November 2022
Bad debt — Writing off — Condition precedent — Assessee must arrive at bona fide decision that the debt not recoverable — Legal action taken by assessee in winding up proceedings against debtor lessee company — Assessee’s decision to write off debt in view of amended section 36(1)(vii) — Commercial expediency — Allowable — Change in method of accounting by assessee irrelevant
K. B. Bhujle, Advocate
L. K. P. Merchant Financing Ltd. vs Dy. CIT [2022] 447 ITR 507 (Bom.)
A.Y.: 1991-92
Date of order: 18th July, 2022 Sections: 36(1)(vii), 36(2) of ITA, 1961
49. Bad debt — Writing off — Condition precedent — Assessee must arrive at bona fide decision that the debt not recoverable — Legal action taken by assessee in winding up proceedings against debtor lessee company — Assessee’s decision to write off debt in view of amended section 36(1)(vii) — Commercial expediency — Allowable — Change in method of accounting by assessee irrelevant
The assessee was a NBFC engaged in the business of lease finance. It entered into a lease agreement with a company, the lessee, of lease of certain equipment for which, it had already made payments to the suppliers. It received one instalment of lease rental from the lessee which defaulted in further instalments. The assessee following the mercantile system of accounting had offered these incomes totaling to Rs. 23.62 lakhs in A.Ys. 1987- 88, 1988-89 and 1989-90. In view of the dispute with the lessee, the assessee filed a winding up petition against the lessee in the Bombay High Court. For A.Y.1991-92 in the reassessment proceedings u/s 147, the AO held that according to the mercantile system of accounting followed by the assessee, the accrued lease incomes were taxable in the respective years and disallowed the written off bad debt on the ground that the write off was premature.
The Commissioner (Appeals) directed the AO to allow deduction of an amount of R20.69 lakhs to be written off by the assessee for A.Y. 1991-92. The Tribunal held that even if the claim of the assessee in respect of bad debt was correct, it could not be considered since the assessee had accounted for lease rentals and had also claimed depreciation and reversed the order of the Commissioner (Appeals).
The Bombay High Court allowed the appeal filed by the assessee and held as under:
“i) Once a business decision has been taken by the assessee to write off a debt as a bad debt in its books of account and the decision is bona fide, it should be sufficient to allow the claim of the assessee. The method of accounting has no relevance to the issue.
ii) The written off lease rental amount had not been reversed from the income entry in Schedule-16. Writing off of the bad debt was in accordance with the provisions of section 36(1)(vii). The Commissioner (Appeals) had recorded in his order that the lessee company had become a sick company. Obviously, the prospects of recovery of lease rentals were quite bleak and the assessee considering that the debt could not be recovered in the foreseeable future had decided to write off a debt of Rs.20.69 lakhs as bad debt during the previous year relevant to the A.Y.1991-92. The assessee had taken a business decision to write off the debt as a bad debt.
iii) The reversal of lease rentals of Rs. 20.69
A.Y.: 1991-92
Date of order: 18th July, 2022 Sections: 36(1)(vii), 36(2) of ITA, 1961
49. Bad debt — Writing off — Condition precedent — Assessee must arrive at bona fide decision that the debt not recoverable — Legal action taken by assessee in winding up proceedings against debtor lessee company — Assessee’s decision to write off debt in view of amended section 36(1)(vii) — Commercial expediency — Allowable — Change in method of accounting by assessee irrelevant
The assessee was a NBFC engaged in the business of lease finance. It entered into a lease agreement with a company, the lessee, of lease of certain equipment for which, it had already made payments to the suppliers. It received one instalment of lease rental from the lessee which defaulted in further instalments. The assessee following the mercantile system of accounting had offered these incomes totaling to Rs. 23.62 lakhs in A.Ys. 1987- 88, 1988-89 and 1989-90. In view of the dispute with the lessee, the assessee filed a winding up petition against the lessee in the Bombay High Court. For A.Y.1991-92 in the reassessment proceedings u/s 147, the AO held that according to the mercantile system of accounting followed by the assessee, the accrued lease incomes were taxable in the respective years and disallowed the written off bad debt on the ground that the write off was premature.
The Commissioner (Appeals) directed the AO to allow deduction of an amount of R20.69 lakhs to be written off by the assessee for A.Y. 1991-92. The Tribunal held that even if the claim of the assessee in respect of bad debt was correct, it could not be considered since the assessee had accounted for lease rentals and had also claimed depreciation and reversed the order of the Commissioner (Appeals).
The Bombay High Court allowed the appeal filed by the assessee and held as under:
“i) Once a business decision has been taken by the assessee to write off a debt as a bad debt in its books of account and the decision is bona fide, it should be sufficient to allow the claim of the assessee. The method of accounting has no relevance to the issue.
ii) The written off lease rental amount had not been reversed from the income entry in Schedule-16. Writing off of the bad debt was in accordance with the provisions of section 36(1)(vii). The Commissioner (Appeals) had recorded in his order that the lessee company had become a sick company. Obviously, the prospects of recovery of lease rentals were quite bleak and the assessee considering that the debt could not be recovered in the foreseeable future had decided to write off a debt of Rs.20.69 lakhs as bad debt during the previous year relevant to the A.Y.1991-92. The assessee had taken a business decision to write off the debt as a bad debt.
iii) The reversal of lease rentals of Rs. 20.69
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