Bad Debts written off as irrecoverable must form part of income.
The assessee can claim bad debts by just writing off as irrecoverable in the accounts without establishing that they have actually become bad debts or not but it is incumbent on the assessee to at least prove that the impugned bad debts have formed part of income of the assessee before being written off. This was held by ITAT in a recent judgment detailed hereunder.
ABCAUS Case Citation:
933 2016 (06) ITAT
Important Judgments Cited:
Dhali Enterprises and Engineers (P) Ltd.vs. CIT (2007) 207 CTR (Guj.) 729
TRF vs. CIT 323 ITR 397 (SC) [Civil Appeal No.5293 of 2003]
Brief Facts of the Case:
The assessee company was engaged in trading in detergents, toilet soaps and incense sticks. The case for the relevant assessment year was selected for scrutiny assessment. In response to the notice only part of the information called for were supplied and due to non attendance and non compliance on many occasions, the assessment was completed ex parte u/s 144 r.w.s. 143(3) on the basis of available records in the file. One of the additions made was Rs. 1911282/- towards disallowance of bad debts. Aggrieved, the assessee company appelad to CIT(A) who placing reliance on the Gujarat High Court judgment in Dhati Enterprises (supra) confirmed the disallowance. The Hon’ble Gujarat High Court in Dhali Enterprises (supra) had held as under:
“Business expenditure – Bad debt – conditions precedent – Requirement for claiming deduction on account of bad debt is that the debt should be written off as irrecoverable and the assessee should prove that the debt has become bad in that year – Mere debiting the amount is not sufficient -Amount due to assessee was not paid by the debtors in the relevant year due to some mutual differences – Correspondence between the parties shows that the assessee was insisting on payment of the debts – It cannot be said that the debts had become bad in the relevant year – claim for bad debts rightly disallowed.
Conclusion : Debts due to assessee cannot be said to have become bad in the relevant year where the debtors had not paid the amount due to some differences and the assessee was insisting on payment and therefore, claim for deduction of bad debts was not allowable.”
Aggrieved by the order of CIT(A), the assessee company agitated the matter before ITAT.
Contentions of the Assessee:
It was submitted that bad debts had been claimed in the books of account relating to 14 parties because the recovery of these 14 accounts was not forth-coming and there were meager possibility of their recovery. That copy of accounts were furnished before the authorities and informed that assessee had sold goods to these parties and offered the income thereon for taxation and merely because the assessee did not furnish PAN, the claim of bad debts u/s 36(1)(vii) cannot be denied as there is no pre-condition of PAN detail for claiming the expenditure as this is not the case of cash credit wherein assessee is required to furnish the proof of identity or genuineness of the cash credit.
Observations of ITAT:
The Tribunal opined that a assessee is entitled to claim irrecoverable bad debts if they have been claimed by the assessee in the books of account maintained subject to the rider of section 36(2)(i) which provides that no such deduction shall be allowed unless the same has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off. Thus from the conjoined reading of the provisions of section 36(1)(vii) read with section 36(2)(i) of the Income Tax Act, 1961, the Tribunal specified the following requisite conditions which need to be adhered to by the assessee for allowance of bad debt:-
(i) It must be a debt or part thereof
(ii) Such debt must be in the revenue nature
(iii) Such debt should be in respect of a business which is carried on by the assessee in the relevant accounting year.
(iv) Such debt must have been taken into account in computing the income of the assessee in the previous year or in earlier year as a part of gross sales/turnover.
(v) Such debt must be incidental to the business
(vi) Such debt must have been written off as irrecoverable in the account of the assessee in the previous year.
The ITAT also highlighted the Hon’ble Supreme Court judgment in TRF case (supra) wherein it had been held that,
“This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.”
The ITAT noted that the assessee had not been able to place on record the details showing that the debts have been taken into account in computing the income of the assessee and therefore while allowing the appeal of the assessee, restored the matter back to the file of Assessing Officer to examine this aspect.
Note: In this context CBDT has recently issued Circular No. 12/2016 which is line line with the judgment delivered by the Supreme Court in TRF (supra) case. Click Here to read more >>