Zauri Leasing And Finance Ltd. vs Income Tax Officer on 8 April, 2008

[Cites 31, Cited by 11]

Income Tax Appellate Tribunal - Delhi

Zauri Leasing And Finance Ltd. vs Income Tax Officer on 8 April, 2008

Equivalent citations: (2008)115TTJ(DELHI)721

ORDER

B.R. Kaushik, A.M.

1. This appeal by the assessee has been filed against the order of learned CIT(A)-XXI, New Delhi, dt. 31st May, 2005.

The assessee is a limited company engaged in the business of leasing and hire purchase of equipment, financing, bill discounting, loan placement etc. The first ground of appeal is reproduced below:

1. On the facts and circumstances of the case the CIT(A) has erred in upholding the AO's act of disallowing appellant's claim of bad debts of Rs. 80,68,668 out of total write off of Rs. 85,69,350. The disallowance so upheld is in total disregard to the provisions of Section 36(1)(vii) read with the provisions of section. [Section 36(2)]

2. The assessee claimed bad debts of Rs. 85,69,350. The AO observed that the amounts were written off as bad debt during the pendency of suits Under Section 138 of the Negotiable Instruments Act. The assessee maintained that the claim was admissible because:

(i) it was not necessary for the assessee to take legal action against the defaulters or wait for the outcome of the suit for the allowability of the claim of bad debts;

(ii) the claim of bad debt was admissible on the basis of the decision of the management that the debt has become bad;

(iii) the assessee had not been able to recover any amount from the parties till the date of assessment despite the lapse of three years from the end of closure of the accounts of the relevant accounting period, which itself proved that the accounts written off were irrecoverable;

(iv) criminal proceedings were instituted against the parties Under Section 138 of the Negotiable Instruments Act as distinguished from civil proceedings for the recovery of debts but the parties have failed to pay the amount; and

(v) the foregoing circumstances clearly proved that the debts had become bad and the claim was rightly made.

3. The AO also required the assessee to justify the claim of bad debts of Rs. 1,54,610 from Rama Paper Mills on account of lease rent. According to the assessee:

(i) an effluent plant was leased to M/s Rama Paper Mills Ltd. and the lease rent was shown as income in asst. yrs. 1997-98 to 1999-2000;

(ii) during the period relevant to asst. yr. 1998-99, one more equipment was leased to M/s Rama Paper Mills, and the lease rent was accordingly shown as income;

(iii) the party started defaulting in August, 1998, its cheques bounced and suit was filed Under Section 138 of the Negotiable Instruments Act;

(iv) thereafter, settlement was arrived at whereby the party made payment of a large part of the outstanding amount and the balance amount of Rs. 1,54,610 was written off as irrecoverable debt, which was allowable Under Section 36 of the Act; and

(v).the relevant books of accounts were not readily traceable.

4. The AO observed that:

1. the relevant books of accounts were not produced for verification; and

2. relevant details were not submitted to ascertain the period for which the debts in question had remained outstanding and whether the same were taken into account for determining taxable income of any preceding year.

5. The AO, therefore, rejected the entire claim of Rs. 85,69,350 as bad debt for the reason that the assessee had failed to furnish any evidence in support of its claim.

The learned CIT(A) examined the issue in detail as per discussion in para 5 at pp. 6-10 of his order. The findings of the learned CIT(A) are summarized below:

(a) The amount of Rs. 85,69,350 claimed as bad debt by the assessee comprised of principal and the interest thereon;

(b) As per provisions of Section 36(1)(vii) of the IT Act, deduction was to be allowed in respect of the bad debt written off as irrecoverable in the account of the assessee in the relevant previous year subject to Section 36(2) of the Act which provided that the debt in question should have been taken into account in computing the income of the assessee;

(c) (i) The debt due to the assessee in the case of SMS Construction, Udaipur was for hire purchase of machinery in financial year 1996-97;

(ii) The finance charges of Rs. 2,50,341 per year were accounted for in the period relating to asst. yrs. 1998-99 and 1999-2000;

(iii) the assessee failed to give the copy Of suit filed against the party;

(iv) it was not possible to verify the claim that the cheques issued by the party for payment of instalments of hire purchase were not honoured;

(v) However the claim of bad debts to the extent of Rs. 5,09,682, taken into account for the asst. yrs. 1998-99 and 1999-2000 was considered eligible for deduction;

(d) (i) The assessee (Haryana Steel) also did not furnish the copy of suit filed against Haryana Steel & Alloys Ltd., Sonepat, in support of its claim that 11 cheques of the party towards the bills discounting were dishonoured in the previous year relevant to asst. yr. 1999-2000;

(ii) Specific details and confirmation that the cheques were dishonoured, were also not filed;

(iii) The assessee had not accounted for the bill discounting charges in the relevant year, and

(iv) claim for allowability of bad debts written off in respect of this party was not admissible;

(e) (i) Similarly, the assessee did not submit the copies of suit filed against Rama Paper Mills Ltd., Kiratpur, U.P. in support of its claim that the cheques for lease charges for asst. yrs. 1998-99 and 1999-2000 for effluent treatment plant given on lease during the period relevant to asst. yr. 1999-2000 were dishonoured;

(ii) Specific confirmation from the bank that cheques were dishonoured was also not filed; and

(iii) The write off claim could not, therefore, be allowed;

(f) The claim of bad debt written off in respect of the following parties was also rejected for similar reasons:

(i) Deepak Industries Ltd., Kolkata for lease charges of asst. yrs. 1998-99 and 1999-2000 for the lease of turning centre for Rs. 47.7 lakhs in asst. yr. 1997-98;

(ii) Rapid Construction, New Delhi for lease charges for asst. yrs. 1999-2000 and 2000-01 of becon batching plant and DG set amounting to Rs. 26,89,910 stated to be given on lease in asst. yr. 1999-2000;

(iii) Atul Glass Ltd., New Delhi for lease charges for asst. yrs. 1998-99 to 2000-01 for the GD set of Rs. 40 lakhs given on lease during the period relevant to asst. yr. 1997-98.

Thus the CIT(A) allowed the claim of bad debt of Rs. 5,00,682 and rejected the rest of the claim for the reason that the assessee could not file evidence in support of its claim that the charges given by the parties were not honoured and it was noticed by him that there was considerable recovery of bad debts.

