CIT vs. U.P. Rajkiya Nirman Nigam Ltd.; [2013] 36 taxmann.com 96 (All):
For the A. Y. 2004-05, the assessee’s claim for deduction of bad debts u/s. 36(1)(vii) of the Income-tax Act, 1961 was disallowed by the Assessing Officer on the ground that the decision to write off bad debt was not taken in the relevant previous year. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the following questions were raised before the High Court:
“i) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that assessee can keep his accounts open for an indefinite period and pass an entry at a later stage even after 12 months from the closure of the accounting period?
ii) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing the claim of bad debts of the assessee on the ground that it has been written off in the accounts of the relevant previous year while failing to appreciate that decision to write off bad debt was not taken in the relevant previous year and the same were actually not done in the previous year by 31st March?”
The Allahabad High Court upheld the decision of the Tribunal and held as under:
“i) On perusal of the provisions, it reveals that the only requirement for allowing the bad debt u/s. 36 (1) (vii) of the Income-tax Act, is that any bad debt or part thereof is written off as irrecoverable and secondly, they should be written off in the accounts of the assessee for the previous year. In the instant appeal, neither the department nor the assessee disputes that the debt had become bad and it was written off.
ii) The prescription as provided is to write off bad debt by the assessee in the accounts ‘for the previous year’, but it does not say to write off bad debt ‘in the previous year’. Thus, there is a vast difference if the word ‘in’ would have been there in place of ‘for’. Further, the words ‘accounts of the assessee’ are qualified with further words ‘for the previous year’. Thus, it only means that the accounts in which the Act of writing off is to be done by the assessee should be for the previous year. Therefore, the law requires to write off the bad debt in the accounts of the assessee in the relevant accounting year. There is neither any condition nor any provision that the writing off should be done in the previous year, i.e. before end of the financial year.
iii) In the present case, debts relating to the period 1987-88 and 1998-99 claimed in the accounts which were prepared up to 31-03-2004 and as the accounts of the assessee are open and subject to corrections by the Auditors, as per the Companies Act, then such writing off can be done in those account books. No new legal proposition has been brought to our notice for treating the debt as bad or irrecoverable should be taken in the previous year itself. In other words, where account books are not closed and not signed by the Board of Directors and not adopted by the shareholders as per the Companies Act, it is legally permissible to make adjustments before they are finally adopted.
iv) Further, it is admitted that the original return, on the basis of unaudited accounts, was filed on 01-11-2004. After audit had taken place and report of the Auditors was accepted, revised return was filed on 18-08-2005 and it is only in the revised return, the debts to the tune of Rs. 2 crore and odd had been declared as bad. The ground taken by the Assessing Authority and Appellate Authority for not accepting the said bad debts during the assessment year under consideration, i.e. 2004-05 is contrary to the provisions of section 36 (1) (vii) of the Income-tax Act, and further in view of the interpretation as stated here-in-above. Therefore, the Tribunal has rightly allowed the appeal of the assessee.
v) In view of above, the questions are answered in the negative, i.e., against the Revenue and is in favour of the assessee.”
