Court allows deduction of bad debts for 1990-91 assessment year under Income-tax Act

The Court held that the disallowance of bad debts for the assessment year 1990-91 was not justified. The interpretation of section 36(1)(vii) of the Income-tax Act before and after the amendment by the Direct Tax Laws (Amendment) Act, 1987, supported the assessee's position that bad debts, if written off as irrecoverable in the previous year, were eligible for deduction. The matter was referred to the Patna Bench of the Income-tax Tribunal for further action.

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Issues:
1. Disallowance of bad debts for assessment year 1990-91.
2. Interpretation of section 36(1)(vii) of the Income-tax Act before and after the amendment by the Direct Tax Laws (Amendment) Act, 1987.

Issue 1: Disallowance of Bad Debts
The assessee, a private limited company dealing in motor vehicles and hotel business, filed a return for the assessment year 1990-91 showing a loss of Rs. 23,40,873. The assessment reduced the loss to Rs. 11,26,676 due to disallowance of various expenses, including bad debts amounting to Rs. 1,48,219. The Assessing Officer disallowed the bad debts as there was no evidence proving they had become bad during the relevant period. The matter was taken to appeal but was unsuccessful. The Tribunal considered the amendment made by the Direct Tax Laws (Amendment) Act, 1987, and concluded that the assessee would be entitled to deduction of bad debts if they were written off fairly, reasonably, and bona fide. The Tribunal noted that the debts were in the books for previous years but lacked supporting bills and details.

Issue 2: Interpretation of Section 36(1)(vii) of the Income-tax Act
Before the amendment by the Direct Tax Laws (Amendment) Act, 1987, section 36(1)(vii) allowed deduction for established bad debts in the previous year. The amendment changed this provision to allow deduction for bad debts written off as irrecoverable in the accounts of the assessee for the previous year. The amendment aimed to simplify the process and avoid disputes regarding the allowability of bad debts in specific years. The assessee argued that the debt written off as irrecoverable in the previous year should entitle them to deduction, which was supported by Circular No. 551 issued by the Department. The Court agreed with the assessee, stating that the condition for deduction was met as the bad debts were written off. The Court emphasized that the amendment aimed to streamline the deduction process and eliminate disputes.

In conclusion, the Court held that the Tribunal was not justified in confirming the disallowance of bad debts under the head bad debts for the assessment year 1990-91. The Court's interpretation of section 36(1)(vii) of the Income-tax Act before and after the amendment by the Direct Tax Laws (Amendment) Act, 1987, supported the assessee's position that bad debts written off as irrecoverable in the previous year were eligible for deduction. The opinion was forwarded to the Patna Bench of the Income-tax Tribunal for further action.

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