6. The learned Counsel reiterated the submissions taken before the lower authorities and maintained that:

(i) the entire claim of bad debts of Rs. 85,69,350 was required to be allowed because the amount was written off as irrecoverable in the books of account of the assessee;

(ii) in view of amendment to s. 36(1)(iii) of the IT Act w.e.f. 1st April, 1989 the assessee was not required to prove that the debts had become bad;

(iii) as per Circular No. 551 dt. 23rd Jan., 1990 [(1990) 82 CTR (St) 325 : (1990) 183 ITR (ST) 7], the claim of bad debt was to be allowed in the year of write off;

(iv) since the genuineness of the transaction was not questioned, the amount written off was deductible as bad debt; and

(v) the case of the assessee was squarely covered by the decisions of CIT v. Morgan Securities & Credits (P) Ltd. (2007) 210 CTR (Del) 336 : (2007) 292 ITR 339 (Del) and CIT v. Autometers Ltd. (2007) 210 CTR (Del) 339 : (2007) 292 ITR 345 (Del).

7. Learned Departmental Representative relied on the orders of the lower authorities.

We have carefully considered the issue. It is seen from the order of the learned CIT(A) that the assessee failed to produce the relevant evidence in support of its claim that the cheques issued by the parties were dishonoured;

(ii) despite proper opportunity given by the lower authorities the assessee did not even file the copies of the relevant suits filed in the Court so as to enable the lower authorities to verify the relevant facts;

(iii) the assessee could not establish that the amount written off had been taken into account for determining the income of any previous year as per the statutory requirement of the provisions of Section 36(2) of the Act;

(iv) the learned CIT(A) has given clear finding of facts in his impugned order and taken note of the fact that there were considerable recoveries in the subsequent years; and

(v) the amount of Rs. 85,69,350 claimed as bad debt written off comprised of the principal amount and the interest.

It is, however, seen from paras 27-29 and 42-100 of the paper book placed on record that the assessee had filed before the lower authorities (i) copies of decree against SMS Construction; (ii) complaint filed against Haryana Steel & Alloys Ltd.; (iii) details of assets leased and (iv) lease rent received in asst. yrs. 1998-99 and 1999-2000. We are, therefore, of the considered opinion that the issue has not been examined properly by the lower authorities as is clear from their orders that these documents filed with paper book have not been duly considered. We, therefore, set aside this issue to the file of the AO with the direction that he should consider the evidence filed by the assessee and decided the issue afresh after giving proper opportunity to the assessee. This ground is treated as allowed for statistical purposes.

8. The second ground of appeal is as under:

2.(a) On the facts and circumstances of the case, the CIT(A) has erred in upholding the AO's act of treating stale cheques of Rs. 58,689 appearing in sundry creditors as income of the appellant company Under Section 41(1).

(b) The CIT(A) without any basis erred in holding that the creditors have written off the debt.

9. The facts, in brief, are that it was observed by the AO from the details of sundry creditors filed by the assessee on 9th Feb., 2004 that an amount of Rs. 58,689 was appearing against the head "Stale cheques". The assessee was required to explain as to why the amount of Rs. 58,689 should not be treated as income Under Section 41(1) of the Act because of cessation of liability. He was also required to file the dates of issue of cheques, the names of the parties to whom the cheques were issued and details of transactions with these parties during the year. The assessee did not submit any reply and the amount of Rs. 58,689 was added by the AO as income of the assessee Under Section 41(1) of the Act. The learned CIT(A) upheld the addition for the reasons that:

(i) the cheques issued by the assessee were not encashed;

(ii) the assessee had the capacity to pay the liabilities in question;

(iii) since the cheques were not encashed the amount was not debited to the bank account of the assessee;

(iv) the liability in question should not have been continued to be shown in the books of account; and

(v) the liability ceased to exist.

The learned Counsel reiterated the submissions taken before the learned CIT(A) and discussed in para 2.2 of his impugned order which are summarized below:

(i) the act of the AO in making the addition of Rs. 58,689 Under Section 41(1) of the Act shown as liability on account of "stale cheques" was arbitrary and against the principles of law;

(ii) the liability could not be considered as income as per IT Act;

(iii) the cheques were appearing as liability of the assessee;

(iv) there was no cessation of liability within the scope and meaning of Section 41(1) of the Act;

(v) the Explanation to Section 41(1) is also not attracted because the assessee had not written off the corresponding credits in its books of account; (vi) even if the liability was barred by the law of limitation, it would not be considered that the liability ceased to exist either because the amount had not been shown as liability in the books of account or because the assessee had unilaterally written it off;

(vii) despite the insertion of Expln. 1 of Section 41(1) w.e.f. 1st April, 1997 by the Finance (No. 2) Act, 1996, the judicial view still holds good so far as it has been held that even if the assessee had voluntarily written off the liability, the liability would not cease to exist because the unilateral write off did not involve the consent of the creditors;

(viii) the amount was written off in the subsequent year in the relevant books of account and offered for tax.

10. We have carefully considered the issue in view of the material placed on record and rival submissions. It is observed that:

(i) in view of admission of the assessee that the liability in question was written off in subsequent year and offered for tax, there was no dispute as to the cessation of the liability in question and the consequent taxability thereof;

(ii) since the liability were admittedly "on account of stale cheques", it was clear that it had ceased to exist when the cheques in question were considered "stale";

(iii) the learned CIT(A) has, therefore, correctly upheld the addition made by the AO in this year because the cheques were considered stale in this year by the assessee itself as shown in its books of account of the accounting period under consideration and the amount in question have been rightly taxed as income of the previous year;

(iv) the learned CIT(A) very fairly directed that the appropriate action should be taken in the assessment of the subsequent year in which the amount had been offered to tax; and

(v) with due respect the decision of the Hon'ble apex Court in the case of CIT v. Sugauli Sugar Works (P) Ltd. did not apply on the facts of the case of the assessee, in view of the fact that the assessee had himself admitted that the liability had ceased to exist and the amount was offered to tax in subsequent year and thus, the only issue before us is as to the year when the liability ceased to exist, which in our considered opinion, as discussed above, is this previous year. We, therefore, see no reason to interfere with the decision of the learned CIT(A). This ground of appeal is accordingly rejected.

11. The third ground of appeal is reproduced below:

(a) On the facts and circumstances of the case the learned CIT(A) has erred in upholding the act of the AO of disallowing the appellant's claim of depreciation of Rs. 2,93,687 on lease of five cars.

(b) The CIT(A) erred in confirming the disallowance of depreciation on lease of two cars where the name of the appellant is mentioned on the purchase invoice.

(c) The CIT(A) erred in confirming the disallowance of depreciation on three other leased cars when the beneficial ownership of the appellant was established.

