2006 (5) TMI 117 - AT - Income Tax

Bad Debt for the purpose of disallowance - Whether as per existing provisions even after the amendment with effect from 1-4-1989 it is obligatory on the part of the assessee to prove that the debt written off by him is indeed a Bad Debt for the purpose of allowance under section 36(1)(vii)? As Per K.C. Singhal Judicial Member HELD THAT - The answer to this question would depend on the interpretation of the language used by the Legislature. It is the cardinal rule of interpretation that where the language used by the Legislature is clear and unambiguous then the plain and natural meaning of the words should be supplied to the language used and resort to any rule of interpretation to unfold the intention is permissible only where the language is ambiguous. Plethora of decisions of the Apex Court are there to support this proposition The Hon ble Supreme Court in the case of SMT. TARULATA SHYAM AND OTHERS VERSUS COMMISSIONER OF INCOME-TAX WEST BENGAL 1977 (4) TMI 3 - SUPREME COURT held that in the taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a Tax. There is no presumption as to a tax. Nothing is to be read in nothing is to be implied. One can only look fairly at the language used. The submission of assessee s Counsel that the words bad debt indicate the nature of allowance only and therefore such significance should not be attached to the word bad cannot be accepted. Such submission is contrary to the cardinal rule of interpretation discussed by us earlier inasmuch as it would amount to the deletion of the word bad from the language used by the Legislature. Thus mere writing off the debt is not sufficient for claiming deduction under section 36(1)(vii) of the Act effective from 1-4-1989. In addition the assessee is also under obligation to show at least prima facie that the debt has become bad. Whether a debt has become bad or not would depend on the facts of each case. The observations of the Hon ble Bombay High Court in the case of Jethabhai Hirji Jethabhai Ramdas would be a guiding factor for determining such question of fact. As Per G.E. Veerabhadrappa (Vice President) Dr. O.K. Narayanan (Accountant Member) The act of writing off a debt as irrecoverable in the accounts of the assessee is deemed to be discharging the onus of the assessee in holding a debt as bad. When the statute has provided the mode of discharging the onus of proof by writing off the debt as bad debt it is not incumbent on the Revenue to call for further evidence. The rule regarding the deductibility of bad debt provided in section 36(1)(vii) after the amendment is a statutory rule by itself and therefore there is no need for insisting any other proof. The Statutory rule itself declares the rule of deduction of bad debt. If it is again necessary to prove by demonstrative proof that the debt has become bad then there is no necessity to insert a statutory rule. The onus of proving the debt as bad debt has been prescribed by the statutory rule. Once that statutory rule is satisfied by following the prescribed method no further obligations remain on the assessee to be discharged. The requirement on the part of the assessee to prove that the debt has really become bad will only annex an obligation which is not spelt out in the so-called clear provisions of the amendment brought out with effect from 1-4-1989. The accounts of the assessee are subject to audit which means that the board general body of shareholders and the statutory auditors have confirmed that the decision to write off is bona fide charge on the profit and loss account. There is no qualification in the auditors report to say that the write off was not a business consideration which only strengthened that what has been written off to the profit and loss account is a bad debt and can be duly established so with all the attended circumstances. Asking for any demonstrative evidence or proof will only seem to be doing violence to the provisions contained in the Act and wanting the assessee to do the same act which were specifically omitted to be done by the Amending Act. It is within the personal knowledge of the businessman whether a debt has become bad or not. His decision as long as it is bona fide cannot be disputed by demanding from him a demonstrative proof to establish that the debt has actually become bad. The write off of a bad debt according to us is a prima facie evidence on the part of the assessee with whom the information rests and is a sufficient requirement of the amended provision. In the light of majority view the question is answered in negative and in favour of the assessee - The matter will now go to the regular Bench for passing order in conformity with the majority decision on the question referred to the Special Bench.

Summary

Issues Involved:
1. Whether, after the amendment effective from 1-4-1989, it is obligatory for the assessee to prove that the debt written off is indeed a bad debt for allowance under section 36(1)(vii) of the Income-tax Act, 1961.

Detailed Analysis:

1. Obligation to Prove Debt as Bad Debt Post-Amendment:
The primary issue was whether, post-amendment effective from 1-4-1989, the assessee must prove that the debt written off is indeed a bad debt for the purpose of claiming a deduction under section 36(1)(vii).

Arguments by Revenue:
The Revenue argued that for a deduction under section 36(1)(vii), two conditions must be satisfied: (i) the debt must be a bad debt, and (ii) it must be written off in the accounts. They contended that the language of the statute is clear and unambiguous, and the words "bad" and "irrecoverable" cannot be ignored. They relied on various judicial decisions to support their argument that each word in the statute must be given its due meaning. The Revenue also highlighted the potential for abuse if the assessee were allowed to write off good debts merely to manipulate taxable income.

Arguments by Assessee:
The assessee argued that the amendment aimed to remove the hardship of proving that a debt had become bad in a particular year. They referred to the legislative intent and the Circular explaining the amendment, which suggested that the deduction should be allowed in the year the debt is written off. They contended that the honest and bona fide judgment of the assessee should be sufficient to determine whether a debt is bad, and the onus should not be on the assessee to prove beyond doubt that the debt has become bad.

Tribunal's Analysis:
The Tribunal noted that the language of section 36(1)(vii) is clear and unambiguous, and each word must be given its plain and natural meaning. The word "bad" qualifies the word "debt," indicating that not every debt can be written off for claiming a deduction; it must be a bad debt. The Tribunal emphasized that the assessee must form an honest opinion based on material on record that the debt has become bad. Mere writing off of any debt is not sufficient for claiming a deduction. The Tribunal also rejected the contention that a debt should be presumed to be bad if written off by the assessee, as the onus is on the assessee to prove that the conditions for claiming the deduction are fulfilled.

Dissenting Opinion:
The Vice President and Accountant Member disagreed with the Judicial Member's conclusion. They argued that the amendment with effect from 1-4-1989 removed the requirement for the assessee to establish that a debt had become bad. They referred to the legislative history and the Circular explaining the amendment, which indicated that the amendment aimed to eliminate disputes and rationalize the provisions. They contended that the act of writing off a debt as irrecoverable in the accounts should be deemed sufficient to claim the deduction, and the Revenue's apprehension of abuse was a remote possibility.

Conclusion:
The majority view held that the assessee is not required to prove that the debt has become bad beyond writing it off in the accounts. The act of writing off a debt as irrecoverable is sufficient compliance for claiming a deduction under section 36(1)(vii). The Tribunal emphasized that the amended provisions aimed to simplify the process and avoid litigation, and the honest and bona fide judgment of the assessee should be accepted unless there is evidence to the contrary. The matter was referred back to the regular Bench for a decision on merits based on the majority view.