Case Note & Summary
The appellant, M/s. Citadel Fine Pharmaceuticals Ltd., filed a return of income for assessment year 2009-10 under the Income Tax Act, 1961. The Assessing Officer passed an assessment order on 23.12.2011, wherein one of the issues was the write-off of bad debts amounting to approximately Rs.4.94 crores. The debts were due from M/s. Polaris Health Care Pvt. Ltd. (PHCPL) for job work undertaken during financial years 2003-04, 2004-05, and 2005-06. The assessee had created a provision for doubtful debts of Rs.4.07 crores as at 31.03.2005, which was added back in the computation of income. In the assessment year 2009-10, the assessee wrote off the entire amount of Rs.4.94 crores in the profit and loss account. The Assessing Officer allowed deduction only for debts up to 31.03.2005 (Rs.4.07 crores), disallowing the balance on the ground that from 01.04.2005 onwards, the transactions were unilateral and not acknowledged by the debtor. The assessee challenged the disallowance by filing a writ petition, which was dismissed by a learned Single Judge on 22.04.2021. The present appeal is against that dismissal. The legal issue was whether the assessee is entitled to deduction for bad debts written off in the books for amounts due after 01.04.2005, when the debtor did not acknowledge the transactions. The appellant argued that under Section 36(1)(vii) read with Section 36(2), the only requirement is that the debt must be written off as irrecoverable in the books, and there is no condition that the debtor must acknowledge the debt. The respondents contended that the transactions after 01.04.2005 were unilateral and not genuine, and therefore the debts were not allowable. The court analyzed the provisions of Section 36(1)(vii) and Section 36(2) of the Act, and held that the condition for deduction is merely that the debt must be written off as irrecoverable in the books of the assessee. The court noted that the assessee had written off the debts in the profit and loss account, and the Assessing Officer had not disputed the fact that the debts were taken into account in computing income in earlier years. The court also observed that the debtor's acknowledgment or the bilateral nature of transactions is not a requirement under the law. The court allowed the appeal, set aside the order of the learned Single Judge, and directed the Assessing Officer to allow the deduction for the entire bad debts written off, subject to verification that the debts were taken into account in computing income in any previous year.
Headnote
A) Income Tax - Bad Debts - Deduction under Section 36(1)(vii) - Write-off in Books - The assessee claimed deduction for bad debts written off in the profit and loss account for amounts receivable from a debtor. The Assessing Officer allowed deduction only for debts up to 31.03.2005, disallowing debts arising after that date on the ground that the debtor did not acknowledge the transactions. The High Court held that under Section 36(1)(vii) read with Section 36(2), the only condition for deduction is that the debt must be written off as irrecoverable in the books of the assessee. The debtor's acknowledgment or unilateral booking is irrelevant. The court allowed the appeal and directed the Assessing Officer to allow the deduction for the entire bad debts written off. (Paras 1-16) B) Income Tax - Bad Debts - Provision for Doubtful Debts - Not Deductible - The assessee had created a provision for doubtful debts of Rs.4.07 crores as at 31.03.2005, which was added back in the computation of income. The court noted that a provision is not a write-off and cannot be claimed as a deduction. Only when the debt is actually written off in the books can the deduction be claimed. (Paras 3-4) C) Income Tax - Bad Debts - Section 36(2) - Conditions for Deduction - The court clarified that Section 36(2) requires that the debt must have been taken into account in computing the income of the assessee in any previous year, and the amount must be written off as irrecoverable in the books of the assessee. There is no requirement that the debtor must acknowledge the debt or that the transactions must be bilateral. (Paras 10-12)
Issue of Consideration
Whether the assessee is entitled to deduction of bad debts written off in the books of account for amounts due from a debtor after 01.04.2005, when the debtor did not acknowledge the transactions and the assessee continued to provide services despite knowing the amounts were irrecoverable.
Final Decision
The appeal is allowed. The order of the learned Single Judge dated 22.04.2021 in W.P.No.35630 of 2016 is set aside. The Assessing Officer is directed to allow the deduction for the entire bad debts written off, subject to verification that the debts were taken into account in computing income in any previous year.
Law Points
- Bad debt deduction under Section 36(1)(vii) read with Section 36(2) of Income Tax Act
- 1961
- Write-off in books sufficient for deduction
- Debtor's acknowledgment not necessary
- Provision for doubtful debts not deductible
- Actual write-off in profit and loss account required
