2010 (9) TMI 241 - HC - Income Tax

Debt is bad or not - Held that - Assessing Officer has not examined whether the debt has in fact been written off in accounts of the assessee - This exercise has not been undertaken by the Assessing Officer. Hence the matter is remitted to the Assessing Officer for de novo consideration - appeal is dismissed

Summary

Issues:
Challenge to Tribunal's order under Section 260A of Income Tax Act, 1961 for Assessment Year 2004-2005. Interpretation of Section 36(1)(vii) regarding writing off debts without establishing them as bad.

Analysis:
1. The appeal was filed challenging the Tribunal's order under Section 260A of the Income Tax Act, 1961 for the Assessment Year 2004-2005. The revenue contended that the Tribunal erred in setting aside the order passed under Section 263 of the Act by the Commissioner of Income Tax (Appeals). Additionally, it was argued that the Tribunal also erred in law by writing off debts without establishing them as bad debts as required by Section 36(1)(vii) of the Act.

2. The Tribunal had dismissed the revenue's appeal, stating that the amended provisions of Section 36(1)(vii) obviate the need to establish a debt as "bad." The Tribunal cited relevant case law and a CBDT Circular to support its decision. The case involved a situation where bad debts were written off due to the inability to recover payments, and all conditions under Section 36(1)(vii) were met. The Tribunal found that the issue raised in the appeal had already been settled by previous court decisions and Supreme Court orders.

3. The Supreme Court's decision in Civil Appeal No. 5293 of 2003 clarified the changes in Section 36(1)(vii) pre and post April 1, 1989. It highlighted that after April 1, 1989, it is not necessary for the assessee to establish that a debt has become irrecoverable; instead, writing off the bad debt in the accounts is sufficient. However, in the present case, the Assessing Officer failed to verify whether the bad debt was actually written off in the accounts of the assessee. The matter was remitted back to the Assessing Officer for a fresh examination specifically on the write-off aspect.

4. In light of the established legal position post-amendment to Section 36(1)(vii), where writing off bad debts in accounts is deemed sufficient, the High Court dismissed the present appeal without further elaboration. The Court upheld the principle that after April 1, 1989, establishing a debt as bad is not mandatory; it is enough if the bad debt is written off as irrecoverable in the accounts.