Commissioner of Income Tax vs Sirpur Paper Mills Ltd.

V.V.S. Rao, J.—This appeal by the revenue is against the order of the Income Tax Appellate Tribunal (ITAT), Hyderabad Bench, in I.T.A. No. 138/Hyd/00, dated 08.02.2008.

The Assessee - the Respondent herein - filed its return for the assessment year 1996-97 declaring an income of Rs. 55,20,147/-. During scrutiny, inter alia it was found by the assessing officer that the Assessee had claimed Rs. 14,26,260/- as bad debts written off consisting of twenty items. In so far as bad debts are concerned, the assessing officer called for details and explanations. After conducting enquiry, the assessing officer came to the conclusion that eleven items of bad debts, in a sum of Rs. 11,85,086/- could not be written off as bad debts and that the explanation of the Assessee that it had issued computer generated reminders to the customers (sundry debtors) in a standard proforma was not convincing. The assessing officer, however, allowed the claim of the Assessee for bad debts in a sum of Rs. 2,41,174/-. The assessing officer did not also allow certain amount of depreciation and loss for the assessment year 1995-96. With these, we are not concerned in this case.

Against the assessment order dated 25.02.1999, the Assessee went in appeal before the Commissioner, Income Tax (Appeals-III), Hyderabad. The only contest was with regard to the disallowance of bad debts amounting to Rs. 11,85,086/-. The Appellate Commissioner, relying on Commissioner of Income Tax Vs. Coates of India Ltd., dismissed the appeal confirming the assessment order. Aggrieved by the same, the Assessee successfully filed an appeal before the Appellate Tribunal, which allowed the appeal on 08.02.2008.

The Senior Counsel for the Income Tax Department submits that, in the absence of any material to establish that the debt has become a bad debt, the deduction u/s 36(1)(vii) of the Income Tax Act, 1961 cannot be granted. He would urge that, even though the material was not placed before the assessing authority or the appellate authority, the Tribunal ought to have insisted upon such material in proof of bad debts, before accepting the allowance claimed by the Assessee.

Chapter IV Part D of the Income Tax Act deals with computation of business income from profits and gains of business or profession. Section 28 is the main provision which stipulates the heads of income which shall be chargeable to income tax under this head. Sections 30 to 36 allow various deductions to be made from the business income. In addition to the business expenditure that is allowed in computing the income chargeable to tax under the head "profits" and "gains" of business, Section 36 enumerates ''other deductions''. One of them is bad debts, which reads as under.

Other deductions.

36 (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28-

(vii) 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:

Provided that in the case of an Assessee to which Clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

A plain reading of the above provision would show that, if an Assessee writes off a debt or part thereof as irrecoverable in the accounts for the previous year, the same can be allowed as deduction u/s 36(1)(vii). The controlling words/phrase in Clause (vii) is ''which is written off as irrecoverable''. No further proof is necessary. In TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, the Supreme Court noticed the difference in the language in Section 36(1)(vii) as it existed prior "Prior to 01.04.1989 Clause (vii) reads thus: "subject to the provisions of Sub-section (2), the amount of any debt, or part thereof which is established to have become a bad debt in the previous year ". to 01.04.1989 and after 01.04.1989 and laid down

This position in law is well-settled. After April 1, 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. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in the accounts of the Assessee. When a bad debt occurs, the bad debt account is debited and the customer''s account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors.

In the case on hand, the Respondent claimed that computer generated reminders were sent to the customers on weekly basis in a standard proforma. The assessing officer seems to have accepted this to a certain extent, and, had allowed deduction towards bad debt to an extent of Rs. 2,41,174/- disallowing Rs. 11,85,086/-, only on the ground that the Assessee did not produce office copies of the reminders sent to the customers. This found favour with the appellate authority. The learned Tribunal, however, came to the correct conclusion relying on the decision of the Delhi High Court in CIT v. Autometers Limited (2007) 292 ITR 395 (Del). In view of the decision of the Supreme Court in TRF Limited, the impugned order of the learned Tribunal is unassailable.

This I.T.T.A., is therefore dismissed in limine.