CASE IN BRIEF: This case is a landmark decision by a two-judge bench of the Hon’ble Delhi High Court on the issue of ‘writing off’ of ‘Bad debts’ after the demerger of a company. When the original company would have been entitled to write off the bad debts, the successor who acquires the assets and liabilities from the previous owner would also be entitled to treat the bad debts in the same manner in which the original owner was entitled under law and this act of writing off would not amount to contravention of section 36(1)(vii) of the Income Tax Act 1961.
BRIEF FACTS OF THE CASE: The assessee company, consequent upon a scheme of demerger under section 391 to 394 of the Companies Act, 1956, had acquired all the assets and liabilities of two web based portals that were hitherto being operated by the assessee's holding company. Those web based portals were acquired as going concerns. Shareholders of the holding company were issued shares in the assessee company pursuant to the demerger. The assessee thereafter continued to run and operate the two web portals and derived income by way of online services, co-branded income, advertisements and management of events.
In the very first year of operation, after the said demerger, the assessee company had written off bad debts amounting to Rs. 3,63,31,432/- in its books. According to the assessing officer these debts related to the years 2003 to 2006 when the web portals were run and operated by the holding company and that the assessee could not have written off the bad debts as such act contravened section 36(1)(vii) of the Income-tax Act, 1961. Consequently, he rejected the claim in respect of the bad debts written off.
Later, an appeal was made before the Commissioner of Income Tax who held that the assessee was entitled to write off the irrecoverable bad debts, although the said debts has been acquired by the holding company.
Aggrieved by such decision the Revenue made an appeal before The Income Tax Appellate Tribunal who merely confirmed the decision of the Commissioner of Income Tax (Appeals) and found no infirmity in the decision of the Commissioner of Income Tax (Appeals)
Then finally an appeal was mad by the Revenue against such decision before the Hon’ble Delhi High Court who finally dismissed the appeal.
FINAL DECISION: The Hon’ble Delhi High Court (“Court”) dismissed the appeal made by the Revenue, and held that the assessee was entitled to write off the irrecoverable bad debts in his books.REASONS FOR REJECTION:
The decision of the court was given basically by placing reliance on the decision of the Supreme Court in the case of CIT v. Veerabhadra Rao: 155 ITR 152 (SC), where it was held that the assesse was entitled to write off the irrecoverable bad debts although, the said debts had been acquired from the holding company.
The Supreme Court in the said decision in the case of Veerabhadra Rao observed that if a business, along with its assets and liabilities, is transferred by one owner to another, there was no reason as to why the debts so transferred should not be entitled to the same treatment in the hands of the successors.