2015 (4) TMI 1257 - AT - Income Tax

Appeal Partially Allowed, Emphasizing Autonomy in Bad Debts Write-Off

The Tribunal partially allowed the appeal, emphasizing the importance of verifying the bad debts written off by the appellant. The judgment highlighted ... Disallowance of bad debts written off - Held that:- Now it is quite settled law that, if the bad debts has been written off in the books of account, then it is not necessary for the assessee to establish that debt has become irrecoverable. It is the decision of the assessee to write off the bad debt as irrecoverable in the accounts of the assessee. This proposition has been quite settled in the case of TRF Ltd. Vs. CIT [2010 (2) TMI 211 - SUPREME COURT] and catena of other decisions. However, from the perusal of the order of the appellate order, it is seen that, Ld. CIT(A) has made on observations that assessee has not written off the bad debts in the account of M/s. Kiraj Consultants Pvt. Ltd. and in its books of account. Learned counsel has filed a copy of general ledger account and also the parties account of M/s. Kiraj Consultants Pvt. Ltd., wherein it has been clearly shown that amount of ₹ 2,61,09,809/- has been transferred to bad debts. Even in the P&L Account, in schedule 12 the bad debts written off [net of provisions] have been shown. Thus, this matter needs verification from the end of the AO to see, whether the bad debts has in fact been written off in accounts of the assessee or not - Appeal filed by the Assessee is partly allowed for statistical purposes. Issues: Disallowance of bad debts, disallowance of business loss, adjudication of additional ground of appeal.Analysis:1. Disallowance of Bad Debts: The appellant, a share broker, claimed a deduction for bad debts amounting to Rs. 2,61,09,809 written off during the year under Section 36(1)(vii) read with Section 36(2) of the Income-tax Act, 1961. The Assessing Officer (AO) observed a debit balance in the ledger account of a subbroker, M/s. Kiraj Consultants Pvt. Ltd., which the appellant claimed as bad debt. The AO contended that the appellant did not take necessary steps to recover the amount and instead wrote off the debts without legal recourse. The AO also highlighted the regulatory provisions of SEBI infringed by the appellant's actions. However, the appellant argued that the bad debts were irrecoverable and should be allowed as a deduction. The Tribunal found that the bad debts were indeed written off in the appellant's accounts, as evidenced by the general ledger and party account, contrary to the AO's assertion. The Tribunal, citing legal precedents, held that the decision to write off bad debts lies with the assessee and allowed the claim partly for statistical purposes, pending verification by the AO.2. Disallowance of Business Loss: The appellant also contended that the amount of Rs. 2,61,09,809 should be allowed as a business loss. The AO and the Commissioner of Income-tax (Appeals) (CIT(A)) rejected this claim, stating that the losses did not crystallize in the relevant assessment year. The CIT(A) further noted that a substantial amount was paid by the appellant to the subbroker despite the outstanding debit balance, indicating that it could not be treated as a bad debt. The Tribunal did not delve into this issue extensively as the primary focus was on the bad debts claim. Consequently, the alternative ground raised by the appellant was deemed academic and infructuous.3. Adjudication of Additional Ground of Appeal: The appellant raised an additional ground of appeal which the CIT(A) did not adjudicate. The appellant argued that the arbitration award received during the previous year relevant to the subsequent assessment year should allow the loss as a deduction in the subsequent year. However, the Tribunal did not address this additional ground in detail, considering the primary issue of bad debts. The Tribunal allowed the appeal partly for statistical purposes based on the verification required regarding the bad debts claim, rendering the discussion on the additional ground inconsequential.In conclusion, the Tribunal partially allowed the appeal, emphasizing the importance of verifying the bad debts written off by the appellant. The judgment highlighted the autonomy of the assessee in deciding the write-off of bad debts and the need for factual confirmation by the AO. The detailed analysis provided clarity on the legal interpretation and application of provisions related to bad debts and business losses in the context of share broking transactions.