2011 (1) TMI 408 - HC - Income Tax

Deduction - Bad debt - Provision of section 36(1)(vii) as it existed prior to April 1 1989 and after April 1 1989 - if an assessee writes off a debt or part thereof as irrecoverable in the accounts for the previous year the same can be allowed as deduction u/s 36(1)(vii) - The controlling words/phrase in clause (vii) is which is written off as irrecoverable - No further proof is necessary - Decided in favour of assessee.

Summary

Issues: Disallowance of bad debts under section 36(1)(vii) of the Income-tax Act, 1961.

Analysis:
1. The appeal by the Revenue challenged the order of the Income-tax Appellate Tribunal regarding the disallowance of bad debts amounting to Rs. 11,85,086 claimed by the assessee for the assessment year 1996-97.

2. The Assessing Officer found that certain bad debts claimed by the assessee could not be written off as bad debts, and allowed only a partial amount. The Commissioner, Income-tax (Appeals-III), upheld this decision based on precedent, but the Appellate Tribunal later allowed the appeal on the basis of the provisions of section 36(1)(vii) of the Income-tax Act.

3. The senior counsel for the Income-tax Department argued that the Tribunal should have required material proof of the bad debts before granting the deduction under section 36(1)(vii) of the Income-tax Act.

4. Section 36(1)(vii) allows for the deduction of bad debts that are written off as irrecoverable in the accounts of the assessee for the previous year. The Tribunal's decision was in line with the Supreme Court's ruling in T. R. F. Ltd. v. CIT [2010] 323 ITR 397 (SC) that after April 1, 1989, it is not necessary to establish that the debt has become irrecoverable, but sufficient that it is written off as such in the accounts.

5. The Assessing Officer disallowed a significant portion of the bad debts claimed by the assessee due to the absence of office copies of reminders sent to customers. However, the Tribunal, following the decision of the Delhi High Court in CIT v. Autometers Ltd. [2007] 292 ITR 345 (Delhi), allowed the deduction as the bad debts were written off as irrecoverable in the accounts, in accordance with the law.

6. The Tribunal's decision was upheld, and the appeal by the Revenue was dismissed, affirming the allowance of the bad debts claimed by the assessee under section 36(1)(vii) of the Income-tax Act, 1961.