1995 (2) TMI 89 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance made in respect of bad debt of Rs. 1,75,932.
2. Applicability of section 36(2) for the claim of bad debt.
3. Consideration of the amount as a trading loss under section 28(1) and/or section 37.

Summary:

Issue 1: Deletion of disallowance made in respect of bad debt of Rs. 1,75,932

The appeal by the revenue challenges the deletion of disallowance made in respect of a bad debt of Rs. 1,75,932. The Assessing Officer (AO) noted that the bad debt related to a debit balance in the account of M/s. Jagnnath Pankajkumar from whom the assessee made certain purchases. The assessee had made excess payments aggregating to Rs. 1,75,932 in A.Y. 1982-83, which could not be recovered. The AO concluded that the conditions prescribed in section 36(2) were not satisfied, as the payment made in excess was not taken into account in computing the assessee's income in any year.

Issue 2: Applicability of section 36(2) for the claim of bad debt

The first appellate authority observed that the assessee had written several letters to the seller party, indicating the seller's deteriorated financial position. The assessee decided not to pursue legal action due to the remote chance of recovery. The appellate authority relied on the conditions mentioned in section 36(2) as amended by the Finance Act 1987, which allows the deduction in the year the debt is written off. The appellate authority deleted the disallowance and directed the ITO to grant the deduction.

The revenue argued that no efforts were made by the assessee to recover the amount and that it could not be regarded as a bad debt u/s 36 r.w.s. 36(2) as it never formed part of the assessee's income. The assessee's counsel contended that the payment was of a revenue nature and covered by section 36, citing various decisions to support the claim.

Issue 3: Consideration of the amount as a trading loss under section 28(1) and/or section 37

The Tribunal examined the facts and decisions cited by the assessee's counsel. It noted that the conditions for the grant of deduction for bad debt u/s 36(2) were not met, as the advance given for the purchase of goods would not have increased the profits of the assessee's business. The Tribunal referred to the judgment of the Hon'ble Gujarat High Court in CIT v. Equitorial (P.) Ltd., which held that such amounts could not be treated as bad debts u/s 36(1)(vii) r.w.s. 36(2).

The Tribunal then considered whether the amount could be allowed as a trading loss u/s 28(1) and/or u/s 37. It observed that the lower authorities had not considered this aspect. The Tribunal set aside the orders of the departmental authorities and restored the matter to the AO for deciding the allowability of the amount as a trading loss after necessary examination. The AO was directed to examine the reality of the loss, the treatment of the amount in the books of the said party, and the appropriate year of allowability. The assessee was given the liberty to produce all relevant material before the AO.

Conclusion:

The appeal was treated as allowed for statistical purposes, with the matter remitted back to the AO for fresh consideration regarding the allowability of the amount as a trading loss u/s 28(1) and/or u/s 37.