Facts of the Case

  • The Assessee (Sawhney Exports) is an export house engaged in the business of exporting garments and receiving payments in foreign exchange.
  • For the Assessment Year (AY) 1997-98, the Assessee filed its return of income claiming a deduction for bad debts amounting to ₹1,25,36,852/-.
  • The Reserve Bank of India (RBI) granted permission to write off a sum of ₹90,36,518/- in the books of accounts via a letter dated 20th March, 1998, which fell after the close of the relevant previous year. The Assessing Officer (AO) allowed this portion.
  • However, for the remaining balance of ₹31,62,238/-, the Assessing Officer denied the deduction and added it back to the income, citing that the Assessee failed to furnish RBI approval/evidence during the assessment proceedings for this specific amount.
  • The Commissioner of Income Tax (Appeals) [CIT(A)] overturned the AO's decision, noting that the entire amount of ₹31,62,238/- had been genuinely written off in the books during the relevant previous year. The CIT(A) held that RBI approval is not a mandatory pre-condition under the Income Tax Act for claiming a bad debt deduction.
  • The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s deletion, prompting the Revenue Department to appeal to the High Court of Delhi.

Issues Involved

  • Whether the Income Tax Appellate Tribunal was correct in deleting the addition of ₹31,62,238/- made by the Assessing Officer on account of disallowed bad debts under Section 36(1)(vii) of the Act.
  • Whether the approval or permission from the Reserve Bank of India (RBI) is a mandatory condition precedent for writing off foreign exchange-related bad debts under the provisions of the Income Tax Act, 1961.

Petitioner’s (Revenue/CIT) Arguments

  • The learned counsel for the Revenue argued that a mere entry in the books of accounts to "write off the debts" is legally insufficient to claim a deduction under Section 36(1)(vii) of the Act.
  • The Revenue contended that the onus remains entirely on the Assessee to actively prove that the debts had become completely irrecoverable beyond doubt.
  • Because the RBI approval for the disputed portion of ₹31,62,238/- was not submitted concurrently, the deduction should not be sustained.

Respondent’s (Assessee/Sawhney Exports) Arguments

  • Note: No one appeared through counsel on behalf of the respondent during the final hearing; however, the lower authorities' recorded stance was evaluated.
  • The Assessee’s position established before the CIT(A) and ITAT was that the amount had been factually and structurally written off in the books of accounts during the previous year relevant to the assessment year.
  • The Assessee maintained that since the AO had already accepted a substantial portion (₹90,36,518/-) where RBI approval was received after the close of the previous year, the remaining balance should be accorded the same treatment.

Court Order / Findings

  • The High Court of Delhi observed that the Reserve Bank of India had issued its initial approval on 20th March, 1998, which was already subsequent to the previous year relevant to AY 1997-98.
  • The Court pointed out the inconsistency in the Revenue's approach: the Assessing Officer had allowed a major chunk of the bad debts despite the approval coming post-previous year, yet disallowed the remaining balance of ₹31,62,238/- under identical chronological circumstances.
  • The Court explicitly affirmed that under the statutory provisions of Section 36(1)(vii) of the Act, the essential requirement is that the Assessee must write off the bad debts in its books of accounts during the previous year relevant to the assessment year.
  • The High Court held that the Tribunal committed no error in deleting the addition, finding that no substantial question of law arose for its consideration. Consequently, the Revenue’s appeal was dismissed.

Important Clarification

  • RBI Approval vs. Income Tax Provisions: The Delhi High Court confirmed the legal principle that regulatory clearances under foreign exchange guidelines (such as RBI approvals for export write-offs) do not override or act as a mandatory prerequisite for statutory allowances under the Income Tax Act, 1961. If an assessee complies with the explicit accounting condition of Section 36(1)(vii) by writing off the debt in its books within the relevant previous year, the deduction cannot be withheld merely due to delayed or pending regulatory regulatory paperwork from the RBI.

Section Involved

  • Section 36(1)(vii) of the Income Tax Act, 1961 (Deduction for bad debts written off as irrecoverable in the accounts of the assessee).

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2007:DHC:10144-DB/VBG04052007ITA4102007_100708.pdf

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