A claim of bad-debt not available u/s 36(1)(vii) may be claimed u/s 37(1): Delhi High Court

Mohan Meakin Limited v. Commissioner Of Income Tax, Delhi decided on 11 May, 2011

ITA No.405/2007

Assessment Year: 1986-87

Relevant Facts:

1. During the relevant assessment year 1986-87, the assessee filed revised return wherein beside other things it had claimed deduction of Rs.4,48,462/- as un- recovered bad debts.

2. The Assessing Officer allowed deductions of those small amounts, but declined that of Rs.4,22,114/- in respect of M/s.Kanpur Boot House of Shri Bhagwan Dass.

3. He was not satisfied with the explanation given by the assessee with regard to the reasons for being unable to recover the said amount. He disallowed the deduction observing that the assessee had failed to produce any evidence regarding efforts made for the recovery of the said amount and thus had not established that it became bad during this year.

4. On appeal, the CIT(A) reversed the order of the AO. On further appeal by the department, the ITAT decided in favour of the department.

Questions of law:

1. In the facts and circumstances of the case and in law, whether the ITAT erred in disallowing deduction of Rs.4,22,114/- to the assessee as bad debts for the assessment year 1986-87?

Upholding the appeal of the assessee, the Hon’ble Court held that:

(i) If a bad-debt does not fall under section 36(1)(vii), a claim may be made u/s 37(1). It appears that sections 28 and 29 read together do not show that if a case comes under section 36 then the applicability of section 37 will be taken out but rather means that a case may come either under Section 36 or section 37 and a computation may be made under either of the sections.

(ii) A new argument may be raised at the High Court level even if the same was not raised before the lower authorities.

It was ultimately held that:

Para 10: “Applying the principles of law as regard interpretation of Sections 28, 29, 36(1)(vii), 36(2) and Section 37 of the Act as enunciated by the Division Bench of J&K High Court and the Apex Court in the afore-cited cases, we are of the considered view that it was in the totality of overall situation of the matter that the assessee decided to write off the advances made to M/s.Kanpur Boot House as bad debt. The reason as given by the assessee was apparently well-founded and was abruptly rejected by the Assessing Officer and the Tribunal.”

Para 12: "Merely because the claim was not made out under one particular provision of the Act, but was so made out under another provision of law, we failed to understand as to how the assessee could be debarred to raise such legal question. Having regard to all this, we are of the considered view that it was legally permissible to raise question of deduction under Section 37 of the Act even if it was not raised before the authorities below."

The decision is available here.