Case Note & Summary
The appellant, M/s. L.K.P. Merchant Financing Ltd., a Public Limited Company registered as a Non-Banking Finance Company engaged in lease finance, filed an appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Mumbai dated 28th July 2003 for Assessment Year 1991-92. The appeal was admitted on 29th November 2004 on the substantial question of law whether the Tribunal was correct in confirming the Assessing Officer's rejection of the appellant's claim for deduction of bad debt written off under Section 36(1)(vii) of the Act. The facts reveal that on 19th December 1987, the appellant entered into a lease agreement with M/s. Orson Electronics. For the Assessment Year 1991-92, the appellant filed a return showing nil income, which was processed under Section 143(1)(a). Subsequently, proceedings under Section 147 were initiated, and a notice under Section 148 was issued as the Assessing Officer believed income had escaped assessment. In the reassessment proceedings, the assessee was assessed to a sum of Rs.20,69,805/-, which gave rise to the dispute. The appellant claimed deduction for bad debt written off in respect of the lease agreement, but the Assessing Officer rejected the claim, and the Tribunal confirmed the rejection. The High Court, after hearing the parties, held that once the assessee writes off the debt in its books as irrecoverable, the condition for deduction under Section 36(1)(vii) is satisfied, and the Assessing Officer cannot substitute his own opinion regarding recoverability. The court allowed the appeal, set aside the Tribunal's order, and directed the Assessing Officer to allow the deduction.
Headnote
A) Income Tax - Bad Debt Deduction - Section 36(1)(vii) Income Tax Act, 1961 - Write off in books - The appellant, a Non-Banking Finance Company, claimed deduction for bad debt written off in respect of a lease agreement. The Assessing Officer and Tribunal rejected the claim on the ground that the debt was not established to be irrecoverable. The High Court held that once the assessee writes off the debt in its books as irrecoverable, the condition for deduction under Section 36(1)(vii) is satisfied, and the Assessing Officer cannot substitute his own opinion regarding recoverability. The court allowed the appeal and directed the Assessing Officer to allow the deduction. (Paras 1-10)
Issue of Consideration
Whether the Tribunal was correct in confirming the Assessing Officer's rejection of the appellant's claim for deduction of bad debt written off under Section 36(1)(vii) of the Income Tax Act, 1961.
Final Decision
The appeal is allowed. The order of the Income Tax Appellate Tribunal is set aside. The Assessing Officer is directed to allow the deduction claimed by the appellant under Section 36(1)(vii) of the Income Tax Act, 1961.
Law Points
- Bad debt deduction
- Section 36(1)(vii) Income Tax Act
- 1961
- Lease finance
- Non-Banking Finance Company
- Write off in books
- Reasonable belief of irrecoverability
