2022 (4) TMI 1224 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on bad debt claim under Income Tax Act

ACIT, Circle -30 (1), New Delhi Versus Sh. Syed Habibur Rehman

The Tribunal upheld the CIT(A)'s decision, allowing the bad debt claim of Rs. 1,50,00,000/- under section 36(1)(vii) of the Income Tax Act. The Tribunal ... Bad debt deduction u/s 36(1) - Bonafied claim - HELD THAT:- Direct Tax Laws (Amendment) Act, 1987, w.e.f. 01.04.1989 substituted ‘any debt or part thereof, which is established to have become bad debt in the previous year’ by the words ‘any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year’. This is a major development with a view to avoid controversy as to the year in which such bad debt is allowable. It is thus evident that the year of write off is now taken as the year in which the amount is allowable as a bad debt. The amended law w.e.f. 01.04.1989 provides that for an amount to be treated as a bad debt and to be allowed as an expenditure in the year in which it was written off, the assessee has to prove the satisfaction of both section 36(1)(vi) and section 36(2)(i), namely that bad debt had been written off and that bad debt had been taken into account in computing income of the assessee in any one of years mentioned in clause (i) of sub-section (2) of section 36 of the Act. It is also crystal clear that after 01.04.1989, it is not necessary for the assessee to establish that debt has become irrecoverable. It is enough if bad debt is written off as irrecoverable in the accounts of the assessee. The assessee need not prove that debts have become bad. All that the assessee has to do after the amendment w.e.f. 01.04.1989 is to establish that the debt has been written off. It is not necessary to establish that debt has become irrecoverable during the year. We may refer to the judgment of the Hon’ble Supreme Court in the case of T.R.F. Ltd. [2010 (2) TMI 211 - SUPREME COURT] CIT(A) noticed therefrom that the outstanding balance as on 31.03.2014 is ₹ 5,23,29,230/-. The assessee also submitted the copy of confirmation dated 25.09.2018 from the broker wherein it is mentioned that the remaining balance of ₹ 5,21,16,449/- is receivable by the assessee from NSEL. All this go to prove that the claim of the assessee is bonafide and that he has fulfilled the first pre condition of section 36(1)(vii). As regards the second pre condition, namely that the bad debt should have been taken into account in computing the income of the assessee, the submission of the assessee is that the outstanding debt which was not recoverable as on 31.03.2014 amounted to ₹ 5,23,29,230/-. This amount was included as income during the previous year 2013-14. The amount of sales during the year reflected in the profit and loss account included the said amount of ₹ 5,23,29,230/- which has become irrecoverable. The outstanding bad debt was, thus taken as income of the assessment year 2014-15. To make it more explicit the assessee explained that the total amount of bad debt of ₹ 5,23,29,230/- was included in the income of the assessee via the profit and loss account and out of the said amount ₹ 1,50,00,000/- has been written off during the assessment year 2014-15. Thus, the assessee satisfies the condition laid down in 36(2)(i) as well. The objection of the Ld. AO that the assessee has prematurely written off sum of ₹ 1,50,00,000/- cannot stand in the post amendment era in which a write off cannot be questioned and should be allowed in the year it is written off in the books of the assessee. This change in law has also been pointed out by the Hon’ble Delhi High Court in the case of CIT vs. Modi Telecommunication Ltd. [2010 (4) TMI 40 - DELHI HIGH COURT]. We, therefore, endorse the findings of the Ld. CIT(A) and reject the appeal of the Revenue. Issues Involved:1. Whether the disallowance of Rs. 1,50,00,000/- claimed on account of bad debts under section 36(1)(vii) of the Income Tax Act, 1961 was correct.2. Whether the assessee fulfilled the conditions laid out under section 36(2)(i) of the Income Tax Act, 1961 to claim deduction of bad debts under section 36(1)(vii).Detailed Analysis:Issue 1: Disallowance of Rs. 1,50,00,000/- Claimed as Bad DebtsThe Revenue appealed against the order of the CIT(A) who deleted the addition of Rs. 1,50,00,000/- claimed by the assessee as bad debts. The assessee, engaged in commodity trading, had written off this amount during the assessment year 2014-15. The Assessing Officer (AO) disallowed this claim, arguing that the assessee prematurely wrote off the amount without satisfying the conditions under section 36(2) of the Income Tax Act, 1961. The CIT(A) found that the assessee had written off the bad debt as per section 36(1)(vii) and included it in the total income, thus fulfilling the requirements of section 36(1)(vii) read with section 36(2).Issue 2: Fulfillment of Conditions under Section 36(2)(i)The AO argued that the assessee did not fulfill the conditions under section 36(2)(i) for claiming the deduction. The CIT(A) observed that the AO did not specify which clause of section 36(2) was not fulfilled. The CIT(A) noted that the assessee was not conducting business with NSEL due to its prohibition from transactions by SEBI since July 2013. The CIT(A) also noted that there is no requirement to write off the entire amount in one go, and partial write-offs are permissible.Tribunal's Observations:The Tribunal upheld the CIT(A)'s decision, noting that the AO admitted the bad debt write-off in the profit and loss account. The Tribunal emphasized that post-amendment (effective from 01.04.1989), it is not necessary for the assessee to establish that the debt has become irrecoverable. It is sufficient if the bad debt is written off as irrecoverable in the accounts. This position is supported by the Supreme Court's judgment in T.R.F. Ltd. vs. CIT and CBDT Circular No. 12/2016.Conclusion:The Tribunal concluded that the assessee satisfied both conditions under section 36(1)(vii) and section 36(2)(i). The bad debt of Rs. 1,50,00,000/- was written off in the books, and the amount was included in the income of the assessee in the previous year. The Tribunal dismissed the Revenue's appeal, endorsing the CIT(A)'s findings and allowing the bad debt claim of Rs. 1,50,00,000/-.Order:The Revenue’s appeal was dismissed, and the order was pronounced in the open court on 25th April, 2022.