12. This ground of appeal was not pressed by the learned Counsel and is dismissed accordingly.

13. The fourth ground of appeal is as under:

On the facts and circumstances of the case the CIT(A) has erred in upholding AO's act of disallowing sum of Rs. 13,34,586 on account of diminution in the value of re-possessed stock even when the same was in accordance with the method of accounting adopted by the appellant.

14. As per relevant facts on record, the assessee had declared value of stock of "hire re-possessed" at Rs. 19,00,000 as on 31st March, 2001 as against Rs. 32,34,586 as on 31st March, 2000. It claimed the amount of Rs. 13,34,585 as diminution in value of stock under the head "Operating, administrative and other expenses". As per questionnaire dt. 20th Dec., 2002, the assessee company was required by the AO to file the details of the same. The reply of the assessee submitted before the AO as per its letter dt. 19th Feb., 2004 has been reproduced in para VI at pp. 3-4 of the assessment order. In short the assessee contended that:

(i) the diminished value of re-possessed stock was on account of tippers' given on hire to M/s SMS Constructions;

(ii) due to financial crisis the party had stopped paying the hire purchase instalments;

(iii) despite best of efforts, no payment was forthcoming from them;

(iv) left with no alternative, the assessee company took the possession of the tippers given on hire purchase and wrote off the amount due from the party on account of hire purchase instalments as bad debts;

(v) the outstanding amount on account of balance period of hire purchase was shown as stock on repossession of the tippers, the value of which was taken as per the remaining balance at the year end and the value of stock was shown as per the realizable value of the assets;

(vi) since these 'tippers' were not in good condition on account of heavy wear and tear, the difference between the book value on repossession and the revaluation as per physical appraisal was taken as diminution in the value of assets as per the prevailing system of hire purchase accounting.

According to the AO, the assessee failed to produce before him the valuation report or any other evidence in support of his claim that the value had decreased to Rs. 19 lakhs. He, therefore, rejected the claim of the assessee and added the amount of Rs. 13,34,586 to the income of the assessee.

The assessee as per its letter dt. 3rd Nov., 2004 placed at pp. 1 to 7 of the paper book further contended before the learned CIT(A) that:

(i) the repossession of assets was effected by the assessee in July, 1998 as per terms of the hire purchase agreement dt. 17th Dec, 1996;

(ii) the value of the re-possessed assets was shown in the books of account of the assessee at Rs. 32,34,586 being the cost of the assets as reduced by the principal recovered till the date of repossession;

(iii) pending settlement of the dispute with the party, the value of stock on hire has been shown constantly at Rs. 32,34,586 since July, 1998;

(iv) since neither the dispute was resolved nor the Court cases were decided and the auditors had been raising serious objections to value the assets at the same amount for almost seven consecutive years, despite considerable fall in the value of these equipments due to passage of time and technological obsolescence the management decided to take the real value of assets so as to depict true and fair picture of its assets and liabilities in its books of accounts;

(v) the relevant hire purchase agreement could have, in any case, ended in the financial year 1999-2000, reducing the value of equipment to 'nil';

(vi) as against prescribed depreciation @ 25 per cent as per IT Rules the management took the reduced value at Rs. 19 lakhs by taking approximately depreciation @ 15 per cent;

(vii) the diminution in the value of stock on hire was in accordance with the method of accounting as described in para 1(1)(iii) of Schedule 14 and could not be considered excessive.

15. The learned CIT(A) duly considered the aforestated submissions as per discussion in para 2.2 of his impugned order but rejected the claim of the assessee for the reasons that:

(i) the revaluation of stock by using the depreciation (approximate) @ 15 per cent was neither reliable nor prescribed; and

(ii) the assessee neither filed the valuation report nor any other evidence in support of its claim.

16. The learned Counsel reiterated the submissions taken before the lower authorities.

The learned Departmental Representative relied on the orders of the lower authorities.

We have carefully considered the issue in view of the material placed on record and orders of the lower authorities. It is observed that the lower authorities have not examined the claim of the assessee that the tippers were taken in its stock on "repossession at a cost of Rs. 32,32,586 in July, 1998 and that the value of the machinery in question had diminished due to the passage of time and technological obsolence and, therefore, the stock of machinery in question was valued at a lower price. In our considered opinion, if the assessee had given the 'tippers' on hire, the ownership of the tippers all along vested in the assessee and the leased tippers given on hire were the capital assets of the assessee. Since it is not a case of sale on instalments the tippers given on hire, cannot be considered the stock of the assessee. In such a situation even if the tippers were re-possessed as per claim of the assessee, the tippers could not be considered stock-in-trade because the tippers were never intended to be sold and the tippers repossessed did not cease to be the capital asset of the assessee. Since the tippers had neither been given for lease during July, 1998 to 31st March, 2001 nor put to use by the assessee, the depreciation could not be claimed and the value of tippers in the balance sheets remained unchanged. The issue has not, thus, been examined properly by the lower authorities. This issue is, therefore restored to the AO with the direction that he should re-examine the claim of the assessee in view of the foregoing observations and decide the issue afresh after giving proper opportunity to the assessee. This ground of appeal is treated as allowed for statistical purpose.

The appeal of the assessee is, therefore partly allowed as per discussion above.

I.P. Bansal, J.M. I have gone through the draft order passed by the Hon'ble AM in which the issue regarding bad debt has been restored to the file of AO. I have discussed this issue with him, but I could not persuade myself with the view that this issue is required to be restored back to the file of AO, therefore, to that extent I am not in agreement with the view of Hon'ble AM and in my opinion the matter does not require to be referred back to the AO as the issue for which the matter is being restored back to the AO does not require further verification of facts particularly in view of remand report of the AO dt. 15th March, 2005, a copy of which is placed at pp. 18 to 20 of the paper book. Therefore, I proceed to express my opinion on this issue. So far as it relates to other issues I am in agreement with the Hon'ble AM. My findings with regard to issue of bad debts are as follows.

17. The assessee company had claimed bad debts of Rs. 85,69,350 in place of P&L a/c. The assessee was asked to explain regarding its claim of bad debts. In response the assessee submitted details of bad debts vide letter dt. 19th Feb., 2004 and vide order sheet entry dt. 9th Feb., 2004 the assessee was required to file reasons as to why bad debts were written off during pendency of suits Under Section 138. Reply was submitted vide letter dt. 27th Feb., 2004. It was explained that bad debt is allowable on the basis of decision of management that the same has become bad. Reference was made to the decision of Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT . It was submitted that till date assessee has not received any amount from these parties and this itself is a testimony of the fact that the amounts are unrecoverable. It was explained that the suit filed Under Section 138 under Negotiable Instruments Act was for criminal liability which has nothing to do with recovering of the amount and for recovering of the amount civil proceedings have been instituted separately.

