2010 (11) TMI 807 - HC - Income Tax

Bad debts written off - Whether ITAT is justified in law in deleting the penalty imposed u/s 271(1)(c) ignoring the fact that the assessee had furnished inaccurate particulars of its income and had failed to substantiate its claim of bad debts written off - Held that - In view of judgment of T.R.F. Ltd. (2010 (2) TMI 211 - SUPREME COURT) it is not necessary for the assessee to establish that the debt had already become irrecoverable. If the assessee takes a bonafide decision that it was necessary to write off the bad debts the writing off may be justified. In any case for levy of penalty it has to be shown that the assessee had made concealment or had given wrong information to evade tax there was no intention to evade tax - no substantial question of law arises appeal is dismissed

Summary

Issues:
- Appeal under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal for the assessment year 2005-06.
- Justification for deleting the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961.
- Validity of writing off bad debts and imposition of penalty.
- Interpretation of Section 36(1)(vii) regarding bad debts.
- Requirement for the assessee to establish irrecoverability of debt.
- Assessment of intention to evade tax for the levy of penalty.

Analysis:
1. The appeal was filed by the revenue challenging the order of the Income Tax Appellate Tribunal regarding the deletion of penalty under section 271(1)(c) of the Income Tax Act, 1961. The main issue was whether the assessee's claim of bad debts written off was justified and whether the penalty was rightly imposed.

2. The Assessing Officer disallowed the entry of writing off bad debts by the assessee, leading to an addition to the declared income and imposition of penalty. However, on appeal, the penalty was set aside as it was observed that the writing off of bad debts was not an attempt to evade tax. The Tribunal affirmed this finding, stating that the claim made by the assessee was not patently erroneous and was in line with the relevant provisions of law.

3. The Tribunal highlighted that under Section 36(1)(vii), an assessee can claim a deduction by choosing to write off the debt as irrecoverable in the books of account, without the need to prove the debt had become bad to the hilt. This interpretation was supported by a decision of the Special Bench of the Tribunal and affirmed by the Bombay High Court. The Tribunal concluded that the claim of the assessee was not false, lacked falsity, and was made with bonafide intentions.

4. The High Court noted the Supreme Court's judgment that it is not necessary for the assessee to establish the irrecoverability of the debt if a bonafide decision to write off bad debts was taken. To levy a penalty, it must be proven that there was a concealment of information or an intention to evade tax. Since both the CIT(A) and the Tribunal found no intention to evade tax, the High Court dismissed the appeal, stating that no substantial question of law arose in this case.

5. In conclusion, the High Court upheld the decision of the Tribunal and the CIT(A) regarding the validity of writing off bad debts and the deletion of the penalty under section 271(1)(c) of the Income Tax Act, 1961. The judgment emphasized the importance of bonafide intentions in claiming deductions and the absence of any attempt to evade tax in such cases.