AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (7) TMI 963
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....Company registered as a Non Banking Finance Company engaged in the business inter alia of lease finance. 4. For the Assessment Year 1991-92, the Appellant Company filed a return showing "nil" income. The return was processed under Section 143(1)(a) of the Act. Subsequently, proceedings under Section 147 of the Act were initiated by issuance of a notice under Section 148 of the Act as the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment. In the re-assessment proceedings, the assessee was assessed to a sum of Rs.20,69,805/- which is the dispute having given rise to the question of law in this Appeal. 5. Earlier, on December 19th, 1987, a lease agreement was entered into between the Appellant and one M/s. Orson Electronics Ltd., as lessee to transfer the right to use of certain equipments by way of lease. As per the terms of the lease deed, order for manufacturing and supply of the equipment was placed on three concerns to whom, the Appellant-assessee made payments on behalf of lessee. The first installment of lease amount was received by the Assessee. Further installments due were also accounted for as income in the respective years, as p....
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....to reverse the entry to claim bad debt, was against the established principle of accountancy. Further, it was observed that since the assessee was maintaining mercantile system of accounting and if such reversal was allowed, then it would be a clear violation of the method of accounting adopted by the assessee and even if the claim of the assessee in respect of bad debt may be correct, the same could not be considered as the assessee had accounted for lease rentals and has also claimed depreciation. 10. Aggrieved by the aforesaid order of the Tribunal, the assessee has approached this Court by filing this Appeal impugning the Tribunal order on inter alia the aforementioned substantial question of law. 11. Ms.Dinkle Hariya, learned Counsel for the Appellant submits that since the Assessment Year in question is 1991-92 and as per the amended Section 36(1)(vii), after 1st April, 1989, it is not necessary for the assessee to establish that the debt has in fact become irrecoverable, it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Learned Counsel draws the attention of this Court to the decision of the Hon'ble Supreme Court in the case of T....
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....(2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause: Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause. [Explanation 1.]-For the purposes of this clause, any bad debt o....
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....ance of recovering it from the debtor. It is a debt which cannot reasonably be collected nor is there any reasonable expectation of recovery. Expanding further with respect to the provisions of Section 36(1) (vii), in Paragraph 11, this Court observed that when the assessee treats the debt as a bad debt in his books, the decision has to be a business or a commercial decision and cannot be whimsical or fanciful. The decision must be based on material that the debt is not recoverable. The decision must be bona fide. This Court observed that the difference between the position, pre-amendment and post amendment would be that the burden is no longer on the assessee and can be claimed in the year it is written off in the books of account as irrecoverable. If the A.O. is to disallow a debt as a bad debt, he must arrive at a conclusion that the decision to treat a debt as bad debt was not bona fide. The obligation on the assessee is that he must be prima facie satisfied based on information available that the debt is bad and that would be sufficient requirement of the amended provisions. Paragraphs 10 and 11 of the said decision are usefully quoted as under: 10. Let us refer to some Dict....
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....e information available that the debt is bad and that would be sufficient requirement of the amended provisions." 18. With the above prefatory discussion on the settled principles with regard to Section 36(1)(vii), post amendment, let us examine the facts of this case with reference to these principles. 19. The assessee had entered into a lease agreement with M/s.Orson Electronics Ltd., the lessee, to transfer the right to use by way of lease of certain equipment for which, it had already made payments to the suppliers. It received one installment from the lessee but did not receive payment of the further installments on which, lessee had defaulted. The assessee following the mercantile system of accounting offered these incomes totaling to Rs.23,62,815.10 as set out earlier in the Assessment Years 198788, 1988-89 and 1989-90. However, in view of the dispute with the lessee, the assessee filed a winding up petition against the lessee in the Bombay High Court. It is not in dispute that the assessee had entered into a bona fide lease agreement with the lessee or that it had paid amounts to the suppliers of the equipment on behalf of the lessee. The first installment of the lease am....