In, Pr. Commissioner of Income Tax vs Khyati Realtors Pvt. Ltd, SC held that, merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non-compliance with the conditions in Section 36(1)(vii),36(2), and Explanation to Section 36(1)(vii) would not entitle the assessee to claim a deduction.
Facts
The assessee carries on real estate development business, trading in transferable development rights (TDR) and finance. In respect of its return for the assessment year 2009-2010, the Assessment Officer issued a notice under Section 143(2) of the IT Act, 1961 and also under Section 142(1) of the Act, calling for various details. The assessee filed its response thereto. The assessee contended that an amount of ₹ 10 crores was deposited with one M/s C. Bhansali Developers Pvt. Ltd. towards acquisition of commercial premises two years prior to the assessment year in question (i.e., in 2007). It was contended that the project did not appear to make any progress, and consequently, the assessee sought return of the amounts from the builder. However, the latter did not respond. As a result, the assessee’s Board of Directors resolved to write off the amount as a bad debt in 2009. It was also contended that the amount could also be construed as a loan, since the assessee had ‘financing’ as one of its objects. The AO disallowed the sum of ₹ 10 crores claimed as a bad debt in determining its income under “Profits and Gains of Business or Profession”. Aggrieved, the assessee appealed. Before the appellate Commissioner. The CIT(A) confirmed the disallowance on account of bad debts and interest.
A further appeal was preferred to the ITAT, which allowed the assessee’s plea. The Revenue sought an appeal to the Bombay High Court under Section 260A of the IT Act. The Bombay High Court ruled that no question of law requiring a decision arose in the appeal. Hence, Revenue filed a Special Leave Petition before the Supreme Court of India.
Contention Made
Petitioner: It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of both Section 36(1)(vii) and Section 36(2) of the Act.
The assessee had also pleaded that the amount was given as a ‘loan’ to the developer, which was a different plea altogether. This plea was bereft of any material as to the terms of the loan, or the conditions of repayment, including interest.
Respondent: That since the builder/borrower defaulted in repaying the amount, the respondent assessee decided to write off the same as a bad debt under Section 36(1)(vii) read with Section 36(2) of the Act. That after the amendment of Section 36 of the Act in 1989, there was virtually no scope for the AO to scrutinize in detail a decision to write off the debt.
Court Observation
The Single Bench of Supreme court of India observed that, before the 1989 amedment, even a provision could be treated as a write off. However, after this date, the Explanation to Section 36(1)(vii) brought about a change. Hence, a mere provision for bad debt per se was not entitled to deduction under Section 36(1)(vii). SC further observed that; The assessee is obliged to prove to the AO that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act.
Court Judgment
SC while setting aside the findings of the ITAT and the High Court, has held that, merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non-compliance with the conditions in Section 36(1)(vii),36(2), and Explanation to Section 36(1)(vii) would not entitle the assessee to claim a deduction.
Case: Pr. Commissioner of Income Tax vs Khyati Realtors Pvt. Ltd.
Citation: CIVIL APPEAL NO._________OF 2022 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 672 OF 2020)
Bench: Hon’ble Justice Uday Umesh Lalit , Justice S. Ravindra Bhat and Justice Sudhanshu Dhulia
Decided on: 25th August 2022
Read Judgment @Latestlaws.com
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