Bad debts u/s 36(1)(vii) disallowed as only provision made, not written off in books

Bad debts claimed u/s 36(1(vii) disallowed as only provision was made and bad debts not written off in books of account

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance of bad debts claimed u/s 36(1)(vii) of the Income Tax Act, 1961 (the Act).

ABCAUS Case Law Citation
ABCAUS 3556 (2021) (10) ITAT

Important case law relied referred:
RF Ltd vs. CIT [2010] 190 Taxman 391 (SC)

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance of bad debts claimed u/s 36(1)(vii) of the Income Tax Act, 1961 (the Act).

During the assessment proceedings, the Assessing Officer noticed that the assessee company had claimed   an expenditure under the head ‘provision for Doubtful debts’.

During the scrutiny, the assessee submitted that these debts were from a foreign contract which had come to a closure during the year. It was explained that while settling the accounts, the

foreign customer did not agree to some invoices raised and there was no chance of recovery.  Therefore, 50% of the outstanding amount was written off and debited to the P&L account.

The AO observed that this was not acceptable and moreover it was noticed from the Profit & Loss A/c that this was provision only and not a write-off from the ledger account of the foreign debtor.

The AO therefore, disallowed the written off u/s 36(1)(viia) of the Act. 

Before the Tribunal, the assessee relied on the decision of the Hon’ble Supreme Court wherein it was held that it is not necessary for the assessee to establish that debt has become irrecoverable in case a provision has been made in the preceding previous years.

The assessee also relied on the CBDT Circular No. 12/2016, dated 30

^th May, 2016 which stated that claim  for  any debt or part thereof in any previous year shall be  admissible u/s.36(1)(vii) if it is written off as irrecoverable  in the books of accounts of the assessee for that  previous  year.  It was also mentioned in the circular that    it is not necessary for assessee to establish that the    debt, in fact has become irrecoverable but it is enough if the bad debt is written off as irrecoverable in the books of accounts of assessee.

The Tribunal noted that it was clear from the financial   statements that the assessee had made only a provision, but not written off the bad debts in its books of account.

Further, out of total bad debts claimed, the assessee had made a provision of 50% in its books of account during the year, for which there was no plausible explanation from the assessee.

The Tribunal pointed out that in its own submissions, the appellant had said that the debtor did not agree to some invoices raised i.e. that the bills have not been validated as expenses allowable. Therefore, the case law relied on and CBDT Circular were not applicable to the case of the assessee.

Accordingly, the Tribunal held that the CIT(A) had rightly   dismissed the appeal of the assessee on this count. Accordingly, the grounds raised by assessee on this issue were decided in favour of the Revenue and against the assessee.

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