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PCIT vs. Hybrid Financial Services Ltd (Bombay High Court)
June, 23rd 2020

S. 36(1)(vii)/ 36(2): Write-off of inter corporate deposits and advances given for purchase of vehicles or plant and machinery is allowable as a bad debt. There is no requirement under the Act that the bad debt has to accrue out of income under the same head i.e 'income from business or profession' to be eligible for deduction. All that is required is that the debt in question must be written off by the assessee in its books of accounts as irrecoverable

1. This order will dispose of both Income Tax Appeal
Nos. 1265 of 2017 and 1469 of 2017.
2. Heard learned counsel for the parties.
3. Assessee in both the appeals is the same. While
Income Tax Appeal No. 1265 of 2017 relates to assessment
year 2001-02, Income Tax Appeal No. 1469 of 2017 relates
to assessment year 2003-04.
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4. However, for the sake of convenience, we may
refer to the facts in Income Tax Appeal No. 1265 of 2017.
5. This appeal under Section 260A of the Income Tax
Act, 1961 (“the Act” for short) is preferred by the revenue
against the order dated 26.8.2016 passed by the Income Tax
Appellate Tribunal, Mumbai “H” Bench, Mumbai (“Tribunal”
for short) in Income Tax Appeal No. 7175/Mum/2010 for the
assessment year 2001-02.
5.1. As already noted, Income Tax Appeal No. 1469 of
2017 assails the same order but arising out of Income Tax
Appeal No. 7176/Mum/2010 for the assessment year 2003-
04.
6. Revenue has preferred this appeal projecting the
following two questions as substantial questions of law:-
(i) Whether on the facts and in the circumstances of the case and
in law, the order of the Tribunal for AY 2001-2002 and 2003-
2004 is perverse as it is not based on the facts, relevant to the
assessment year?
(ii) Whether on the facts and in the circumstances of the case and
in law, Tribunal has erred in law to allow bad debts on account
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of inter corporate debt and advances in contravention of
Section 36(1)(vii) read with Section 36(2) of the Act inspite of
the fact that the assessee company is not a banking company
or engaged in the business of money lending?
7. Basically, the two questions center around
allowance of the claim of the respondent – assessee of bad
debts by the Tribunal by deleting the additions made by the
Assessing Officer as affirmed by the first appellate authority.
8. For proper appreciation of the aforementioned two
questions, it may be apposite to deal with the orders passed
by the authorities below.
9. Respondent is an assessee under the Act and
subject to assessment jurisdiction of the Assessing Officer,
Assistant Commissioner of Income Tax, Range-10(1)(1),
Mumbai. Respondent – assessee is a company engaged in
the business of providing finance in the field of lease and
higher purchase transaction, management consultancy
services etc. During the assessment proceedings for the
assessment year 2001-02, Assessing Officer noticed that
assessee had claimed bad debts of Rs. 13,01,04,359.00.
While in three cases, assessee had written off inter corporate
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deposits, in respect of four cases, the written off of bad debts
pertains to advances given either for purchase of vehicles or
plant and machinery. Referring to Section 36(1)(vii) of the
Act, Assessing Officer took the view that unless there was an
admitted debt it could not be allowed as bad debt when it is
written off. Besides, the debt must be incidental to the
business or profession of the assessee. Taking such view,
Assessing Officer issued notice to the assessee to show
cause as to why the amounts covered by the bad debits
should not be added to the income of the assessee.
Assessee in its reply stated that writing off any debt as
irrecoverable in the accounts was sufficient compliance to
Section 36(1)(vii) of the Act. However, by the assessment
order dated 19.2.2004 passed under Section 143(3) of the
Act, Assessing Officer did not accept the reply submitted by
the assessee. Assessing Officer held that a debt is allowable
only when it is a debt arising out of and is incidental to the
trade carried out by the assessee. Therefore, Assessing
Officer held that claim of the assessee for writing off all the
dues could not be entertained.
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10. Aggrieved by the assessment order, assessee
preferred appeal before the Commissioner of Income Tax
(Appeals) -22, Mumbai (also referred as “first appellate
authority”). By the appellate order dated 4.8.2010, the first
appellate authority considered the rival submissions and
relying on the decision of this Court in Director of Income
Tax (International Taxation) Vs. M/s. Oman
International Bank SAOG1 held that apart from writing off
the debts as bad debts, action of the assessee has to be
bonafide and such decision must be based on some
material in possession of the assessee. Mere reversal of
income in its books of accounts did not entitle the assessee
to claim deduction. Affirming the view taken by the
Assessing Officer, first appellate authority rejected the claim
of bad debts made by the assessee.
11. In further appeal before the Tribunal, reliance was
placed in the case of T.R.F. Ltd Vs. CIT2 wherein Supreme
Court held that after 1.4.1989, it was not necessary for the
assessee to establish that the debt in fact has become
1 [2009] 313 ITR 218
2 [2010] 323 ITR 397 (SC)
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irrecoverable. It was enough if the bad debt is written off as
irrecoverable in the accounts of the assessee. Noticing that
assessee had written off all the debts in question as
irrecoverable in its accounts, Tribunal set aside the findings
of the first appellate authority affirming the view of the
Assessing Officer and allowed the claim of the assessee.
Aggrieved, revenue is in appeal before us raising the above
two questions for consideration.
12. Submissions made have been duly considered.
13. Chapter IV of the Act deals with computation of
total income. Heads of income are mentioned in Section 14.
Profits and gains of business or profession is one of the
heads of income. Section 28 of the Act deals with
computation of income under the head ‘profits and gains of
business or profession’.
13.1 Section 36 deals with other deductions. As per
sub-section (1), the deductions provided therein shall be
allowed in respect of the matters dealt with therein, in
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computing the income referred to in Section 28. Clause (vii)
deals with the amounts of bad debt or part thereof which
should be written off as irrecoverable in the accounts of the
assessee for the relevant previous year.
14. In Oman International Bank (supra), this Court
dealt with the question as to whether it was obligatory on the
part of the assessee to prove that the debt written off by the
assessee is recorded as a bad debt for the purpose of
allowance under Section 36(1)(vii). This court opined that to
treat a debt as a bad debt, it has to be a commercial or
business decision of the assessee. Once assessee records a
debt as bad debt in his books of accounts that would prima
facie establish that it is a bad debt unless the Assessing
Officer for good reasons holds otherwise. However, a caveat
was put in to the effect that writing off a debt as bad debt in
the accounts has to be bonafide.
15. However, this question was specifically dealt with
by the Supreme Court in T.R.F. Ltd (supra). Supreme Court
noted the difference in the language of Section 36(1)(vii)
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prior to 1.4.1989 and after the amendment, post 1.4.1989.
Since this aspect is relevant, Section 36(1)(vii) as it existed
prior to 1.4.1989 and after 1.4.1989 are extracted
hereunder:-


