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Bad Debts u/s 36(1)(vii) of the Income Tax act, 1961

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Court :
High Court

Brief :
I. Section 48 of the Income-tax Act, 1961 - Capital gains - Computation of - Assessment year 1998-99 - Whether expression ‘full value of consideration’ used in section 48 does not have any reference to market value but only to consideration referred to in sale deeds as sale price of assets which have been transferred - Held, yes Section 55A of the Income-tax Act, 1961 - Capital gains - Reference to valuation officer - Assessment year 1998-99 - Whether reference to a Valuation Officer under section 55A is for object of ascertaining fair market value of a capital asset and it is only when Assessing Officer is required to ascertain fair market value of a capital asset that provisions of section 55A can be invoked - Held, yes II. Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts - Assessment year 1998-99 - Whether for claiming deduction under section 36(1)(vii), all that assessee is required to do is to write off debt as irrecoverable in its accounts of relevant previous year; fact that permission of Reserve Bank of India to write off debt is communicated to assessee after end of relevant previous year is not relevant for that purpose - Held, yes

Citation :
Commissioner of Income-tax vs Smt. Nilofer I. Singh - (2009) 176 Taxmann 252 (Delhi)

FACTS-I The assessee sold two properties and disclosed capital gains arising thereon. The Assessing Officer was of the view that the sale consideration as disclosed by the assessee and as appeared in registered sale deed did not reflect the fair market value and, accordingly, he referred the matter to the Valuation Officer. The Valuation Officer indicated the fair market value of both properties at much higher figure than that disclosed by the assessee. The Assessing Officer computed the capital gains on basis of the valuation of the Valuation Officer and made addition accordingly. On appeal, the Tribunal deleted the addition. On revenue’s appeal : HELD-I Capital gains are subjected to tax in view of section 45. Section 45(1) provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head ‘Capital gains’. It stipulates that capital gains shall be computed by deducting from the ‘full value of consideration’ received or accruing as a result of the transfer of the capital asset, the amount of expenditure incurred wholly and exclusively in connection with such transfer as also the cost of acquisition of the asset and the cost of any improvement thereto. From a combined reading of section 45(1) and section 48, it is apparent that when a sale of property takes place, the capital gains arising out of such a transfer has to be computed by looking at the full value of the consideration received or accruing as a result of such transfer. From the said full value of the consideration, the amount of expenditure incurred wholly and exclusively in connection with such transfer as also the cost of acquisition of the asset and the cost of any improvement thereto have to be deducted. In the instant case, there was no dispute with regard to the expenditure incurred in connection with the transfer or with regard to the cost of acquisition of the asset and the cost of any improvement. The entire dispute centred upon the expression ‘full value of consideration’. According to the revenue, the full value of consideration refers to the full market value. However, according to the assessee, the expression ‘full value of consideration’ cannot have any reference to the fair market value. [Para 4] In view of several decisions of the Supreme Court, it is clear that the expression ‘full value of consideration’, that has been used in section 48, does not have any reference to the market value, but only to the consideration referred to in the sale deeds as the sale price of the assets which have been transferred. [Para 7] Section 55A begins with the expression ‘with a view to ascertain the fair market value of a capital asset’. In other words, the reference to a Valuation Officer under section 55A is for the object of ascertaining the fair market value of a capital asset. It is only when the Assessing Officer is required to ascertain the fair market value of a capital asset, that the provisions of section 55A can be invoked. There may be certain situations where the Assessing Officer is required to determine the fair market value. One of the situation is indicated in section 45(4) where the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals are to be computed is in question. In such a situation, the provision itself makes it clear that for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. In a situation, as one obtaining under section 45(4), since there is no apparent consideration for the transfer of the asset, the full value of the consideration has to be determined in an indirect manner and that indirect manner has been indicated to be the fair market value of the asset. Thus, when the fair market value of the asset under section 45(4) is to be determined, it is obvious that section 55A would get triggered and a reference to the Valuation Officer would be necessary. [Para 8] Another instance where the fair market value would have to be determined is provided in section 45(1A). Under this provision, where the assessee receives an amount from the insurer on account of damage or destruction to any capital asset as a result of natural calamities such as floods or fires, explosions, etc., the question of determining the capital gains is also connected with the determination of the fair market value of the asset on the date of receipt of such amounts from the insurer. In section 45(1A), it is indicated that for the purposes of section 48, that is, for computation of capital gains, the value of any money or the fair market value of the asset on the date of such receipts shall be deemed to be the full value of the consideration received or accruing as a result of such transfer of capital asset. In this situation also, the Assessing Officer would be required to compute the fair market value of the asset and, therefore, a reference to the Valuation Officer under section 55A would be necessary. [Para 9] But, the facts of the instant case were entirely different. The instant case involved sales simplicitor where the full value of the considerations were the sale prices of the two properties. For the purposes of computing capital gains in such a case, there was no necessity for computing the fair market value and, therefore, the Assessing Officer could not have referred the matter to the Valuation Officer. [Para 10] Hence, the decision arrived by the Tribunal could not be faulted. FACTS-II The assessee had claimed deduction on account of bad debt. The Assessing Officer disallowed the claim on the ground that the Reserve Bank of India’s permission to write off said bad debt had been communicated by the assessee’s bank to the assessee on 5-5-1998 which was the year next to the previous year in question. The Tribunal, however, allowed the claim of the assessee. On the revenue’s appeal : HELD-II The deduction under section 36(1)(vii) is allowed, provided the bad debt is written off as irrecoverable in the accounts of the assessee for the concerned previous year. This is, however, subject to the provision of sub-section (2) of section 36. Nothing had been pointed out to indicate that any of the provisions of sub-section (2) of section 36 would come in the way of the assessee in the facts of the instant case. It was also an admitted position that the assessee had, in fact, written off the bad debts as irrecoverable in its accounts in the relevant previous years. The only argument sought to be raised on behalf of the revenue was that the Reserve Bank of India’s permission had been communicated by the assessee’s bank to the assessee on 5-5-1998 which was the year next to the previous year in question. It was relevant to note that the Reserve Bank of India had already taken the decision for gaining permission to write off the said amount on 18-3-1998. In any event, that was not a relevant consideration inasmuch as all that the assessee had to do was to write off the debt as irrecoverable in its accounts of the relevant previous year. The Tribunal had arrived at a finding of fact based upon a correct appreciation of the law. No substantial question of law arose for consideration. [Para 13] In view of the above discussion, the appeal was to be dismissed.
 

CA Pawan Goswami
on 10 February 2009
Published in Income Tax
Views : 2115
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