TMI Blog2009 (11) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of bad debts was allowed for statistical purposes in favour of assessee with the following directions to the Assessing Officer : "We have heard the parties and perused the record of the case. It may be mentioned that prior to the amendment to section 36(1)( vii ), the assessee was required to satisfy that debt which is written off is established to have become bad. While in view of amended provisions, it would be sufficient to allow the claim for write off of bad debts, if in the opinion of the assessee, a particular debt has become bad and the same has been written off in the books of account as irrecoverable. The amended provisions have left to the prudence or the judgment of the businessman to consider whether a particular debt has become bad and the same should be written off in the books of account as irrecoverable. The Hon ble High Court of Gujarat in the case of CIT v. Girish Bhagwat Prasad 256 ITR 772 has held that in order to claim deduction under section 36(1)( vii ) all that is required by assessee is to show that the bad debt has been written off as irrecoverable, of course, subject to the genuineness of the claim. It may be mentioned that the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting. Thus, it would depend upon the answer whether additional liability, which the assessee had incurred on account of foreign exchange fluctuation, was on account of trading asset or capital asset and which method of accounting the assessee has been followed. It may be mentioned that the system of accounting followed by the assessee would be a crucial factor for allowability of expenditure/losses and for taxation of receipts. In the facts and circumstances of the case, the impugned order passed in this regard is set aside and restored to the file of the Assessing Officer, who may examine the matter afresh in accordance with the law after affording a reasonable opportunity of being heard to the assessee." 5. While giving effect to the order of the Tribunal, the Assessing Officer again made the addition by observing that it is a contingent liability, the true import of which can be determined only on actual payment of the amount. He further stated that debit entry in the profit loss account for foreign exchange notional loss is in the nature of provision or reserve, hence, the same cannot be allowed as a deduction. The disallowance so made was confirmed by the CIT(A) and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record that assessee is engaged in service industry where payment becomes due immediately on rendering of services. As per normal practice after raising of bill for services, 30 days credit is allowed after which follow up action is started. Thereafter having regard to the facts and circumstances of each individual case, a bona fide assessment is made by the management to the effect of its realization and thereafter if the management is satisfied with possibility of its recoverability the same is written off as bad debts in the books of account. During the relevant year under consideration, the assessee had shown income of Rs. 6.88 crores on account of services rendered. Out of it, in the profit loss account the assessee has claimed bad debts of Rs. 47.48 lakhs in respect of 22 parties, full details of which along with the date of entering the transaction, the amount outstanding, date and value of invoice, age of debtor, the amount written off and the date of writing off was furnished before the Assessing Officer. The copy of accounts of all these parties have also been filed. As the assessee was unable to recover the outstanding balance in their account, after making reasonabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account by passing a corresponding entry in the party account nor it is a case of any of the lower authorities that the debt was not taken into account in computing the income of the assessee of the previous year in which bad debt is written off or in any of the earlier previous years. Ledger account of all the parties furnished before the lower authorities which have become bad and the genuine efforts were taken by the assessee to recover the same and only thereafter the amount was written off as bad debt. The provisions of section 36(1)( vii ) have been amended by Direct Tax Laws (Amendment) Act, 1987 with effect from 1-4-1989, wherein the words "any debt, part thereof" have been substituted by "any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year". The old provisions of clause ( vii ) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that assessee would be entitled to deduction of the amount of any bad debts in the year it has been written off as irrecoverable in its accounts as provided under section 36(2) and section 36(1)( vii ) read with Circular No. 551, dated 23-1-1990. In the case of Autometers Ltd. ( supra ), the Hon ble Delhi High Court was specifically dealing with amended provisions of the law with regard to claim of bad debts, wherein it was held that prior to 1-4-1989 it was necessary for the assessee to establish that the debt had become bad, whereas after the amendment with effect from 1-4-1989 in section 36(1)( vii ), for the debt to be classified as bad, the assessee has only to write it off as irrecoverable in its accounts. It was also observed that as per paras 6.6 and 6.7 of Circular No. 551, dated 23-1-1990 that the earlier provision regarding claim of bad debts generated a considerable amount of litigation on the issue whether the assessee had been able to establish that the debt had become bad. It was to overcome this that the amendment was made resulting in a bad debt "now being straightaway allowed in the year of write off". The amendment made in section 36(1)( vii ) was a conscio ..... 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