Further vide order sheet entry dt. 19th Feb., 2004 the assessee was required to explain that the amount of Rs. 1,54,610 not claimed from Rama Paper Mills against lease rental/sale of such assets and was claimed as bad debts that why it should not be disallowed. It was explained that affluent treatment plant was leased out by the assessee company to the said concern and leasing income from the said asset was shown as income in asst. yrs. 1997-98, 1998-99 and 1999-2000. In asst. yr. 1998-99 another equipment was leased to them and against both these equipments rental income was shown. After August, 1998 the aforesaid company started making default in payment and cheques were also bounced. A settlement was reached with the said party on the basis of which the balance amount of Rs. 1,54,610 was written off and thus the same is allowable as bad debts.

Considering these submissions AO. disallowed the entire amount of Rs. 85,69,350 by making observations that no books of account were produced for verification of accounts for this purpose and no details were filed and since these amounts were outstanding or as to whether such amounts were offered for taxation in any preceding years. Thus holding that the assessee has failed to furnish evidence in support of his claim the amount was disallowed. The amount was agitated in appeal filed before CIT(A). CIT(A) has called for remand report dt. 15th March, 2005 of the AO, a copy of which is placed at pp. 18 to 20 of the paper book. The report of the AO in respect of each party is as under:

(1) SMS Construction, Udaipur: The said party had entered into an agreement with the assessee in the asst. yr. 1997-98 for purchase of Hitachi excavator and Tata tippers. The hire purchase finance charges were accounted in asst. yrs. 1998-99 and 1999-2000. The hire purchase charges accounted in asst. yr. 1999-2000 amounted to Rs. 2,50,341. The cheques issued by the party bounced and party defaulted in payment of hire purchase instalments suit Under Section 138 of Negotiable Instruments Act was filed in the Court of Addl. Sessions Judge, Patiala House, New Delhi. Assessee did not file copy of suit for verification.

(2) Haryana Steel & Alloys Ltd., Sonepat: Bills raised on this party were discounted in the year 1999-2000. The details of the bills discounted and discount charges accounted as income were also furnished by the party and the said party had issued cheques towards the bill discounting amounts which bounced in asst. yr. 1999-2000 and legal suits were stated to be filed Under Section 138 of Negotiable Instruments Aet before the Court of Addl. Sessions Judge, Patiala House, New Delhi. Assessee did not file copy of suit for verification.

(3) Rama Paper Mills Ltd., Kiratpur, UP: The party was leased effluent treatment plant for lease amount of Rs. 32,40,625 in asst. yr. 1997-98. The income arising out of such lease transaction was shown in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suit was filed Under Section 138 of the Negotiable Instruments Act. Assessee did not file copy of suit for verification.

(4) Deepak Industries Ltd., Calcutta : The party was leased CNC turning centre amounting to Rs. 47,70,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act. Assessee did not file copy of suit for verification.

(5) Rapid Construction, New Delhi : The said party was leased Becon batching plant and DG set amounting to Rs. 26,84,910 in asst. yr. 1999-2000. The income arising out of this lease transaction was booked in asst. yrs. 1999-2000 and 2000-01. The cheques which were issued by the party bounced and accordingly arbitration proceedings were stated to be initiated before Addl. Sessions Judge, New Delhi for recovery of the principal and interest. No further details have been furnished.

(6) Atul Glass Ltd., New Delhi : The said party was leased a DG set amounting to Rs. 40,00,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act. Assessee did not file copy of suit for verification.

18. After considering the remand report of the AO the learned CIT(A) vide para 5.3 has decided the issue party-wise as under:

(1) SMS Construction, Udaipur: The claim of the assessee in respect of other amount is eligible for deduction @ Rs. 2,50,341 per year as similar income was shown in asst. yrs. 1998-99 and 1999-2000.

(2) Haryana Steel & Alloys Ltd., Sonepat : According to the evidence submitted, the Punjab National Bank memorandum does not contain any specific details to confirm that cheques bounced and no bill discounting charges are booked for the year under consideration. Thus the claim is not allowable.

(3) Rama Paper Mills Ltd., Kiratpur, UP : No specific confirmation for the cheques bounced has been submitted by the assessee i.e. in the shape of bank memorandum and thus no right of claim can be allowed.

19. In respect of the following three parties, i.e., Deepak Industries Ltd., Calcutta, Rapid Construction, New Delhi and Atul Glass Ltd., New Delhi the claim is not allowable for the reason that the claim of the assessee that cheques have bounced is not supported by any bank memorandum. Therefore, write off of bad debt cannot be allowed. Assessee is aggrieved hence in appeal.

It was vehemently pleaded by the learned Authorised Representative that the assessee had fulfilled all the conditions required to be fulfilled for claiming deduction of bad debt. He contended that the disallowance has been upheld by the CIT(A) only for the reason that the assessee did not submit evidence in respect of bounced cheques. He contended that after 1st April, 1989 the only condition for allowability of bad debt is that it should be written off. To support such contention he relied on the following decisions:

(1) CIT v. Morgan Securities and Credits (P) Ltd. (2007) 210 CTR (Del) 336 : (2007) 292 ITR 339 (Del}, (2) CIT v. Autometers Ltd. (2007) 210 CTR (Del) 339 : (2007) 292 ITR 345 (Del).

20. On the other hand, the learned Departmental Representative relying on the orders of AO and CIT(A) pleaded that disallowance has rightly been sustained by CIT(A).

I have carefully considered the rival submissions in the light of material placed before us. From the assessment order it is clear that the assessee company is engaged in the business of leasing, hire purchase of equipments and financing i.e. bill discounting ICDS and loan placement etc. Thus the main business of the assessee company is leasing, hire purchase of equipments and financing in the shape of bill discounting, earning interest on inter-corporate deposits and loan placements. Bad debts which have been written off relates to such activities of the business of the assessee. At the assessment stage there may be some doubt that whether or not the assessee had accounted for income relating to these transactions in the year under consideration or in earlier years. However, the said doubt was cleared by the remand report of the AO dt. 15th March, 2005 which has been referred to in earlier part of this order. As pointed out earlier copy of such remand report is placed at pp. 18 to 20 of the paper book. According to the said report the income in respect of each party relating to which bad debts written off have been accounted for either in the year under consideration or in earlier years. The claim of the assessee is denied only on the basis that the assessee did not furnish copy of suit filed by it against those parties. In my opinion, non-furnishing of copy of suit is not relevant to decide that whether or not bad debts claimed by the assessee are allowable. According to Section 36(1)(vii) subject to the provision of Section (2), the amount of any bad debt or part thereof which is written as irrecoverable in the account of the assessee for the previous year is an allowable deduction. The proviso to Section 36(1)(vii) applies to bad and doubtful debts relating to schedule banks etc. According to Expln. 2 to Section 36(1)(vii) such bad debts which are written off will not be allowable if it is a provision for bad and doubtful debts made in the case of the assessee. Allowability is subject to restriction, placed in Section 36(2) which reads as under:

36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply-

(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;

(ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made;

(iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year), but the AO had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year;

(iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) and the AO is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off the provisions of Sub-section (6) of Section 155 shall apply;

(v) where such debt or part of debt relates to advances made by an assessee to which Clause (viia) of Sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.

