For a debt to be classified as bad, assessee has only to write it off as irrecoverable in its accounts.
Jan 3, 2010 Income Tax Case Laws
There is no requirement that the income in respect of which bad debts is written off has to be recognized as income in earlier previous year and not in the year in which bad debt is written off.
CASE LAW DETAILS
Decided by: ITAT, DELHI BENCH `B’, NEW DELHI, In The case of: C. B. Richard Ellis Mauritius Ltd. v. DDIT (Int’l Taxation), Appeal No.: ITA No. 971/Del/2009, Decided on: November 17, 2009
RELEVANT PARAGRAPH
6. We have considered the rival contentions, carefully gone through the orders of the authorities below and found from the record that assessee is engaged in service industry where payment becomes due immediately on rendering of services. As per normal practice after raising of bill for services, 30 days credit is allowed after which follow up action is started. Thereafter having regard to the facts and circumstances of each individual case, a bona-fide assessment is made by the management to the effect of its realization and thereafter if the management is satisfied with possibility of its recoverability the same is written off as bad debts in the books of account. During the relevant year under consideration the assessee had shown income of Rs.6.88 crores on account of services rendered. Out of it, in the profit & loss account the assessee has claimed bad debts of Rs.47.48 lakhs in respect of 22 parties, full details of which alongwith the date of entering the transaction, the amount outstanding, date and value of invoice, age of debtor, the amount ; ‘ written off and the date of writing off was furnished before the AO. The copy of accounts of all these parties have also been filed. As the assessee was unable to recover the outstanding balance in their account, after making reasonable and bona-fide efforts for recovering, the same was written off as bad debt in the profit & loss account. There is no dispute to the fact that all the amounts were written off by debiting in the profit & loss account. There is also no dispute that corresponding entry in the respective account of parties were also passed. In the assessment order, the AO has wrongly observed that bad debts written off were in the nature of trade discount. In case of trade discount, there is no reason to write off the debt and claim the same u/s 36(l)(vii), since the amount of trade discount is firstly reduced from the gross receipts, and only net receipt is taken as income. The trade discount can be claimed as an expenditure as and when the same is given. The assessee has duly explained the accounting policy followed by it. As per the accounting policy followed by the assessee company, we found that when the services are rendered, the Revenue is recognized by debiting the party account and crediting the income account. In case where money is not recoverable from the party after doing reasonable efforts, the outstanding balance in the account is being written off as bad debts by debiting the profit & loss account and a corresponding entry in the debtor account is also being passed. Even if in the very same year the assessee is unable to recover the amount of bill raised on account of services rendered and which has already been accounted for as income, the assessee wrote off the same in the books of account and claimed it as bad debts. As per the amended provisions of Section 36(l)(vii) if a debt has been written off as irrecoverable in the accounts of the assessee, it will be sufficient for claiming it as bad debts, subject to the condition that the amount so written of has already been accounted for as income in the year or in the earlier years. Thus for claiming any debt as a bad debt, one has to satisfy following two conditions:-
“(1) Debt is written off as bad. debt in the Profit and Loss Account by making corresponding entry in the party account.
(2) Debt is taken in to account in computing the income of the assessee of the previous year in which debt is written off or in earlier previous year.”
7. None of the lower authorities have pinpointed any entry in the books of account to show that the debt has not been written off in the books of account by passing a corresponding entry in the party account nor it is a case of any of the lower authorities that the debt was not taken into account in computing the income of the assessee of the previous year in which bad debt is written off or in any of the earlier previous years. Ledger account of all the parties furnished before the lower authorities which have become bad and the genuine efforts were taken by the assessee to recover the same and only thereafter the amount was written off as bad debt. The provisions of Section 36(l)(vii) have been amended by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1.4.1989, wherein the words “any debt, part thereof have been substituted by “any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year”. The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987, has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. Clauses (iii) and (iv) of sub-section (2) of section 36 provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightaway allowed in the year of write off. The Amending Act, 1987, has, therefore, amended these clauses to withdraw them after the assessment year 1988-89.
8. It is crystal clear from the amended provisions of Section 36(l)(vii) that there is no requirement that the income in respect of which bad debts is written off has to be recognized as income in earlier previous year and not in the year in which bad debt is written off, in fact Section 36(2) itself permits that the income could be of the same previous year in which the debt has been written off or it could have been recognized in the earlier previous year. Thus, the allegation of AO to the effect that income in respect of bad debts written off was not recognized in earlier previous year but in the previous year itself, therefore assessee is not entitled to claim, is of no substance. After carefully analyzing the full details of debts written off, we found that all the conditions of Section 36(l)(vii) read with Section 36(2) have been satisfied, accordingly there is no merit in the action of the lower authorities for declining the claim of deduction on account of bad debts. Assessee’s case is squarely covered by the verdict of Hon’ble Jurisdictional High Court in the case of CIT Vs. Morgan Securities & Credits (?) Ltd. – 162 Taxman 124 (Dei) and CIT Vs. Autometers Ltd. – 292 ITR 345 (Del) wherein it was held that assessee would be entitled to deduction of the amount of any bad debts in the year it has been written off as irrecoverable in its accounts as provided u/s 36(2) and Section 36(l)(vii) read with Circular No.551 dated 23.1.1990. In the case of Autometers Ltd. (supra), the Hon’ble Delhi High Court was specifically dealing with amended provisions of the law with regard to claim of bad debts, wherein it was held that prior to 1.4.1989 it was necessary for the assessee to establish that the debt had become bad, whereas after the amendment w.e.f. 1.4.1989 in Section 36(l)(vii), for the debt to be classified as bad, the assessee has only to write it off as irrecoverable in its accounts. It was also observed that as per para 6.6 and 6.7 of Circular No.551 dated 23.1.1990 that the earlier provision regarding claim of bad debts generated a considerable amount of litigation on the issue whether the assessee had been able to establish that the debt had become bad. It was to overcome this that the amendment was made resulting in a bad debt “now being straightaway allowed in the year of write off’. The amendment made in Section 36(l)(vii) was a conscious decision taken to eliminate litigation with regard to establishing what is bad debt. Case laws cited by learned DR are distinguishable on facts insofar as conditions stipulated in Section 36(2) were not satisfied in respect of accounting of income in earlier years or during the year.
9. In view of the above discussion, we are inclined to agree with learned AR that order passed by lower authorities declining the claim of bad debts written off is devoid of any merit. We are therefore inclined to reverse the finding and conclusion of the lower authorities and allow this ground in favour of assessee.
Tags: bad debt, bad debts, books of account, c b richard ellis, contentions, crores, debtor, mauritius ltd
Leave a Reply