Bad Debts deductible if same been taken into a/c in computing income of an earlier previous year

FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT

This appeal is filed by the assessee impugning the order passed by the Income Tax Appellate Tribunal, Cochin Bench in I.T.A. No. 104/2010 concerning the Assessment Year 2006- 07. In the Assessment Order for the Assessment Year 2006- 07, a copy of which is produced as Annexure- A, the assessee has claimed an amount of Rs. 1,16,521/- as prior period expenses in the Profit and Loss Account. On verification, the Assessing Officer found that the amount represented expenses pertaining to the previous year which was written off in the Assessment Year in question. On the ground that the assessee could not explain when the amount of expenses crystallized, the Assessing Officer held that the expense was not incurred during the previous year relevant to the Assessment Year and hence, cannot be allowed as business expense. Accordingly, the claim of the assessee was disallowed and assessment was completed.2. In the appeal filed before the first appellate authority, the assessee submitted that it is a sub-broker to the principal broker based at Mumbai, and that as per the directions of the SEBI, the share broker has remitted DP charges for the transaction carried out by the customers served by the sub-broker. It was stated that the principal broker had debited in the account of the appellant with Rs. 31,457.59/- during the previous year 2002- 03 and Rs. 85,064.02/- during the previous year 2003- 04. According  to the assessee, the principal broker has not given the break-up of the above debts of the customers on whose behalf these charges were debited. According to the assessee, the fact that the individual customer-wise break- up could not be obtained, was known to them only during the Financial Year 2005- 06 and therefore, the amount acquired the character of the expenditure in that year. Therefore, the assessee claim that the amount is to be allowed as an expenditure of the Assessment Year 2006- 07.

3. The alternative contention raised was that since the assessee could not recover the amount from individual customers from whom it was to be recovered, the amount should be written as bad debt and allowed as an expenditure in the assessment in which it was written off.

4. Both the claims were negatived by the first appellate authority holding that the expenditure claimed was pertaining to the earlier year and so, it cannot be allowed as a revenue expenditure. The alternative claim of the appellant that it was a bad debt was also not accepted because details of the debt were not produced. The Tribunal also upheld the order passed by the lower authorities. It is in this background, this appeal is filed and the questions of law framed are the following:

a) Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in rejecting the claim for deduction of Rs. 1,16,521/- as a revenue expenditure/ bad debt which has been written off from the books of accounts for financial year 2005- 06, relevant to the assessment year 2006- 07?

b) The Appellant having already been assessed on the brokerage income from the shares and the amount written off as bad debt being amount receivable from customers, is not the claim for bad debts legal and valid under section 36(1)(vii)? On that basis is the contrary decision taken by the Appellate Tribunal legal, valid and sustainable?

c) Is the Appellate Tribunal justified in failing to consider the principles of law laid down by the Apex Court in the decision reported in 155 ITR 152 (SC), where the facts are identical, in which the Apex Court held that if the assessee had taken into account the income from transactions with customers in computing the income of the assessee for previous year or of an earlier previous year, the appellant was entitled to claim deduction of the amount as bad debt, when such debts are written off from the books of accounts?

d) Is the decision of the Appellate Tribunal legal, valid and sustainable?”

5. We heard the learned Senior Counsel appearing for the assessee and the learned Senior Counsel appearing for the Revenue.

6. The claim of the assessee that the amount has to be treated as a bad debt and has to be allowed as an expenditure in the year in which it was written off has to be appreciated in the light of the provisions contained in Section 36 of the Income Tax Act. Section 36 provides other deductions and in terms of this provision, deductions provided for in the Section shall be allowed in respect of the matters dealt with therein in computing the income referred to in Section 28, and Clause-(vii) of Section 36(1) provides that, 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 shall be allowed as a deduction in computing the income referred to in Section 28. However, Clause-(i) of sub-section-(2) provides that, in making any deduction for bad debt or part thereof, no such deduction shall be allowed unless such debt or part thereof 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 or of an earlier previous year.

7. This therefore, means that the assessee has to prove satisfaction of both Section 36(1)(vii) and Section 36 (2)(i), viz. that the bad debt has been written off and that the bad debt has been taken into account in computing the income of the assessee in any one of the years mentioned in Clause-(i) of sub-section (2) of Section 36.

8. A reading of the order passed by the Tribunal does not show that an inquiry in that regard has not been undertaken and therefore, we are of the view that the matter requires reconsideration by the Tribunal and the Tribunal should decide the matter afresh giving the assessee an opportunity to substantiate his case, if necessary, by production of additional materials.

9. With that in view, we set aside the order of the Tribunal in ITA No. 104/2010 and remit the matter to the Tribunal for fresh consideration in accordance with law and in the light of the observations herein above made.