21. According to Section 36(2)(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of only debt or part thereof is written off. or of an earlier previous year, or represent money lent in the ordinary course of business of banking or money lending which is carried on by the assessee. In the remand report it has been clearly mentioned by the AO that in respect of each debt income has been taken into account either in the previous year in which the debt has been considered bad or in earlier previous years the relevant portion of AO's observations in respect of each debt has been underlined in the above part of this order. Thus according to Section 36(2) also the assessee fulfills the conditions of allowability of bad debt as there is material on record to show that the debts which have been considered to be bad and are written off in respect of which income have been taken into account either in previous year relevant to relevant assessment year or in earlier previous years. If the bad debt is falling under the category of Section 36(2) and is written off in the books of account i.e. debited to P&L a/c then after amendment w.e.f. 1st April, 1989, the assessee need not to prove that such bad debt had in fact become bad only during the relevant previous year under consideration. The position of law in this regard has been explained in the decision of Hon'ble Delhi High Court in the case of CIT v. Morgan Securities and Credits (P) Ltd. (supra). Circular No. 551 dt. 23rd Jan., 1990 (1990) 82 CTR (St) 325 leaves no scope for the debate since it specifically notices the previous practice of having two establishments with a debt had become bad in previous year, which had generated enormous litigation on the question of allowability of bad debt in a particular year. The circular expressed the hope that this litigation would be eliminated by permitting the debt to be treated as bad or irrecoverable no sooner it was written off in the books of the assessee's concern. Their Lordships have relied on the decision of Hon'ble Gujarat High Court in the case of CIT v. Girish Bhagwat Prasad wherein it has been held that w.e.f. 1st April, 1989 'all that the assessee had to show was that the bad debt was written off as irrecoverable'. Thus in my opinion, upholding of the disallowance by CIT(A) is contrary to the aforementioned decision of Hon'ble jurisdictional High Court in the case of CIT v. Morgan Securities and Credits (P) Ltd. (supra). Respectfully following the aforementioned decision of the Hon'ble Delhi High Court, addition sustained by CIT(A) is required to be deleted. There is no justification in restoring this issue to the file of AO in view of the remand report of AO which is already on record and referred to by learned Authorised Representative.

REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 4th Feb., 2008

22. The following question arising for consideration of the Third Member on a difference of opinion for the asst. yr. 2001-02 is being referred to the Hon'ble President for the opinion of the Third Member:

Whether on the facts and in the circumstances of the case, the addition with regard to bad debts should be deleted or the issue is required to be restored to the file of AO for further verification of facts?

Vimal Gandhi, President 8th Feb., 2008 The following question has been referred to me on account of difference between the learned Members of Tribunal, "I" Bench, Delhi Under Section 255(4) of the IT Act:

Whether on the facts and in the circumstances of the case, the addition with regard to bad debts should be deleted or the issue is required to be restored to the file of AO for further verification of facts?

The facts of the case are that the assessee was a limited company engaged in the business of leasing and hire purchase of equipment, financing, bill discounting, loan placement etc. In the return of income for the assessment year under consideration, the assessee claimed bad debt written off at Rs. 85,69,350. The total income declared was a negative figure of loss of Rs. 64,17,960. The AO took up the assessment and issued notice Under Section 143(2) on 29th Oct., 2002. During the course of assessment proceedings, the assessee, as per letter dt. 21st Oct., 2003 claimed that the Hon'ble Bombay High Court vide order dt. 4th July, 2003 directed amalgamation of the assessee company with its holding company M/s Zuari Industries Ltd., Goa. According to the assessee, the AO thereafter was not sure whether assessment was to be made by him or by the AO at Goa assessing the holding company. Only somewhere in January, 2004, the concerned CIT directed that assessment for the year under consideration be made by the AO at New Delhi. Thereafter the AO wrote letters dt. 19th Feb., 2004 and 27th Feb., 2004. Extracts from the above letters are reproduced in the assessment order. In response to the above letters, the assessee had pointed out that for making claim of bad debt, it was not necessary that assessee should have filed case against the debtor and wait till the said cases were decided. A bad debt is to be allowed on the basis of decision of management that the same had become bad. The assessee pointed out that cheques issued by parties had bounced. Therefore, proceedings Under Section 138 of Negotiable Instruments Act were instituted against the debtors but nothing was recovered from the debtors till date. The assessee also filed separately explanation for write off of bad debt in respect of M/s Rama Paper Mills.

The AO disallowed the claim, with the following observations:

No books of account have been produced for verification of accounts of these persons. No details have been filed as to since when these amounts are outstanding or as to whether such amounts were offered for taxation in any preceding years. As the assessee has failed to furnish any evidence in support of its claim, its claim is not allowed and accordingly the sum of Rs. 85,69,350 is being disallowed. Penalty proceeding Under Section 271(1)(c) of the IT Act, 1961 is being initiated separately for filing inaccurate particulars of income.

After making addition of bad debt in question, total income of assessee was computed at Rs. 32,49,490 which was adjusted against the brought forward loss. Interest income of Rs. 5,88,862 which the assessee had claimed as business income was taken as income from "other sources". However, on appeal, CIT(A) directed that said income be taken as "business income". The order of CIT(A) has been confirmed by the Tribunal in ITA No. 3471/Del/2005 vide order dt. 8th Feb., 2008. Besides this, in the assessment order the ITO has allowed, to carry forward loss from earlier year at Rs. 1,21,51,794. Therefore, even if these bad debts are disallowed and added, it will have no tax effect.

