Commissioner of Income Tax vs Global Capital Ltd.

V.B. Gupta, J.—Admit.

In the present appeal, the Revenue has raised two issues for our consideration. The first issue is as to whether the Income Tax Appellate Tribunal (for short as "the Tribunal") rightly allowed deduction of Rs. 10,92,750 to the assessee on account of bad debts u/s 36(1)(vii) of the Income Tax Act, 1961 (for short as "the Act").

The second issue is as to whether the Tribunal was correct in law in allowing the deduction of remuneration of Rs. 4,52,833 paid by the assessee to Shri Neeraj Kanwar despite the fact that the assessee had not established rendering of services by Shri Neeraj Kanwar for the purposes of business of the assessee-company.

The assessee in the present case filed a return declaring an income at Rs. 4,77,330 which was subsequently revised to Rs. 9,64,840. During the assessment proceedings, the Assessing Officer noticed that the assessee had claimed bad debts amounting to Rs. 10,92,750. The assessee was required by the Assessing Officer to prove that the debt had become actually bad and there was no hope to recover the same at the time of writing it off. No satisfactory explanation was given by the assessee and as such the Assessing Officer held that the debts of Rs. 10,92,750 were not bad at all and the assessee-company had deliberately credited fictitious bad debts and debited to the profit and loss account to reduce its tax liability and disallowed the same.

During the course of the assessment proceedings it was also found by the Assessing Officer that the assessee has paid Rs. 4,52,833 as remuneration to Shri Neeraj Kanwar which was claimed as deduction. The assessee was asked to produce Shri Neeraj Kanwar and establish genuineness/reasonableness of its claim. However, the assessee did not produce Shri Neeraj Kanwar nor adduced any evidence in support of its claim and accordingly the Assessing Officer disallowed the claim of the assessee and added Rs. 4,52,833 to its income.

Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) who allowed the claim of the assessee holding that the amount of Rs. 10,92,750 is allowable u/s 36(1)(vii) of the Act as bad debt and also allowed the claim of the assessee with respect to remuneration of Rs. 4,52,833 paid to Shri Neeraj Kanwar holding that looking to the educational profile of Shri Neeraj Kanwar, it was adequately explained as justifiable.

The Revenue challenged the order passed by the Commissioner of Income Tax (Appeals) before the Tribunal and the Tribunal, vide the impugned order dated December 30, 2005, upheld the order of the Commissioner of Income Tax (Appeals) on both the issues.

Now, the Revenue has challenged the impugned order of the Tribunal by way of the present appeal u/s 260A of the Act before this court.

It has been contended by learned Counsel for the Revenue that though there was a debt due to the assessee but the same had not become bad as the assessee had actually not written off the amount from its accounts book.

On the other hand, it has been argued by learned Counsel for the assessee that in the ledger account as on September 30, 1995, the amount was shown as recoverable from the concerned parties. While preparing the final accounts as on March 31, 1996, the assessee wrote these debts as bad and consequently debited the profit and loss account and reduced the debtors account by the equivalent amounts, which is clear from the balance-sheet. Thus, this amount was bad debt in terms of Section 36(1)(vii) of the Act which is allowable as business expenditure.

As per the provisions of Section 36(1)(vii) of the Act, as amended with effect from April 1, 1989, the assessee was not required to establish that the concerned debt has actually become bad in the relevant year for the purpose of claiming deduction under the Section and the only requirement for claiming this deduction is that the assessee has to write off the relevant debts in its books of account treating the same as bad. In the present case, the assessee had written off the relevant bad debts amounting to Rs. 10,92,750 in its books of account by debiting the profit and loss account and reducing the equivalent amount from the total debtors.

Under these circumstances, we hold that the assessee-company was duly entitled to deduction of a sum of Rs. 10,92,750 on account of bad debts and we do not find any infirmity in the reasoning given by the Tribunal on this point and as such no substantial question of law with regard to this issue arises for our consideration and the appeal filed by the Revenue on this ground stand dismissed.

With regard to the issue of allowing the deduction of remuneration of Rs. 4,52,833 paid by the assessee to Shri Neeraj Kanwar is concerned we are of the opinion that the following substantial question of law arises for our consideration:

(1) Whether the Tribunal was justified in law in allowing the deduction of remuneration of Rs. 4,52,833 paid by the assessee to Shri Neeraj Kanwar despite the fact that the assessee had not established rendering of services by Shri Neeraj Kanwar for the purposes of business of the assessee-company?

Paper books be filed in accordance with the High Court Rules.

List the matter in due course.