The Commissioner of Income Tax-9 vs Sharda Worldwide Exports Pvt. Ltd.

By the present appeal, the Revenue has proposed the following question as a substantial question of law:

"(i) Whether, on the facts and in the circumstances of the case and in law, the Hon''ble ITAT is justified in allowing the assessee''s claim for Bad Debts by relying only on provisions of Section 36(i)(vii) of the Income Tax Act, 1961, ignoring the fact that the assessee has not fulfilled the conditions as per section 36(2) of the Income Tax Act, 1961 with respect of claim of Bad Debt?"

The brief facts reveal that the assessee during the assessment year 2005-06 had written off certain amounts as bad debts. The assessment was reopened by issuance of notice under section 148. The assessee was provided the reasons for reopening the assessment. According to the Assessing Officer, the assessee having taken over the business of one Sharda International, a proprietary concern had acquired inter alia assets in the form of advances given to one Parasrampuria Credits and Investment Ltd. amounting to Rs. 40,96,520/- and one M.J. Patel amounting to Rs. 25,00,000/-, thus, totalling to Rs. 65,96,520/-. According to the Assessing Officer, the write off of this amount as bad debts is contrary to the provisions of section 36(1)(vii) of the Act. He, therefore, concluded that write off is bad and added the same to the income. The assessee preferred an appeal before the Commissioner of Income Tax on 20.1.2011. The Commissioner set aside the order of the Assessing Officer.

Being aggrieved by the order, the Revenue preferred an appeal before the Hon''ble Tribunal on 17.10.2011. The Tribunal confirmed the order of the Commissioner and dismissed the appeal. Hence the Appeal.

We have heard Mr. Singh, learned counsel for the Revenue and Mr. Jasani, learned counsel for the Assessee. The Tribunal observed that in order to write off the debts it was not necessary that the debt was irrecoverable and relied upon the decision of the Supreme Court in TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, (2010) 230 CTR 14 : (2010) 323 ITR 397 : (2010) 13 SCC 532 : (2010) 190 TAXMAN 391 , in which the Hon''ble Supreme Court observed that the provisions of section 36(1)(vii) after its amendment with effect from 1st April, 1989 clearly provided that before the amounts of bad debts are written off it need not be established that the debts had become irrecoverable completely before the write off takes place. The Supreme Court held that when bad debts occurs, the bad debt account is debited and the account of the customer is credited, thereby closing the account.

It will be useful to reproduce provisions of section 36(1)(vii) of the Act both prior and post 1st April, 1989:

"Pre-1st April, 1989:

Other deductions (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28

(i) to (vi) xxxx xxxx xxxx

(vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year.

Post-1st April, 1989:

Other deductions. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--

(i) to (vi) xxxx xxxx xxxx

(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year."

Having heard counsel and having considered that the issue is already covered, there was no occasion for the Assessing Officer to disallow the write off on the ground that no attempts have been made to recover the same. The assessee acquired a proprietary concern M/s. Sharda International and the assets in the form of advances of the balance sheet of two entities were part of the acquisition. These advances were bad debts and were written off under the provisions of Section 36(1)(vii) as amended and effective from 1st April, 1989. Prior to 1st April, 1989 Section 36(1)(vii) provided that for an amount of debt or part thereof to be written off it would have to be established that it became a bad debt in the previous year. Therefore, the fact that the said debt had become irrecoverable should have been established. However, after 1st April, 1989 the amended section provided that the amount of bad debt or part thereof which is written off as irrecoverable could be claimed as deduction. Accordingly no fault can be found with the order of the Tribunal. In the circumstances, we are of the view that this appeal does not raise any substantial question of law and the same is dismissed. There will be no order as to costs.