23. The assessee impugned above disallowance of bad debt in appeal before the learned CIT(A) and reiterated its submissions that only condition required for claiming bad debt was that it should be written off. The assessee filed evidence of proceedings taken against different debtors to establish that proper action was taken against the debtors. The learned CIT(A) sought and obtained a report from the AO, which was furnished on 15th March, 2005. A copy of said report is available at pp. 18 to 20 of the paper book. The learned CIT(A) allowed part of claim but substantially upheld the disallowance of the bad debt, with the following observations:

5.3 Having the provision in mind the remand report of the AO and my decision each party is as follows:

SMS Construction, Udaipur:

This party entered into an agreement with assessee for hire purchase in asst. yr. 1997-98 for purchase of Hitachi excavator and Tata tippers. The hire purchase finance charges were accounted in asst. yrs. 1998-99 and 1999-2000. The hire purchase charges accounted in asst. yr. 1999-2000 amounted to Rs. 2,50,341. The cheques issued by the party bounced and party defaulted in payment of hire purchase instalments. The legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, Patiala House, New Delhi. The assessee has not furnished copy of the suit filed, for verification.

I am of the opinion that only to the extent the income was taken into account in computation and confirmed by the Authorised Representative's report would be eligible for deduction. Assessment year 1998-99, 1999-2000 @ Rs. 2,50,341 i.e. Rs. 5,00,682.

Haryana Steel & Alloys Ltd., Sonepat:

Bills raised on this party were discounted in the year 1999-2000. The details of the bills discounted and discount charges accounted as income is given in the statement No. 1. This party has issued 11 cheques towards the bill discounting amount which bounced in asst. yr. 1999-2000 and legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, Patiala House, New Delhi. The assessee has not furnished copy of the suit filed, for verification.

The Punjab National Bank memorandum submitted by the appellant does not contain any specific details to confirm that cheques bounced. Besides no bill discounting charges have been booked this year. Thus the claim for write off cannot be allowed.

Rama Paper Mills Ltd., Kiratpur, U.P.:

The party was leased effluent treatment plant for lease amount of Rs. 32,40,625 in asst. yr. 1997-98. The income arising out of this lease transaction as booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, Patiala House, New Delhi. The assessee has not furnished copy of the suit filed, for verification.

No specific confirmation that cheques bounced has been submitted by the appellant i.e. bank memorandum. Thus no write off claim can be allowed.

Deepak Industries Ltd. Calcutta:

The party was leased on turning centre amounting to Rs. 47,70,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, New Delhi. However, copy of the suit filed is not furnished for verification.

Rapid Construction, New Delhi:

The said party was leased Becon batching plant and DG set amounting to Rs. 26,84,910 in asst. yr. 1999-2000. The income arising out of this lease transaction was booked in asst. yrs. 1999-2000 and 2000-01. The cheques which were issued by the party bounced and accordingly arbitration proceedings were stated to be initiated before Addl. Sessions Judge, New Delhi for recovery of the principal and interest. No further details have been furnished.

Atul Glass Ltd., New Delhi:

The said party was leased a DG set amounting to Rs. 40,00,000 in asst. yr. 1997-98, the income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, Tis Hazare Courts, New Delhi. However, copy of the suit filed is not furnished for verification.

The claim of the appellant that cheques bounced is not supported by any bank memorandum. In view of which the claim for write off cannot be allowed. It is to be noted that in all cases where appellant has himself had offered to explain the write off on the basis of bounced cheques but not supported with bank memorandum it becomes a case where the appellant himself corroborate the basis of his claim for the write off. Also it is noticed in the P&L a/cs that there was considerable recovery of bad debts. The total write off allowed therefore amounts of Rs. 5,00,682 only.

24. The assessee being aggrieved impugned above order in appeal before the Tribunal and reiterated its claim. The submissions are noted by the learned AM who proposed the leading order. He has directed that the matter should be set aside and restored to the file of the AO to consider evidence filed by the assessee. The operative portion of learned AM's order is as under:

10. We have carefully considered the issue. It is seen from the order of the learned CIT(A) that the assessee failed to produce the relevant evidence in support of its claim that the cheques issued by the parties were dishonoured;

(iv) the learned CIT(A) has given clear finding of facts in his impugned order and taken note of the fact that there were considerable recoveries in the subsequent years; and

(v) the amount of Rs. 85,69,350 claimed as bad debt written off comprised of the principal amount and the interest. It is, however, seen from paras 27-29 and 42-100 of the paper book placed on record that the assessee had filed before the lower authorities (i) copies of decree against SMS Construction; (ii) complaint filed against Haryana Steel & Alloys Ltd.; (iii) details of assets leased and (iv) lease rent received in asst. yrs. 1998-99 and 1999-2000. We are, therefore, of the considered opinion that the issue has not been examined properly by the lower authorities as is clear from their orders that these documents filed with paper book have not been duly considered. We, therefore, set aside this issue to the file of the AO with the direction that he should consider the evidence filed by the assessee and decide the issue afresh after giving proper opportunity to the assessee. This ground is treated as allowed for statistical purposes.

25. The learned JM did not agree with the above proposed order of learned AM. He noted the query made by the AO on 19th Feb., 2004 and reply given by the assessee in para 3 of his proposed order. He also noted that during the course of appellate proceeding, the learned CIT(A) had sought a remand report which was furnished by the AO on 15th March, 2005. The remand report is reproduced by the learned JM in his proposed order as under:

(1) SMS Construction, Udaipur: The said party had entered into an agreement with the assessee in the asst. yr. 1997-98 for purchase of Hitachi excavator and Tata tippers. The hire purchase finance charges were accounted in asst. yrs. 1998-99 and 1999-2000. The hire purchase charges accounted in asst. yr. 1999-2000 amounted to Rs. 2,50,341. The cheques issued by the party bounced and party defaulted in payment of hire purchase instalments suit Under Section 138 of Negotiable Instruments Act was filed in the Court of Addl. Sessions Judge, Patiala House, New Delhi. Assessee did not file copy of suit for verification.

(2) Haryana Steel & Alloys Ltd., Sonepat: Bills raised on this party were discounted in the year 1999-2000. The details of the bills discounted and discount charges accounted as income were also furnished by the party and the said party had issued cheques towards the bill discounting amounts which bounced in asst. yr. 1999-2000 and legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, Patiala House, New Delhi. Assessee did not file copy of suit for verification.

(3) Rama Paper Mills Ltd., Kiratpur, U.P. : The party was leased effluent treatment plant for lease amount of Rs. 32,40,625 in asst. yr. 1997-98. The income arising out of such lease transaction was shown in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suit was filed Under Section 138 of the Negotiable Instruments Act. Assessee did not file copy of suit for verification.

(4) Deepak Industries Ltd., Calcutta: The party was leased CNC turning centre amounting to Rs. 47,70,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 200001. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act. Assessee did not file copy of suit for verification.

