HIGH COURT OF DELHI
Commissioner of Income-tax
v.
Automotors Ltd.
Madan B. Lokur and V. B. Gupta, JJ
IT Appeal No. 466 of 2006
March 2, 2007
Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts -
Assessment year 1994-95 - In relevant year, assessee wrote off certain amount
as irrecoverable in its books of account and claimed deduction thereof under
section 36(1)(vii) - Assessing Officer rejected said claim on ground that
assessee was not able to produce any documentary evidence to show that it made
any efforts to recover amount so written off and, therefore, debts had become
bad - Whether since requirement of assessee to prove that a debt has become a
bad debt was dispensed with by 1989 amendment and, whereafter, all that
assessee had to do was to write off a bad debt as irrecoverable, order of
Assessing Officer requiring assessee to prove that debts had become bad, was
not correct - Held, yes
Circular & Notifications : CBDT Circular No. 551, dated 23-1-1990
In the financial year relevant to the assessment year 1994-95, the assessee wrote off some amount that was due to it as irrecoverable in its books of account and claimed deduction thereof under section 36(1)(vii). The Assessing Officer was of the view that these debts were shown as good debts till 31-3-1993 and the assessee could not produce and documentary evidence to show that any efforts were made by it to recover the amount and therefore the debts had become bad. He, thus, declined to give any benefit to the assessee under section 36(1)(vii). On appeal, the Commissioner (Appeals) held that under section 36(1)(vii), the assessee was only required to write off a bad debt as irrecoverable and, therefore, the order of the Assessing Officer requiring the assessee to prove that the debts had become bad was not correct.
On revenue’s appeal, the Tribunal confirmed the order of the Commissioner (Appeals).
On appeal:
There is a significant difference between the provision of section 36(1)(vii) as it stood prior to 1-4-1989, and the provision as stands today. Prior to 1-4-1989, it was necessary for the assessee to establish that the debt had become bad, whereas now for the debt to be classified as bad, the assessee has only to write it off as irrecoverable in its accounts. [Para 7]
While making the amendment as above, the Central Board of Direct Taxes issued a circular bearing No. 551, dated 23-1-1990, wherein it is stated in paragraphs 6.6. & 6.7 that the earlier provision 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’. [Para 8]
There was no error in the view taken by the Tribunal. The amendment made to section 36(1)(vii) was a conscious decision taken to eliminate litigation with regard to establishing what is bad debt. [Para 10]
If an assessee writes off a debt as a bad debt without giving any reason, he will not get any benefit from this. This is for the reason that by virtue of section 41(1), where a deduction has been allowed in respect of a bad debt which is irrecoverable and if the amount or a part thereof is subsequently recovered, then that amount shall be deemed to be profits and gains of business or profession of that relevant previous year. [Para 11]
The submission of revenue, that the 1989 amendment incorporated only the year of allowability but it did not dispense with the requirement of the assessee to prove that the debt has become a bad debt, could not be accepted as that interpretation would take the situation to what was prevailing pre - 1-4-1989. [Para 12]
Therefore, no substantial question of law arose for consideration of the High court and, hence, the appeal was to be dismissed. [Para 13]