2008 (8) TMI 894 - HC - Income Tax

Deduction on bad debt - word established - Whether even after the amendment to s. 36(1)(vii) which after amendment provides that deduction on account of bad debt should be allowed once the same is established to have been written off in the books of accounts without proving anything else the Tribunal was correct in law in upholding the disallowance on the ground that the assessee appellant had failed to prove that the debt had become irrecoverable? - HELD THAT - It is apparent that prior to amendment the assessee could claim deduction on account of bad debt only if it was established that any debt or part thereof had become a bad debt in the previous year. The legislature in its wisdom chose to amend the Act and the amended provision is absolutely clear that once the assessee writes off any bad debt or any part thereof as being irrecoverable the assessee is entitled to claim deduction for the same. The word established has been deleted from the amended provision. The intention of the legislature is absolutely clear that the assessee is no longer required to establish that the debt is bad. He has only to prove that he has written off the debt in his books of accounts as a bad debt. Once he writes off the debt as being irrecoverable his claim for deduction cannot be rejected on the ground that debt has not been established to have become irrecoverable debt. In view of the clear-cut language of the Sec. 36(2)(iii) and the distinction between the unamended and amended provisions there is no manner of doubt that the intention of the legislature was that the assessee was entitled to claim deduction in case he in his books of account had written off the debt as a bad debt. In our view the language is crystal clear and brooks of no other interpretation. As per the amended provisions of the IT Act 1961 once the debt has been written off as a bad debt it is not the requirement of law that the assessee should establish that the debt has in fact become bad. The reason behind this is that after amendment to s. 36(2) in case the assessee recovers any part of the debt the same is assessable as his income in the year when the debt is recovered. In view of the above discussion the question is answered in favour of the assessee and against the Revenue. Appeal filed by the assessee is allowed and disposed of accordingly.

Summary

Issues:
Interpretation of s. 36(1)(vii) regarding deduction for bad debts written off in the accounts without proving irrecoverability.

Analysis:
The High Court analyzed the amendment to s. 36(1)(vii) of the Income Tax Act for the assessment year 1993-94. Before the amendment, the assessee had to establish that a debt had become bad to claim a deduction. However, post-amendment, the requirement to establish the bad debt was removed, and the assessee only needed to prove the write-off in their books of accounts. The court emphasized that the legislative intent was clear, and once a debt is written off, the deduction should be allowed without proving irrecoverability. The judges highlighted the distinction between the unamended and amended provisions, stating that the amended provision does not require the assessee to establish the debt as bad.

The court also referred to Circular No. 551 issued by the CBDT, which clarified that the claim for bad debt deduction would be allowed in the year of write-off in the accounts. This circular aimed to eliminate disputes and litigation regarding the allowability of bad debts. Additionally, the court cited a judgment from the Delhi High Court supporting the view that once a debt is written off, it should be treated as bad or irrecoverable without the need for further proof. The judges rejected the Revenue's argument that the assessee still needed to establish the debt as bad, emphasizing the legislative changes and circular's guidance.

Regarding the Revenue's reliance on judgments like Travancore Tea Estates Co. Ltd. and Kashmir Trading Co., the court distinguished these cases from the current scenario. The court explained that the judgments cited by the Revenue were based on different factual contexts and did not apply to the interpretation of the amended provisions of s. 36(1)(vii). The court reiterated that under the amended provisions, once a debt is written off as bad, there is no requirement for the assessee to establish the debt as bad in fact.

In conclusion, the court ruled in favor of the assessee, allowing the appeal and disposing of the case accordingly. The judgment emphasized the legislative intent behind the amendment to s. 36(1)(vii) and the clarity provided by Circular No. 551, stating that once a debt is written off in the accounts, the deduction should be allowed without the need to prove irrecoverability.