(5) Rapid Construction, New Delhi: The said party was leased Becon batching plant and DG set amounting to Rs. 26,84,910 in asst. yr. 1999-2000. The income arising out of this lease transaction was booked in asst. yrs. 1999-2000 and 2000-01. The cheques which were issued by the party bounced and accordingly arbitration proceedings were stated to be initiated before Addl. Sessions Judge, New Delhi for recovery of the principal and interest. No further details have been furnished.

(6) Atul Glass Ltd., New Delhi : The said party was leased a DG set amounting to Rs. 40,00,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed Under Section 138 of Negotiable Instruments Act. Assessee did not file copy of suit for verification.

The learned JM thereafter considered the reasons given by learned CIT(A) for upholding the disallowance, The learned JM observed that the assessee company in the relevant period was engaged in the business of leasing and hire purchase of equipment and financing i.e. the bill discounting ICDS and loan placement etc. He further noted that bad debts in question have been written off by the assessee relating to abovementioned business activities. He has observed that at the assessment stage, there might have been doubt whether they relate to business activities of the assessee or not and whether these were part of income in the year under consideration or in earlier years. However, the above said doubt was cleared by the remand report of AO dt. 15th March, 2005. According to said report in respect of each party relating to which bad debts have been written off, income was accounted for either in the year under consideration or in the earlier years. The said portion has been highlighted in the proposed order. In the opinion of the learned JM, non-furnishing of copy of suit was not relevant to decide whether or not bad debt claimed by the assessee are to be allowed. The learned JM, thereafter referred to provision of Sections 36(1)(vii) and 36(2). He has again observed that in the remand report, it has been clearly mentioned by the AO that in respect of each debt income has been taken into account, either in the previous year or in the earlier year. Thus conditions of Section 36(2) were satisfied and bad debts were allowable. He has held, "there is material on record to show that the debts have been considered to be bad and are written off in respect of which income have been taken into account either in the previous year or in earlier previous years". The learned JM in the proposed order further opined that bad debt falling under the category of Section 36(2), if written off in the books of account, is to be allowed as a deduction after amendment of the relevant provision w.e.f. 1st April, 1989. In his opinion, the assessee after amendment in the law need not prove that such bad debt had infact become bad only during the relevant previous year under consideration. The aforesaid proposition, according to the learned JM was fully supported by decision of Hon'ble Delhi High Court in the case of CIT v. Morgan Securities & Credits (P) Ltd. (2007) 210 CIR (Del) 336 : (2007) 292 ITR 339 (Del) as well as by Circular No. 551 dt. 23rd Jan., 1990 [(1990) 82 CTR (St) 325] of CBDT. The learned JM thereafter, following the decision of Delhi High Court and Circular of CBDT directed that the addition made be deleted.

26. In the light of above conflicting views, the matter has been placed before me Under Section 255(4) of the IT Act.

I have heard both the parties. The learned Counsel for the assessee pointed out that AO had not provided sufficient opportunity to the assessee and, therefore, copies of proceedings taken against the debtors as well as books of account were produced in the appellate proceedings. The learned CIT(A) asked for a remand report from the AO on the facts placed before him. In the remand report, the AO had clearly admitted that income from each of the debt claim was duly shown. The detail of such income has been incorporated in the proposed order of the JM. Copies of proceedings taken by the assessee were also filed before the learned CIT(A). This fact is also mentioned by learned AM in his proposed order, although not very relevant after the amendment of the statutory provision w.e.f. 1st April, 1989, The proposed order of learned AM in the view of the learned Counsel for the assessee was contradictory and factually incorrect. The matter in issue stands fully covered by the decision of jurisdictional High Court in the case of Morgan Securities & Credits (P) Ltd. (supra) and by decision of CIT v. Autometers Ltd. (2007) 210 CTR (Del) 339 : (2007) 292 ITR 345 (Del). The learned Counsel further argued that the remand cannot be directed by the Tribunal merely for the sake of remand, particularly when material evidence for deciding the issue is available on record. The learned Counsel for the assessee thus supported the proposed order of the learned JM.

27. Shri R.K. Paliwal, learned Departmental Representative supported the proposed order of the learned AM. He argued that it would be clear from the decision of Morgan Securities & Credits (P) Ltd. (supra) that the assessee even after the amendment, has to prove that the writing off of the bad debt was bona fide. In this case, question of bona fide could not be examined as the assessee did not produce relevant information before the AO or CIT(A). Therefore, remand of the matter on facts and circumstances of the case was fully justified. The learned Departmental Representative further relied upon decision of Hon'ble Madras High Court in the case of South India Surgical Co. Ltd. v. Asstt. CIT wherein their Lordships have held that assessee is to establish that bad debts are bona fidely written off to claim the deduction. Therefore, finding to the above effect was required to be recorded. He further submitted that on some other issues, the CIT(A) remanded the case back to the AO. While framing fresh assessment on those issues, the question of bad debt can also be examined by the AO without causing any prejudice to the assessee. The learned Departmental Representative accordingly supported the proposed order of the learned AM.

28. In rebuttal the learned Counsel for the assessee Shri Anil Jain agued that all evidence was furnished to the AO who after examining them had given remand report to the CIT(A). No finding by AO or by CIT(A) or even in the proposed orders has been recorded that bad debt claim was not bona fide or that transactions involved were bogus. Shri Jain further submitted that the company was amalgamated and ceased to exist on 4th July, 2003. It had huge carry forward losses and, therefore, even if addition is made, it would not lead to any tax gain to the Revenue. Shri Jain further argued that this Tribunal was bound by the decision of Hon'ble Delhi High Court and not by decision of Hon'ble Madras High Court. At any rate even if two reasonable views of the matter were possible, the Bench should take a view favourable to the assessee.

29. I have given careful thought to the rival submissions of the parties. As rioted earlier, the learned AM has remanded the matter to the AO whereas the learned JM, in his proposed order, has directed that disallowance of bad debt be deleted. Therefore, the first question to be examined relates to the principles, which are to be followed by the appellate authorities while exercising discretion to remand the matter. For above proposition, I would like to quote and rely upon the following decisions:

(1) In the case of M.G. Shahani & Co. (Delhi) Ltd. v. CCE it is observed : "The complaint of the appellant before us, for which we find sufficient justification, is that the Tribunal should have itself gone through the evidence and rendered a finding because all the relevant materials were before the Tribunal. To our mind, it appears that the Tribunal has adopted an easy course in remanding the matter. The remand was superfluous when the parties have argued the matter at length. To characterize the order of the Collector as laconic is not correct since he has written a detailed order including reference to relevant case law.

