Write-Off Of A Bad Debt Can’t Be Held To Be An Asset Under Section 153A(1) Of The Income Tax Act, 1961: Bombay High Court

The Bombay High Court has held that a write-off of a bad debt cannot be held to be an asset under section 153A(1) of the Income Tax Act, 1961.

The bench of Justice K. R. Shriram and Justice Firdosh P. Pooniwalla has observed that since the write-off of bad debt cannot be held to be an asset, clause (a) of the 4th proviso to Section 153A(1) of the Act would bar any assessment that is proposed to be made for the Assessment Years 2011-2012, 2012-2013 and 2013-2014.

The petitioner/assessee is a partnership firm engaged in the business of financing, i.e., giving loans to parties on interest against cheques and bills of exchange. Petitioner is also engaged, inter alia, in the business of trading in shares, property and broking.

The common Assessing Officer of the petitioner and Hubtown Limited prepared a satisfaction note. The satisfaction note stated that the ledger account of the petitioner in the books of Hubtown Limited which showed monies received, repayment made, and interest entries thereon had a bearing on the income of the petitioner. The ledger account revealed income in the form of an asset stated to be a deposit in the account had bearing on the income of the petitioner "...beyond six years.....”.

The assessee contended that the satisfaction note refers only to the loan account between the petitioner and Hubtown Limited and the alleged escapement is only in respect of the part thereof which is written off during the year. Writing-off of a bad debt cannot fall within the ambit of “.... income, represented in the form of an asset...”. In any event, this write-off has been allowed in the original assessment proceedings and hence it cannot be said to be income that has escaped assessment.

The department contended that the proceeding under Section 153C was initiated as per provisions of Section 153C, as the incriminating material was found during the search of another assessee that belongs to the petitioner. The satisfaction note was recorded by the Assessing Officer who happened to be the Assessing Officer of the searched person as well as of the assessee, which was in accordance with Section 153C. The entire proceeding up to the stage of the passing order passed under Section 153C read with Section 144 of the Act was done in accordance with the law.

The court noted that where no incriminating material is found/unearthed during the search, the Assessing Officer cannot assess or reassess taking into consideration the other materials in respect of unabated/completed assessments.

The court found that the assessment of the petitioner has clearly not abated in terms of the 2nd Proviso to Section 153A(1) of the Act. Although the 1st proviso to Section 153C(1) of the Act says “provided that in case of such other person, the reference to the date of initiation of the search under Section 132 or making of requisition under Section 132A in the second proviso to sub- section (1) of Section 153A shall be construed as a reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person”, the same cannot be applied.

The court held that In order to make an assessment for an assessment year which falls beyond six assessment years but not later than ten assessment years from the end of the assessment year relevant to the previous year, in which the search was conducted, the 4th proviso to Section 153(A)(1) sets out certain further conditions which are required to be fulfilled before a notice can be issued for the relevant assessment years. Clause - (a) of the 4th proviso requires that the Assessing Officer must have in his possession books, documents or evidence which reveal that income represented in the form of an asset which has escaped assessment amounts to or is likely to amount to rupees fifty lakhs or more. Explanation 2 to Section 153A(1) of the Act sets out an expanded definition of the word “asset” for the purposes of the 4th proviso.

Case Title: Ashok Commercial Enterprises Versus Assistant Commissioner of Income Taxation

Case No.: Writ Petition No.2594 Of 2021

Date: 04/09/2023

Counsel For Petitioner: J. D. Mistri

Counsel For Respondent: Suresh Kumar

Click Here To Read The Order