceptance of money lending business by AO:
It was acknowledged by the AO that the assessee was engaged in the business of money lending, which was not disputed. The Madhya Pradesh High Court precedent highlighted that claiming bad debt in the year it became bad is not mandatory, and it can be claimed in a later year when written off in the books of accounts. This position was further supported by a circular issued by the CBDT.

4. Applicability of precedent regarding claiming bad debt in later years:
In line with the precedent set by the Hon'ble Supreme Court in the case of CIT vs. Pandit Lakshmi Kant Jha, where it was held that in money lending business, amounts not recoverable and written off are allowable as bad debts, the Court found no irregularity or substantial question of law to admit the appeal. Consequently, the appeal was dismissed.

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