Assessee wins appeal for bad debt deduction in landmark ruling.

The Tribunal allowed the appeal by the assessee, directing the Assessing Officer to allow the deduction claim of Rs. 88,59,511 on account of bad debts written off. The Tribunal emphasized that post the amendment to Section 36(1)(vii) effective from 1.4.1989, it is sufficient for the assessee to write off the debt as irrecoverable in the accounts, as supported by relevant judicial decisions. The Tribunal distinguished the case from instances of delayed payment and concluded that the assessee was entitled to the deduction claimed.

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Issues Involved:
1. Whether the revenue authorities were justified in rejecting the claim of the assessee for deduction of Rs. 88,59,511 on account of bad debts written off.

Issue-Wise Detailed Analysis:

1. Claim of Deduction for Bad Debts Written Off:

The primary issue in this appeal is whether the revenue authorities were justified in rejecting the claim of the assessee for a deduction of Rs. 88,59,511 on account of bad debts written off. The assessee, an individual engaged in project management and consultancy services, claimed this deduction in his return of income for the assessment year 2014-15.

2. Assessment Proceedings and AO's Observations:

During the assessment proceedings, the Assessing Officer (AO) observed that the assessee did not provide sufficient evidence to show that the debts written off had indeed become bad and irrecoverable. The AO noted the absence of proof of steps taken to recover the debts, such as correspondence with the entities involved. Consequently, the AO considered the bad debts written off by the assessee as non-genuine and disallowed the claim, adding Rs. 88,59,511 back to the income of the assessee under Section 36(1)(vii) of the Income Tax Act, 1961.

3. CIT(Appeals) Findings:

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that post the amendment of Section 36(1)(vii) effective from 1.4.1989, it was not necessary to establish that the debts had become bad. The CIT(A) acknowledged this legal position but relied on certain judicial precedents, including the ITAT Hyderabad Bench decision in Natco Pharma Ltd. and the Supreme Court decision in Travancore Tea Estates Co. Ltd., which required the assessee to establish that the debt had become bad and irrecoverable. Despite recognizing the legal amendment, the CIT(A) concluded that the write-off was an effort to reduce tax liability and confirmed the AO's order.

4. Tribunal's Analysis and Decision:

The Tribunal noted that the AO did not dispute the actual write-off of debts and the fact that these sums were shown as income in earlier assessment years. The Tribunal emphasized that post the amendment to Section 36(1)(vii) effective from 1.4.1989, it is sufficient for the assessee to write off the debt as irrecoverable in the accounts, as supported by the Supreme Court decision in T.R.F. Limited vs. CIT. The Tribunal found that the CIT(A)'s reliance on pre-amendment judicial decisions was misplaced.

The Tribunal also distinguished the present case from the Embassy Classic P. Ltd. case, where the debt was recovered before filing the return, making it a case of delayed payment rather than a bad debt. In contrast, in the present case, the debts were written off as bad debts and not recovered subsequently.

Conclusion:

The Tribunal concluded that the assessee is entitled to claim the deduction on account of bad debts. The AO was directed to allow the claim of the assessee. Consequently, the appeal by the assessee was allowed.

Pronouncement:

The judgment was pronounced in the open court on October 9, 2020.

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