“Pre-1st April, 1989:
36. Other deductions -(1) The deductions provided for in the
following clauses shall be allowed in respect of the matters dealt with
therein, in computing the income referred to in section 28–
******************************************
(vii) subject to the provisions of sub-section (2), the amount of
any debt, or part thereof, which is established to have become a bad
debt in the previous year.
Post-1st April, 1989:
36. Other deductions-(1) The deductions provided for in the
following clauses shall be allowed in respect of the matters dealt with
therein, in computing the income referred to in section 28–
*******************************************
(vii) subject to the provisions of sub-section (2), the amount of
any bad debt or part thereof which is written off as irrecoverable in
the accounts of the assessee for the previous year.”
15.1. Comparing the provision of Section 36(1)(vii), pre
1.4.1989 and post 1.4.1989, Supreme Court held that the
position in law has become well settled. After 1.4.1989, it is
not necessary for the assessee to establish that the debt in
fact has become irrecoverable. It is enough if the bad debt is
written off as irrecoverable in the accounts of the assessee.
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16. This Court in CIT Vs. Shreyas S. Morakhia3 also
considered a claim of share broker assessee to deduction by
way of bad debts under Section 36(1)(vii). This Court
referred to the decision of the Supreme Court in T.R.F. Ltd
(supra) and held that under Section 36(1)(vii) of the Act, the
amount of any bad debt or any part thereof which is written
off as irrecoverable in the accounts of the assessee for the
previous year is to be allowed as deduction in computing
income under Section 28 of the Act.
17. Thus, it is a settled position in law that after
1.4.1989, it is not necessary for the assessee to establish or
prove that the debt has in fact become irrecoverable but it
would be sufficient if the bad debt is written off as
irrecoverable in the accounts of the assessee. This is
because, as held by this Court, decision to treat a debt as a
bad debt is a commercial or business decision of the
assessee. Recording of a debt as a bad debt in his books of
accounts by the assessee prima facie establishes that it is a
bad debt. If the Assessing Officer disputes that the onus
would be on him to prove otherwise.
3 [2012] 342 ITR 285 (Bom)
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18. Adverting to the facts of the present case,
Tribunal recorded from the materials on record that
admittedly, the debt in question had been written off as
irrecoverable in the accounts of the assessee.
19. If that be the position, then there is compliance to
the requirement of Section 36(1)(vii) of the Act and the
amount covered by the bad debts would be entitled to be
deducted vide computing income under Section 28 of the
Act. Further, it is not necessary, rather there is no
requirement under the Act that the bad debt has to accrue
out of income under the same head i.e ‘income from
business or profession’ to be eligible for deduction. This is
not a requirement of law. All that is required is that the debt
in question must be written off by the assessee in its books
of accounts as irrecoverable.
20. In the light of the above, we do not find any error
or infirmity in the view taken by the Tribunal. No question of
law arises from the order of the Tribunal. Consequently,
appeal filed at the instance of the revenue fails and is
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accordingly dismissed. However, there shall be no order as
to costs.
21. In view of the above, Income Tax Appeal No. 1469
of 2017 would also stand dismissed.

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