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
By 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 irrelevantThe 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.
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