2014 (6) TMI 282 - AT - Income Tax

Appellate Tribunal orders reassessment on bad debts, stresses compliance with Income Tax Act

The Appellate Tribunal allowed the Revenue's appeal for statistical purposes, directing the Assessee to provide details related to the bad debts. The case ... Deletion of bad debts u/s 36(2) of the Act – Failure to furnish details - Genuineness of the debts not proved - Held that:- Following CIT vs. Kohli Brothers Colour Lap Pvt. Ltd. [2009 (11) TMI 3 - ALLAHABAD HIGH COURT] - assessee had failed to furnish the information regarding persons with reference to whom bad debt written off was claimed - it is not obligatory on the part of the Assessee to prove that the bad debt written off by the Assessee is indeed a bad debt for purpose of allowance u/s 36(1) (vii) - there is no obligation on the part of the Assessee to prove the debt became bad subject to provisions of Section 36(2) of the Act - Assessee cannot be questioned to demonstrate debt became bad under the amended provision – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Issues:1. Addition of bad debts in the Profit and Loss account for A.Y. 2004-05.2. Justification for claiming bad debt without proving recovery efforts.Analysis:1. The Revenue's appeal challenged the deletion of an addition of Rs. 13,15,969 made by the Assessing Officer on account of bad debts for the relevant assessment year. The Assessing Officer observed that the Assessee had claimed bad debts but failed to provide complete details during the assessment proceedings. The Assessee contended that the debts were written off as irrecoverable, and there was no requirement to prove the debt had become bad. However, the Assessing Officer found discrepancies in the information provided and made the addition based on lack of evidence regarding recovery efforts and the debt becoming bad.2. The CIT(A) allowed the appeal in favor of the Assessee citing a recent decision of the Honorable Supreme Court in the case of TRF Ltd. v. CIT. The Supreme Court held that it was not necessary for the Assessee to establish that the debt had become irrecoverable, but it was sufficient if the bad debt was written off as irrecoverable in the Assessee's accounts. The CIT(A) concluded that the addition made by the Assessing Officer was not justified and deleted the same.3. The Revenue, dissatisfied with the CIT(A)'s decision, argued that the Assessee had not fulfilled the conditions under section 36(2) of the Income Tax Act as the details of the debt were not provided during the assessment proceedings. The Assessee, on the other hand, relied on the Supreme Court decision mentioned earlier and maintained that the only requirement for claiming bad debt was to write it off as irrecoverable in the books of accounts.4. The Appellate Tribunal noted that the details of the debt were not furnished to the Assessing Officer, and the genuineness of the debts was not proven. The Tribunal highlighted the importance of complying with Section 36(2) of the Income Tax Act and the need for corresponding credit entries in the debtors' accounts after writing off bad debts. Referring to a case law, the Tribunal emphasized that it was not obligatory for the Assessee to prove that the bad debt written off was indeed bad for the purpose of allowance under Section 36(1)(vii).5. Consequently, the Tribunal allowed the Revenue's appeal for statistical purposes and directed the Assessee to provide the necessary details of the parties related to the bad debts. The case was remanded back to the Assessing Officer for a fresh examination of the facts in light of the legal provisions and the Supreme Court's decision.