NEW DELHI, MAY 15, 2013: THE issues before the Bench are - Whether pendency of a civil suit is a bar on writing off the debt, even if in the opinion of assessee its probability of recovery is remote and Whether in order to claim a bad debt, mere writing off the same in assessee’s books is a sufficient compliance of section 36. And the verdict goes in favour of assessee.

Facts of the case

Assessee, a private limited company, is engaged in the business of dealing and servicing motor vehicles and had taken certain property on lease from three landowners for a period of three years renewable for two further periods of 3 years each. The property consisted of a plot of land whereupon the lessors were required to build a warehouse cum workshop and hand over the same to the assessee. In this regard, the assessee advanced certain sums to the lessors which were liable to be adjusted against monthly rent. The monthly rent for the property in question was agreed at Rs 32,400/- and the assessee was entitled to adjust a sum of Rs 17,400/- per month from the advance paid by the assessee to the lessors. In addition to the advance paid by the assessee to the lessors, the assessee also incurred substantial expenditure on the development and interiors of the property. However, the workshop was demolished by the DDA on 01.06.2000 as the land which was subject matter of the lease agreement, in fact, belonged to the DDA and not the lessors. The assessee, thereafter, filed a suit in HC being suit titled as Samara India Pvt. Ltd v. UOI & Ors.: CS(OS) No.2467/2001. The said suit was still pending before HC for recovery of the sums advanced by the assesse to the lessors and the amount expended by the assesse on development and interiors of the property. Assessee had written off a sum of Rs 64,60,707/- as irrecoverable in the previous year, which was an aggregate of two components, namely, advance rent of Rs 33,82,289/- paid by the assessee to the lessors and Rs 30,78,418/- spent by the assessee on the property. During assessment, AO had disallowed such write offs on the basis that the amount represented capital expenditure. It was relevant to state that the genuineness of the expenditure was not doubted by the AO and it had disallowed the amount written off on the ground that the amount incurred by the assesse was on development and improvement of the leasehold property and was of an enduring nature and thus could not be considered as revenue expenditure. The AO held that in view of the explanation to Section 32(1), capital expenditure incurred by an assessee in respect of a building not owned by him, was required to be treated in the same manner as if the expenditure had been incurred on a building owned by the assessee.

On appeal, CIT(A) made a distinction between the amount spent by the assessee on carrying out the renovation and betterment of the workshop and the amount paid by the assessee as advance rent. The CIT (A) upheld the decision of the AO to disallow the write off of a sum of Rs 30,78,418/- spent by the assessee on the workshop. In respect of the sums advanced by the Assessee to the lessors, the CIT (A) deleted the addition to the extent of Rs 34,800/- and upheld the addition of Rs 33,47,489/- to the income of the assessee. The CIT (A) held that as the property was demolished on 01.06.2000 i.e. after a period of only two months from the commencement of the previous year 2000- 2001, an amount of Rs 34,800/- ( i.e. Rs. 17,400/- for each month) was liable to be adjusted from the advance rent in terms of the lease agreement entered. However, the addition of the balance amount of Rs 33,47,489/- was upheld by CIT (A) not on the ground that the same was a capital expenditure but on basis that the same could not be allowed as a revenue loss as the assessee had filed a civil suit for recovery of that amount and the same was being pursued. The CIT (A) held that as the assessee was pursuing its remedies before a Court by way of a civil suit for recovery of the amounts advanced to the lessors, it could not be held that the amounts had become bad debts. On further appeal, Tribunal upheld the decision of the AO and the CIT (A) with regard to the amount of Rs 30,78,418/- spent by the assessee on the workshop as capital expenditure but granted relief to the assessee with regard to the addition made by the AO in respect of the advance rent of Rs 33,82,289/- which had been written off by the assessee, in his profit and loss account, as irrecoverable. Following the decision of the SC in the case of the T.R.F Ltd. v. CIT (2010-TIOL-15-SC-IT), the Tribunal held that pendency of the civil suit was not a bar on writing off the debt if in the opinion of the assessee its probability of recovery was remote. The Tribunal did not accept the view of the CIT (A) that writing off advance rent was not permissible since the assessee was pursuing the suit for recovery of the said amount.

Held that,

++ we find no infirmity in the view expressed by the Tribunal. It is not disputed that the assessee had paid a sum of Rs 33,82,289/- as advance which was to be adjusted against lease rents. The assessee had been carrying on business even prior to the lease agreement with respect to which advance had been made. The assessee had come to a conclusion that chances of recovery, of the amounts claimed from the lessors, in the near future were remote and had therefore written off the amount of Rs 64,60,707/- as irrecoverable in the previous year relevant to the assessment year 2004-2005. For an assessee to claim deduction in relation to the bad debts it is now no longer necessary for the assessee to establish that the debt had become irrecoverable and it is sufficient if the assessee forms such an opinion and writes off the debt as irrecoverable in its accounts. The decision of the SC in the case of the T.R.F Ltd. squarely covers the issue. The Supreme Court had examined the import of the amendment in Section 36(1)(vii) and held that after the amendment of sec. 36(1)(vii), with effect from 1st April, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable : it is enough if the bad debts is written off as irrecoverable in the accounts of the assessee. Following the aforesaid decision in the case of T.R.F Ltd., we find that the appeal does not raise any substantial question of law for our consideration. We accordingly, dismiss the present appeal and leave the parties to bear their own costs.

(See 2013-TIOL-393-HC-DEL-IT)