The main legal point established in the judgment is that after 1st April, 1989, it is not necessary for the assessee to establish that the debt has become irrecoverable, and the decision to treat a debt as bad debt must be a business or commercial decision based on material and must be bona fide.

JUDGMENT :

ABHAY AHUJA, J.

1. This is an Appeal, filed under Section 260A of the Income Tax Act, 1961 (“the Act”) by M/s. L.K.P. Merchant Financing Ltd., being aggrieved by an order dated 28th July, 2003, passed by the Income Tax Appellate Tribunal, Mumbai in Income Tax Appeal No.5403/M/97 for Assessment Year 1991-92.

2. The Appeal came to be admitted on 29th November, 2004 on the following substantial question of law:

“Whether, in the facts and circumstances of the case and in law, the order of the Tribunal confirming the action of the Assessing Officer in rejecting the claim of the appellant for deduction of bad debt written off u/s. 36(i) (vii) of the Act, is bad in law?”

3. The Appellant statedly is a Public Limited Company registered as a Non Banking Finance Company engaged in the business inter alia of lease finance.

4. For the Assessment Year 1991-92, the Appellant Company filed a return showing “nil” income. The return was processed under Section 143(1)(a) of the Act. Subsequently, proceedings under Section 147 of the Act were initiated by issuance of a notice under Section 148 of the Act as the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment. In the re-assessment proceedings, the assessee was assessed to a sum of Rs.20,69,805/-which is the dispute having given rise to the question of law in this Appeal.

5. Earlier, on December 19th, 1987, a lease agreement was entered into between the Appellant and one M/s. Orson Electronics, as lessee to transfer the right to use of certain equipments by way of lease. As per the terms of the lease deed, order for manufacturing and supply of the equipment was placed on three concerns to whom, the Appellant-assessee made payments on behalf of lessee. The first installment of lease amount was received by the Assessee. Further installments due were also accounted for as income in the respective years, as per the mercantile system of accounting although the lessee defaulted in payment of further installments. The following lease incomes were offered for assessment:

6. It is the case of the Appellant that in view of the defaults in payment of the balance installments, the assessee approached this Court seeking winding up of M/s.Orson Electronics Ltd., and appointment of Official Liquidator to safeguard the interest of the creditors. That in view of the dispute that arose, the assessee company wrote off the amount of Rs.20,69,805.30 (23,62,875.10 minus 2,93,069.80) as bad debt during the previous year relevant to A.Y.1991-92.

7. In the re-assessment, the Assessing Officer held that as per the mercantile system of accounting followed by the assessee, the accrued lease incomes were taxable in the respective years. The writing off was not allowed by the Assessing Officer observing that in view of the pendency of the dispute of the assessee before the High Court, the assessee had not foregone its right to claim the lease rentals and that the write off was premature.

8. The assessee filed an Appeal before the Commissioner of Income Tax (Appeals) and vide order dated 21st May, 1997, the Commissioner of Income Tax (Appeals) partly allowed the Appeal of the assessee directing the Assessing Officer to allow deduction of an amount of Rs.20,69,805/-to be written off by the assessee in its books of account for the Assessment Year 1991-92 observing that the lease rentals offered as income on mercantile basis can be definitely said to have become bad from the business point of view of the assessee and the assessee’s subsisting right to recover the amount and the pendency of the matter before the High Court were not valid grounds to postpone writing off of the amo