Successor Inherits Rights to Write Off Bad Debts: Precedent Upheld

The appeal by the revenue challenging the disallowance of bad debts written off by the assessee for the assessment year 2007-08 was dismissed. The Commissioner of Income Tax (Appeals) allowed the write-off based on precedent, stating that debts acquired from the holding company could be treated similarly in the hands of the successor. The Supreme Court's ruling emphasized that the successor should have the same rights as the original owner regarding bad debts, leading to the allowance of the write-off. The High Court upheld the decision, noting that no substantial question of law arose for consideration.

---

---

Issues:
1. Disallowance of bad debts written off by the assessing officer.
2. Entitlement to write off bad debts acquired from a holding company.
3. Requirement of evidence to show debts had become bad.

Issue 1: Disallowance of Bad Debts:
The appeal by the revenue challenged the disallowance of Rs. 3,63,31,532/- as bad debts written off by the assessee for the assessment year 2007-08. The assessing officer contended that the bad debts related to the period when the web portals were operated by the holding company, contravening section 36(1)(vii) of the Income-tax Act, 1961. The Commissioner of Income Tax (Appeals) allowed the write-off based on the decision in CIT v. Veerabhadra Rao, stating that debts acquired from the holding company could be treated similarly in the hands of the successor.

Issue 2: Entitlement to Write Off Bad Debts:
The Commissioner of Income Tax (Appeals) relied on the Supreme Court decision in CIT v. Veerabhadra Rao, emphasizing that after a business transfer, the successor should have the same rights as the original owner regarding bad debts. The Supreme Court's ruling established that if the original owner could write off bad debts, the successor acquiring the assets and liabilities should also be entitled to the same treatment. Consequently, the appeal of the assessee was allowed, permitting the write-off of bad debts.

Issue 3: Requirement of Evidence for Bad Debts:
The revenue raised a point before the Commissioner of Income Tax (Appeals) and later before the High Court regarding the necessity of evidence to prove that the debts had indeed become bad. However, the Commissioner of Income Tax (Appeals) referenced the Supreme Court decision in T.R.F. Limited v. CIT, which stated that post the amendment effective from 01.04.1989, it was not mandatory for the assessee to demonstrate the irrecoverability of the debt. The Supreme Court clarified that it sufficed if the bad debts were written off as irrecoverable in the accounts of the assessee. In this case, the assessee had properly reflected the bad debts as irrecoverable in its accounts. The High Court found no fault in the decisions of the lower authorities and dismissed the appeal, stating that no question of law, let alone a substantial one, arose for consideration.

---