S. 36(1)(vii)

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.  

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

Harshad J Choksi v CIT (Income Tax Appeal No. 43 OF 1997 dated August 14, 2012) (Bom HC) Background: The assessee is a stock and share broker. During the assessment year 1991-1992, the assessee sought to write off an amount of Rs.47.58 lacs as bad debts, due to breach committed by 3 members of the BSE. The AO held that the assessee was not entitled to claim the benefit of bad debts in respect of Rs.47.58 lacs, as the assessee has not satisfied the condition precedent as provided under Section 36(2) of the Act, which requires that the amount must be offered to tax in an earlier previous year. On Appeal, the Commissioner of Income Tax (Appeals) upheld the finding of the Assessing Officer to the extent of Rs.44.98 lacs after having allowed an amount of Rs.2.60 lacs as a business loss.  On appeal before the Tribunal the assessee contended that even if the deduction is not allowable as bad debts under Section 36(1)(vii) of the Act, the aforesaid amount of Rs.44.98 lacs should be allowed as a business loss in computing the profits and gains earned in carrying on a business. The Tribunal held that once an assessee has made a claim for loss on account of bad debts then unless the assessee fulfills the requirements of Section 36(2) of the Act, the benefits of the same cannot be extended to the assessee.

Bad debts if not allowable u/s 36(2), would be allowable u/s 37 – Bombay HC

CIT v Epsilon Advisers (P.) Ltd. [IT APPEAL NO. 23 OF 2006 dtd. 13.06.2012] Karnataka High Court Background: The assessee is a private limited company providing consultancy services in electronic and telecommunications. In the return filed for AY 2001-02, the assessee had claimed deduction for write-off of Rs 75.00 lakh  as inter-corporate deposit (deposited with M/s BPL Wireless Telecommunication Services Ltd (BWTL) and the Rs 5.34 crore as interest free advance. As M/s BWTL has closed down its business, the assessee-company had claimed bad-debts u/s 36(1)(vii) for the aforesaid amounts. The assessee held substantial interest by way of investment in sharesin BTWL. The AO allowed the amount of inter-corporate deposit of Rs 75 lakhs as an amount irrecoverable and but did not agree for allowing the balance of Rs 5.34 crore also as bad debt for the reason that amount cannot be considered as part of an advance made in the course of money lending activity. The AO also reasoned that there was no semblance of a lending activity for this advance is concerned. The advance was not evidenced by way of any supporting documents and no security or surety had been obtained. Even the shares held by the assessee-company in M/s BWTL were not treated as part of stock-in-trade, but as long term investment in that company and therefore lending of a sum of Rs 5.34 crore by the assessee company cannot be considered as part of any business activity.

Write-off of loans to sister concern not allowable u/s 36(1)(vii) unless it is a business ...