Bad Debt Admissible If Written Off In Books of Account

Shrawan Goenka Vs ACIT (ITAT Patna)

Brief facts relevant to the issue are that during the assessment proceedings, the Assessing Officer noted that the assessee had debited in his Profit & Loss A/c, a sum of Rs.4,94,006/- under the head bad debts. On being asked to produce the details along with supporting papers, bills, vouchers, the assessee submitted that the amount debited under the head ‘bad debts’ was raised during the same previous year. It was further submitted that in the business of dairy products many customers did not pay whenever they get rotten milk or other dairy products. However, the assessee furnished the list of four debtors, but could produce confirmation from only two debtors. The Assessing Officer however noted that the assessee’s claim of expenses in respect of aforesaid two debtors were inflated and was not substantiated by adequate supporting documents. He, therefore, disallowed the amount pertaining to two debtors amounting to Rs.2,41,607/-.

In appeal, the ld. CIT(A) confirmed the addition made by the Assessing Officer.

Before this Tribunal, the ld. counsel for the assessee has submitted that the assessee was in the business of dairy distributors and that the assessee has duly provided list of debtors, persons in whose case the debtors had actually become bad and non-recoverable. He has further submitted that the Assessing Officer without any incriminating evidence on the file made the assessment that the debt in respect of two debtors was inflated. The ld. counsel has relied upon CBDT Circular no.12/2016 dated 30.05.2016, wherein, it has been directed to the Income-Tax Authorities that the claim of any bad debt shall be admissible u/s 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of account of the assessee for that previous year and it fulfils the conditions stipulated in sub-section (2) of sub-section 36(2) of the Act.

The ld. DR could not rebut the above submission of the ld. AR, in view of this, the appeal of the assessee is allowed and the addition made by the lower authorities on this issue are ordered to be deleted.

FULL  TEXT OF THE ORDER OF ITAT PATNA

The present appeal has been preferred by the assessee against the order dated 20.03.2020 of the Commissioner of Income Tax(Appeal), Hazaribagh [hereinafter referred to as ‘CIT(A)’] passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’). The assessee in this appeal has taken the following grounds of appeal:

“1.The order passed by ld Commissioner of Income-tax (Appeals) – Hazaribagh is unjust, unwarranted and bad in law.

2. The ld Commissioner of Income-tax (Appeals) Hazaribagh failed to appreciate and/or overlooked and/or did not consider the submissions made by the appellant as also other facts of the case.

3. On the facts and in the circumstances of the case, the ld Commissioner of Income-tax (Appeals) – Hazaribagh erred in confirming disallowance of bad debts amounting to Rs 2,41,607/-.

4. On the facts and in the circumstances of the case, the ld Commissioner of Income-tax (Appeals) – Hazaribagh erred in confirming ad hoc addition of 5% on expenses incurred under head miscellaneous expenses, power & fuel and travelling.

5. The appellant craves leave to add, amend, rectify, modify or otherwise alter any ground of appeal.”

2. Ground No.1 &2 are general in nature.

3. Ground No.3 – Vide Ground No.3, the assessee has agitated against the action of the CIT(A) in confirming the disallowance of bad debts of Rs.2,41,607/-.

Brief facts relevant to the issue are that during the assessment proceedings, the Assessing Officer noted that the assessee had debited in his Profit & Loss A/c, a sum of Rs.4,94,006/- under the head “bad debts”. On being asked to produce the details along with supporting papers, bills, vouchers, the assessee submitted that the amount debited under the head ‘bad debts’ was raised during the same previous year. It was further submitted that in the business of dairy products many customers did not pay whenever they get rotten milk or other dairy products. However, the assessee furnished the list of four debtors, but could produce confirmation from only two debtors. The Assessing Officer however noted that the assessee’s claim of expenses in respect of aforesaid two debtors were inflated and was not substantiated by adequate supporting documents. He, therefore, disallowed the amount pertaining to two debtors amounting to Rs.2,41,607/-.

In appeal, the ld. CIT(A) confirmed the addition made by the Assessing Officer.

Before this Tribunal, the ld. counsel for the assessee has submitted that the assessee was in the business of dairy distributors and that the assessee has duly provided list of debtors, persons in whose case the debtors had actually become bad and non-recoverable. He has further submitted that the Assessing Officer without any incriminating evidence on the file made the assessment that the debt in respect of two debtors was inflated. The ld. counsel has relied upon CBDT Circular no.12/2016 dated 30.05.2016, wherein, it has been directed to the Income-Tax Authorities that the claim of any bad debt shall be admissible u/s 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of account of the assessee for that previous year and it fulfils the conditions stipulated in sub-section (2) of sub-section 36(2) of the Act. The contention of the aforesaid Circular are reproduced as under:

“Circular No. 12/2016, dt. 30-5-2016 [F.No.279/Misc./140/2015-ITJ]

Admissibility of Claim of Deduction of Bad Debt Under Section 36(1)(vii) r/w Section 36(2)

Proposals have been received by the Central Board of Direct Taxes regarding filing of appeals/pursuing litigation on the issue of allowability of bad debt that are written off as irrecoverable in the accounts of the assessee. The dispute relates to cases involving failure on the part of assessee to establish that the debt is irrecoverable.

2. Direct Tax Laws (Amendment) Act, 1987 amended the provisions of sections 36(1)(vii) and 36(2) of the Income Tax Act 1961, (hereafter referred to as the Act) to rationalize the provisions regarding allowability of bad debt with effect from the 1st April, 1989.

3. The legislative intention behind the amendment was to eliminate litigation on the issue of the allowability of the bad debt by doing away with the requirement for the assessee to establish that the debt, has in fact, become irrecoverable. However, despite the amendment, disputes on the issue of allowability continue, mostly for the reason that the debt has not been established to be irrecoverable. The Hon’ble Supreme Court in the case of TRF Ltd. In CA Nos. 5292 to 5294 of 2003 vide judgment dated 9-2-2010 [(2010) 36 (I) ITCL 2 (SC): 2010 Tax Pub (DT) 1481 (SC) has stated that the position of law is well settled. After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1) (vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of accounts of assessee.

4. In view of the above, claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vi) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act.

5. Accordingly, no appeals may henceforth be filed on this ground and appeals already filed, if any, on this issue before various Courts/Tribunals may be withdrawn/not pressed upon.

6. This may be brought to the notice of all concerned.”

The ld. DR could not rebut the above submission of the ld. AR, in view of this, the appeal of the assessee is allowed and the addition made by the lower authorities on this issue are ordered to be deleted.

4. Ground No.4 – Vide Ground No.4 the assessee contested the action of the ld. CIT(A) in confirming the ad hoc disallowance @ 5% on expenses, power and fuel and travelling.

The ld. counsel for the assessee in this regard stated that the aforesaid expenses were actually incurred by the assessee and the required details and evidences including bills and vouchers were produced before the Assessing Officer. That, moreover the expenses of power and fuel were paid to the State Electricity Board which could be confirmed from the bills issued by the Electricity Board and, therefore, there was no question of any ad hoc disallowance.

The ld. DR could not rebut the aforesaid contentions of the ld. counsel for the assessee. In view of this, we do not find justification on the part of the lower authorities in making the ad hoc disallowance of 5% of the miscellaneous expenses. The addition on this account is also ordered to be deleted.

Ground No.5 is general in nature.

In view of observation made above, this appeal of the assessee stands allowed.

6. In the result, the appeal of the assessee stands allowed.