Rule 8D cannot be applied before 2008-09; written-off non-performing asset interest may qualify as bad debt.

Rule 8D was held inapplicable to assessment years before 2008-09, so a disallowance under section 14A based on that rule for assessment year 2006-07 could not stand and required fresh consideration by the assessing authority. The note also states that interest dues written off in the books as irrecoverable, where the corresponding income had earlier been offered to tax on accrual basis, satisfied section 36(1)(vii); actual proof of irrecoverability was not required once the write-off was made, and the bad debt deduction was allowable.

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Issues: (i) Whether disallowance of expenditure relatable to exempt income under section 14A could be sustained by applying Rule 8D for the assessment year 2006-07. (ii) Whether the interest dues written off in respect of non-performing assets were allowable as bad debt under section 36(1)(vii).

Issue (i): Whether disallowance of expenditure relatable to exempt income under section 14A could be sustained by applying Rule 8D for the assessment year 2006-07.

Analysis: Rule 8D was held to be applicable only from assessment year 2008-09. Since the assessment year in question was 2006-07, the disallowance made by applying Rule 8D could not be sustained and the matter required fresh consideration by the assessing authority.

Conclusion: The issue was decided in favour of the assessee, and the disallowance under section 14A was set aside with restoration of the matter to the assessing officer.

Issue (ii): Whether the interest dues written off in respect of non-performing assets were allowable as bad debt under section 36(1)(vii).

Analysis: The amounts in question had been written off in the books as irrecoverable and had earlier been offered to tax on accrual basis. In such a situation, the statutory requirement under section 36(1)(vii) was satisfied, and it was not necessary to prove actual irrecoverability once the write-off was made in the accounts.

Conclusion: The issue was decided in favour of the assessee, and the bad debt claim was allowed.

Final Conclusion: The appeal succeeded in part, with relief granted on both contested issues in substance, though the section 14A matter was remitted for fresh adjudication.

Ratio Decidendi: For assessment years prior to 2008-09, Rule 8D cannot be applied to make a disallowance under section 14A, and a debt is deductible as bad debt when it is written off as irrecoverable in the assessee's accounts.

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