2010 (4) TMI 40 - HC - Income Tax

Court rules written-off bad debts deductible without proving irrecoverability under Income Tax Act

The High Court dismissed the appeal regarding the allowability of bad debts deduction under Section 36(1)(vii) of the Income Tax Act for the Assessment ... Bad debt under section 36(1)(vii) – – The assessee had written off an amount of Rs.81,28,269/- during the year in question on account of bad debts. In this case Delhi High Court on the basis of Tribunal took the view that once the assessee had written off the outstanding amounts as irrecoverable in its books of accounts, it was sufficient compliance of the provisions indicated above and, therefore, the Assessing Officer ought not to have disallowed the deduction on account of bad debts written off by the assessee held that no interference with the Tribunal’s order is called for and, in any event, no substantial question of law arises for our consideration. The appeal is dismissed. – Decision in favor of assessee – against the revenue Issues:- Allowability of bad debts deduction under Section 36(1)(vii) of the Income Tax Act, 1961.- Verifiability and identifiability of bad debts for deduction.- Compliance with the provisions post-amendment in Section 36(1)(vii) from 01.04.1989.- Necessity of proving irrecoverability of bad debts post-amendment.- Remand for verification of bad debts write-off.Issue 1: Allowability of bad debts deduction under Section 36(1)(vii)The appeal by the Revenue was against an order related to the Assessment Year 1998-99 where the assessee had written off an amount of Rs.81,28,269 as bad debts. The Assessing Officer disallowed the deduction, leading to an appeal. The assessee contended that the conditions under Section 36(1)(vii) were fulfilled as the debts were taken into account in computing income and written off as irrecoverable. The Commissioner of Income Tax (Appeals) disallowed the deduction based on the lack of verifiability and identifiability of the bad debts, without disputing the assessee's compliance with the conditions.Issue 2: Verifiability and identifiability of bad debts for deductionThe Commissioner of Income Tax (Appeals) disallowed the bad debts deduction on the grounds of lack of verifiability and identifiability, despite the debts being taken into account in computing income and written off as irrecoverable. The focus was on the customers and bad debts' identification rather than disputing the compliance with the statutory conditions.Issue 3: Compliance with the provisions post-amendment in Section 36(1)(vii) from 01.04.1989The Tribunal allowed the appeal, emphasizing that the writing off of bad debts in the accounts was sufficient compliance with the provisions post-amendment in Section 36(1)(vii) from 01.04.1989. It was noted that proving the debt as irrecoverable was not necessary after the amendment, and the writing off itself was prima facie evidence of compliance.Issue 4: Necessity of proving irrecoverability of bad debts post-amendmentThe judgment highlighted that post-amendment from 01.04.1989, it was not essential for the assessee to establish the irrecoverability of the debt. The writing off of bad debts as irrecoverable in the accounts was deemed sufficient compliance, citing the decision in TRF Limited v. Commissioner of Income Tax.Issue 5: Remand for verification of bad debts write-offThe Revenue sought remand for verification of the bad debts write-off, citing a previous case. However, the court differentiated the present case, where the bad debts were admitted to be written off in the accounts. As such, there was no need for remand as the matter was clear without further verification.In conclusion, the High Court dismissed the appeal, finding no substantial question of law for consideration and upholding the Tribunal's order regarding the allowability of bad debts deduction based on compliance with the statutory provisions and the post-amendment requirements.