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2007] 292 ITR 339 [2007] 162 TAXMAN 124 (DELHI) HIGH COURT OF DELHI Commissioner of Income-tax v. Morgan Securities & Credits (P.) Ltd.* VIKRAMAJIT SEN AND S. MURALIDHAR, JJ. IT APPEAL NO. 1442 OF 2006 DECEMBER 7, 2006 Section 36(1)(vii), read with section 36(2), of the Income-tax Act, 1961 - Bad debts - Assessment year 2003-04 - Whether an assessee would be entitled to a deduction of amount of any bad debt, which has been written off as irrecoverable in its accounts for previous year under section 36(2) and section 36(1)(vii) - Held, yes Circulars and notifications - Circular No. 551, dated 23-1-1990 FACTS The assessee-company, solely engaged in the money lending business, had written off certain amount as bad debts after taking legal action against one of the debtor companies 'S'. The Assessing Officer, however, dis-allowed the same holding, inter alia, that their writing off as bad was not predicated on an honest opinion formed by the assessee and further that the provisions could not be used as a carte blanche to treat any debt as bad during the year in which it had become exigible to tax. On appeal, the Commissioner (Appeals) upheld the impugned disallowance. On second appeal, the Tribunal deleted the impugned addition treating it to be irrecoverable. On appeal : HELD A debt becoming bad or irrecoverable are but two sides of the same coin. The Commissioner (Appeals) had endorsed the reasoning of the Assessing Officer to the effect that the assessee had merely written off the debts at the end of the year so that its taxable income would get reduced. The Commissioner (Appeals) as well as the Assessing Officer were influenced by the fact that there had been no previous dealings between the assessee and 'S'; no security was taken for the loan and the sequence of events from the advance of the loan to its writing off did not span across even one year. To the contrary, it appeared that those factors would be relevant if the stand of the department was that the transaction itself was sham or false. Once it was accepted that the transaction actually took place, those factors would, in fact, quell a doubt that the decision to write off the loan as a bad debt…

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