CIT vs. Kohli Brothers Color Lab (Allahabad High Court)

DATE: (Date of pronouncement)
DATE: December 6, 2009 (Date of publication)

Click here to download the judgement (kohli_bros_bad_debts_361vii.pdf)

Assessee has to prove “bad debt” even under new s. 36 (1) (vii)

The assessee wrote off an amount as a “bad debt” in its accounts and claimed a deduction u/s 36 (1) (vii). The AO asked the assessee to furnish information as to the names and addresses of the debtors, copies of ledger accounts and efforts made to realize these dues. On failure by the assessee to furnish the information, the claim was disallowed on the ground that the onus to prove that the debt was a bad debt was on the assessee which had not been discharged. This stand was confirmed by the CIT (A). On appeal, the Tribunal decided in favour of the assessee by relying on Oman International Bank 100 ITD 285 (Mum) (SB) where it had been held that after the amendment of s. 36(1)(vii) w.e.f. 1.4.1989, it was not obligatory on the part of the assessee to prove that the debt written of was indeed a bad debt. On appeal by the Revenue, HELD reversing the Tribunal:

(i) The effect of the amendment to s. 36 (1) (vii) is that it is not necessary for the assessee to establish that the debt had become bad in the previous year and mere writing of the debt as irrecoverable is sufficient. However, the said entry of write off of the bad debt in the books of accounts is not conclusive and the AO is not precluded from making inquiries as to whether the entries are genuine and not imaginary or fanciful. The AO has the power u/s 143(2) to see that the entries are not mere paper work or fake.

(ii) However, at the same time, the wisdom of the assessee cannot be questioned and no demonstrative or infallible proof of bad debt having become bad is required. Commercial expediency is to be seen from the point of view of assessee depending on nature of transaction, capacity of debtor etc.

(iii) This interpretation harmonizes S. 143 (2) with s. 36(1)(vii) so that the assessees are enabled to get deduction of their bad debts while at the same time the AO is authorized to see that the provisions of the Act are not flouted by any means.

See Also: Oman International Bank 313 ITR 128 (Bom), Star Chemicals 313 ITR 126 (Bom), Suresh Gaggal 180 Taxman 90 (HP), Morgan Securities 292 ITR 339 (Del) & Consolidated Digest of Case Laws