Facts of the Case

The present appeal was filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 04 July 2019, wherein the ITAT deleted an addition of ₹4,07,53,938/- made by the Assessing Officer on account of bad debts written off.

The assessee, Nilgiri Financial Consultants Ltd., had business transactions with M/s Max New York Life Insurance Company during Financial Years 2007-08 and 2008-09. Subsequently, certain amounts remained unrecovered and were written off as bad debts.

The Assessing Officer disallowed the claim, primarily on the ground that the debtor company had shown the amount as payable in its books and that the assessee had not closed the account.

Issues Involved

  1. Whether the bad debts claimed by the assessee were allowable under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961.
  2. Whether the existence of a corresponding liability in the debtor’s books affects the allowability of bad debt deduction.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in deleting the addition made by the Assessing Officer.
  • The debtor (Max New York Life Insurance Company) had acknowledged the amount as a liability in its books under Section 133(6).
  • The assessee had not closed the debtor’s account, indicating that the debt had not actually become bad.
  • Reliance was placed on the remand report submitted before the CIT(A).

Respondent’s Arguments (Assessee)

  • The transactions were limited to FY 2007-08 and 2008-09, and no further dealings occurred thereafter.
  • The amounts were duly accounted as income in earlier years and offered to tax.
  • The unrecovered amount was written off in the books, fulfilling statutory conditions.
  • Reconciliation showed that a significant portion of invoices was not accepted/paid by the debtor.

Court Findings / Judgment

The Delhi High Court upheld the ITAT’s order and dismissed the Revenue’s appeal.

The Court held that:

  • For claiming bad debt deduction, two conditions must be satisfied:
    1. The debt must have been taken into account in computing income in earlier years.
    2. The amount must be written off in the books of accounts.
  • The CIT(A) had recorded a finding of fact that both conditions were satisfied.
  • The debtor had not treated a substantial portion of invoices as payable, supporting the assessee’s claim.
  • No evidence was produced by the Revenue to show recovery of the alleged bad debts in subsequent years.

Accordingly, the claim of bad debts was held to be valid and allowable, and the appeal was dismissed.

Important Clarification by Court

  • Writing off bad debts in the books is sufficient compliance if conditions under Sections 36(1)(vii) and 36(2) are met.
  • The treatment of the amount in the debtor’s books does not override the assessee’s right to claim deduction.
  • Absence of recovery over multiple years strengthens the claim of bad debt.

Sections Involved

  • Section 36(1)(vii) – Deduction for bad debts
  • Section 36(2) – Conditions for allowability of bad debts
  • Section 133(6) – Power to call for information

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:2786-DB/MMH25072022ITA1592020_173905.pdf

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