2008 (8) TMI 140 - HC - Income Tax

High Court upholds deduction for bad debts written off by money-lending business.

The High Court upheld the decision to allow the deduction for bad debts written off by the assessee under section 36(1)(vii) for the assessment year ... AO disallowing the deduction claimed in respect of bad debts - It is a settled position of law that the assessee does not have to establish the bad debt and he merely has to indicate that the bad debt was written off in his books in the year in question. That has already been done – therefore, deduction is allowable u/s 36(1)(vii) – revenue’s appeal dismissed Issues:Assessment of bad debts deduction under section 36(1)(vii) for the assessment year 2001-02.Analysis:The judgment pertains to an appeal filed by the Revenue regarding the assessment year 2001-02, questioning the deletion of an addition of Rs. 32,90,820 made by the Assessing Officer after disallowing the deduction claimed for bad debts written off by the assessee. The facts reveal that the assessee had given a sum of Rs. 50 lakhs to a debtor-company, which suffered heavy losses due to a fire, leading to financial deterioration. Consequently, the board of directors decided to negotiate with the debtor company and wrote off the irrecoverable amount, resulting in the sum of Rs. 32,90,820 being written off as bad debts in the relevant year.The Commissioner of Income-tax (Appeals) deleted the addition made by the Assessing Officer, emphasizing that as the appellant was in the business of money-lending, the written-off principal amount should not be treated as capital in nature. The Commissioner also highlighted that the bad debt was written off in the books of account during the relevant year, and a compromise deed was merely a formality. The Tribunal upheld the Commissioner's decision, noting that the bad debt written off in the books of account was allowable as a deduction under section 36(1)(vii) of the Income-tax Act, 1961.Moreover, it was established that the appellant did not need to prove the bad debt but only had to show that it was written off in the books during the year in question. The judgment further addressed a contention raised regarding the principal amount written off as a capital loss, arguing that since the Commissioner had already determined the appellant was in the business of money-lending, the principal amount should not be treated as capital in nature. Additionally, it was noted that interest received from the debtor company had been taxed as business income in previous assessment years, confirming the appellant's engagement in money-lending business.In conclusion, the High Court found no fault with the impugned order, stating that no substantial question of law arose for consideration. As a result, the appeal was dismissed, affirming the decision to allow the deduction for bad debts written off by the assessee.