Bad debts: Mere write-off in the books is not sufficient – Hyderabad ITAT


Natco Pharma Ltd v DCIT [ITA No 377 (Hyd) of 2009 & 487 of 2010] (Hyderabad ITAT)

Background:

Assessee has written off a sum of Rs. 5,70,09,063 towards creditor advances pertaining to 461 parties. During the assessment proceedings, the assessee could furnish the desired details sought for by him only in respect of two parties. In respect of the remaining 459 parties, the assessee merely furnished the names of those parties. It could not furnish the address of those parties. The assessee has submitted that advances were made to those parties either for supply of material or for rendering services. The assessee has claimed that those parties have failed to supply goods/render services and the advance amount could not be recovered from them.

The AO held that the said amounts are not bad debts and hence provisions of section 36(2) are not applicable to the same. Further, the assessee has not filed account copies of those parties and therefore, the claim of the assessee for deduction of the amount of Rs. 5,21,62,330 cannot be allowed.  

Assessee’s contentions:

  • The parties have failed to supply goods/ render services and the advance amount could not be recovered from them as the whereabouts of some of the parties are not known and some parties have refused to return the advances. In these circumstances, the assessee wrote off the advances.
  • The impugned debt had actually been written off in the books of account of the assessee.

Tax Authority’s arguments:

  • Various amounts shown against different parties, do not constitute trade debt, and unless it is a trade debt, the same cannot be allowed deduction, following ratio of decision of Hon’ble Andhra Pradesh High Court in CIT v. Sirpur Paper Mills [1983] 144 ITR 393

HELD:

  • As per the amendment to the provisions of section 36(1)(vii), claim of bad debts or part thereof has to be allowed for and from the A.Y. 1989-90 in the year in which such bad debts or part thereof has been actually written off as irrecoverable in the accounts of the assessee.
  • Under section 143(2) of the Act, the AO is empowered to require the assessee to produce the evidence in support of the return, as such where the assessee has claimed as bad debt or part thereof, written off as irrecoverable in the accounts under section 36(1)(vii) of the Act
  • Merely relying on the amendment, it cannot be said that an inquiry is not permissible to see and satisfy that there is some semblance of the genuineness in the entry in the books.
  • Though standard of proof of proving the same as bad debt, is not required to be adopted and is to be decided on the wisdom of the assessee and not on the wisdom of AO, but to show that entry which had been made as bad debt, there has to be some material in support of the same.
  • Merely because entries have been made, in respect of bad debt, writing it off, claiming deduction, the said entries can always be examined by the AO.
  • The assessee only furnished list of debts and the details called for by the authorities have not been furnished. Further, debts which were written off were not trade debts.

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