INCOME TAX ACT, 1961

Section 36(1)(vii)

Business deduction under section 36(1)(vii) - Bad debts - Allowability of - Bad debts on account of settlement of claims

Assessee claimed bad debts, which comprised of certain amount on account of settlement of claims. It submitted that it provided services to two entities but they did not clear the entire amount of such services, as there were some differences between the parties with respect to performance to be achieved and time frame thereof. It also furnished copy of settlement deed, wherein the certain amount was agreed to be paid by the said two entities to the assessee. Accordingly, the remaining amount, which was not cleared by the said entities, was claimed as bad debts. AO concluded that as the said two entities were related to assessee, the bad debts claimed by it, were nothing but sham transactions and colourable device. Thus, he added the said amount under section 143(3). Held: It was not disputed that assessee rendered services to the said two parties. Further, as revenue generated from rendering such services was offered to tax in earlier years and the same were accepted as genuine transactions, any loss due to non-recovery of the said amounts could not be held to be non-genuine and re-characterised as sham transactions. Moreover, once the debts are written off as irrecoverable, that is sufficient and assessee is not required to prove that the debt has actually become bad during the year. Hence, the assessee would be entitled to deduction of bad debts on account of settlement of claims.

Followed:T.R.F. Ltd. v. CIT (2010) 323 ITR 397 (SC): 2010 TaxPub(DT) 1481 (SC)Distinguished:Sovereign Securities Private Limited v. ITO [ITA No. 2715/Mum/2009 for assessment year 2004-05 Order dated 10-4-2012]

REFERRED :

FAVOUR : In assessee's favour

A.Y. :

SUBSCRIBE FOR FULL CONTENT