Facts of the Case

  • The assessee company acquired all assets and liabilities of two web-based portals pursuant to a scheme of demerger under Sections 391–394 of the Companies Act, 1956.
  • The web-based portals were acquired as going concerns from the holding company.
  • Following acquisition, the assessee continued operating these portals and earned revenue through online services, co-branded income, advertisements and event management activities.
  • In its first year after demerger, the assessee wrote off bad debts amounting to ₹3,63,31,432 in its books of accounts.
  • The Assessing Officer disallowed the claim on the ground that these debts related to earlier years (2003–2006) during which the business had been operated by the holding company and therefore the assessee could not claim deduction under Section 36(1)(vii) of the Income-tax Act, 1961.

Issues Involved

  1. Whether a successor company acquiring assets and liabilities through demerger can claim deduction for bad debts relating to the predecessor company under Section 36(1)(vii) of the Income-tax Act, 1961.
  2. Whether the assessee must establish actual irrecoverability of debts after the amendment effective from 01.04.1989.
  3. Whether writing off bad debts in the books of accounts is sufficient compliance under the Income-tax Act.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that the debts pertained to years during which the business was operated by the holding company and therefore the assessee was not entitled to write off those debts.
  • It was contended that the claim violated Section 36(1)(vii) of the Income-tax Act, 1961.
  • The Revenue further argued that there should be evidence proving that the debts had actually become bad and irrecoverable before allowing deduction. 

Respondent’s Arguments (Assessee)

  • The assessee contended that the business, together with all assets and liabilities, had been transferred under a valid demerger scheme.
  • Since the business was acquired as a going concern, the successor company stepped into the shoes of the predecessor company and became entitled to identical treatment in relation to transferred debts.
  • The assessee relied upon judicial precedents recognizing that transferred debts retain the same character in the hands of successors.
  • It was further argued that after amendment of Section 36(1)(vii), actual proof of irrecoverability was unnecessary once debts had been written off in the books of accounts.

Court Findings/ Order

The Delhi High Court upheld the orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal and dismissed the Revenue's appeal.

The Court held:

  • When a business together with assets and liabilities is transferred to another entity, the successor becomes entitled to the same legal treatment regarding transferred debts as was available to the predecessor.
  • The Court relied upon the Supreme Court judgment in CIT v. Veerabhadra Rao (155 ITR 152 SC) which held that transferred debts continue to retain their character in the hands of the successor.
  • The Court further relied upon T.R.F. Limited v. CIT (323 ITR 397 SC) and held that after amendment effective from 01.04.1989, it is not necessary for an assessee to establish actual irrecoverability of debts.
  • Recording the debt as written off in the books of account is sufficient.
  • No substantial question of law arose for consideration and the appeal was dismissed. 

Important Clarification

The judgment clarifies that:

  • Successor entities acquiring businesses through demerger, amalgamation, or transfer of business as a going concern are entitled to the same tax treatment regarding bad debts as available to predecessor entities.
  • Following amendment of Section 36(1)(vii), taxpayers are not required to prove actual irrecoverability of debts.
  • Mere write-off in books of accounts satisfies the legal requirement for claiming deduction.
  • Tax authorities cannot deny deduction solely because the debt originated in the hands of the predecessor entity.

Sections Involved

Income Tax Act, 1961

  • Section 36(1)(vii) – Deduction in respect of bad debts written off
  • Section 36(2) – Conditions for allowability of bad debts

Companies Act, 1956

  • Sections 391–394 – Scheme of arrangement and demerger\

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2013:DHC:1783-DB/BDA09042013ITA2092013.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.