The Tribunal has adopted an easy course of remanding the matter to Collector, when it could have decided the same. The remand was superfluous when the parties have argued the matter at length and relevant material for decision was available on record. The CEGAT should have itself analysed the evidence and given a factual conclusion."

(2) In the case of United Commercial Bank v. CIT --wherein it has been held that the Tribunal has power to remand a case for further investigation of facts but such power has to be exercised with proper discretion and it should not be exercised if all the basic facts necessary for the disposal of the matter are already on record and further if these facts appear in the order of the lower tax authorities.

(3) In the case of Maharani Kanak Kumari Sahiba v. CIT --Remand should only be made in very rare cases and should be used sparingly and only in cases where the Tribunal, after examination of material already placed on record by way of evidence, takes a view that it is not possible for it to make a just order. Surinder Pal Verma v. Asstt. CIT (2004) 83 TTJ (Chd)(TM) 24 : (2004) 89 ITD 129 (Chd)(TM).

(4) In the case of Karnataka Wakf Board v. State of Karnataka AIR 1996 (Kar) 55 at pp. 63 and 64, it has been held that: "Where the party had an opportunity of adducing evidence in the case but with open eyes failed to adduce that evidence, the case should not be remanded to give a second chance to the party to adduce that evidence. The policy of the law is that once that matter has been fairly tried between the parties, it should not, except in special circumstances, be reopened and retired. In a recent decision their Lordships of the Supreme Court laid down that power to order retrial after remand, where there had already been a trial on evidence before the Court of first instance, cannot be exercised merely because the appellate Court is of the view that the parties who could lead better evidence in the Court of first instance have failed to do so."

(5) In the case of Ghasi Ram Dayanand v. CST 92 STC 478 @ 480, 481 (All), it has been held that remand cannot be made for the purpose of de novo trial for permitting the parties to adduce fresh evidence to fill up lacuna or to decide a point when material is already on record.

(6) Powers of the Tribunal in the matter of setting aside an assessment are large and wide, but these powers cannot be exercised to allow the AO an opportunity to patch up the week parts of his case and to fill up the omission by giving another innings-

(i) Asstt. CIT v. Anima Investment Ltd. (2000) 68 TTJ (Del)(TM) 1 : (2000) 73 ITD 125 (Del)(TM);

(ii) Asstt. CIT v. Arunudoi Apartments (P) Ltd. (2002) 123 Taxman 48 (Gau)(Mag);

(iii) Smt Neena Syal v. Asstt. CIT (2000) 69 TTJ (Chd) 516: (1999) 70 ITD 62 (Chd).

(7) The Courts have held that appeals are not to be decided for giving 'one more innings' to the lower authorities in the appellate jurisdiction.

(i) Rajesh Babubhai Damania v. ITO ;

(ii) CIT v. Harikishan Jethalal Patel "Remand not for the benefit of the party seeking it to fill up gaps."

30. It is clear from above that primary power, rather obligation of the Tribunal, is to dispose of the appeal on merits. The incidental power to remand, is only an exception and should be sparingly used when it is not possible to dispose of the appeal for want of relevant evidence, lack of finding or investigation warranted by the circumstances of the case. Remand in a casual manner and for the sake of remand only or as a short cut, is totally prohibited. It has to be borne in mind that litigants in our country have to wait for long to have fruit of legal action and expect the Tribunal to decide on merit. It is, therefore, all the more necessary that matter should be decided on merit without allowing one of the parties before the Tribunal to have another inning, particularly when such party had full opportunity to establish its case. Unnecessary remands, when relevant evidence is on record, belies litigant's legitimate expectations and is to be deprecated. Having regard to aforesaid principle, it is necessary to look into records to see whether there is sufficient material on record to dispose of the issue on merit and there is no need to remand the issue to provide a fresh inning to the Revenue.

31. Before proceeding to examine the evidence on record, it is necessary to bear in mind the principle laid down by jurisdictional High Court for examining question of allowability of bad debt Under Section 36(1)(vii) of IT Act after its amendment w.e.f. 1st April, 1989. In the case of Morgan Securities & Credits (P) Ltd. (supra), their Lordships laid down as under:

A conjoint reading of Section 36(2) and Section 36(1)(vii) makes it clear that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular No. 551, dt. 23rd Jan., 1990 [(1990) 82 CTR (St) 325], the relevant portion of which reads as follows:

6.6 The old provisions of Clause (vii) of Sub-section (1) r/w Sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the AO in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending-Act, 1987, has amended Clause (vii) of Sub-section (1) and Clause (i) of Sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee.

6.7 Clauses (iii) and (iv) of Sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the ITO was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightaway allowed in the year of write off. The Amending Act, 1987, has, therefore, amended these clauses to withdraw them after the asst. yr. 1988-89.

The conundrum which has arisen before us had also engaged the attention of the Gujarat High Court in CIT v. Girish Bhagwat Prasad with which we are in respectful agreement. Our learned brothers had pointedly observed that the genuineness of the claim predicated on Section 36(1)(vii) of the IT Act was not in doubt. Where the loan transaction is itself shrouded in uncertainty other provisions of the statute would immediately come into play. Our learned Brothers further observed that prior to the amendment from 1st April, 1989, the allowance under the said section was confined to debts and loans which had become irrecoverable in the accounting year. Without adverting to the above extracted circular, it was opined that w.e.f. 1st April, 1989, 'all that the assessee had to show was that the bad debt was written off as irrecoverable'. One year later an altogether different Bench of the Gujarat High Court had to decide the question of whether it was enough if the assessee writes off the debt as bad in its books of account and whether the assessee company need not establish the debt to have become bad, in Dy. CIT v. Patidar Ginning & Pressing Co. (1999) 157 CTR (Guj) 177. The appeal of the Revenue was dismissed.

It is our view that the Circular No. 551 leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year, which had generated enormous litigation on the question of allowability of bad debt in a particular year. The circular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as a bad or irrecoverable no sooner it was written off in the books of the assessee concerned. In these circumstances no substantial question of law arises in the present case. Dismissed.

The aforesaid decision was again applied by their Lordships of Delhi High Court in the case of Autometers Ltd. (supra). After noting the change made in the statutory provision w.e.f. 1st April, 1989, their Lordships observed as under:

We find that there is a significant difference between the provision as it stood prior to 1st April, 1989 and the provision as it stands today. Prior to 1st April, 1989, it was necessary for the assessee to establish that the debt had become bad, whereas now for the debt to be classified as bad, the assessee has only to write it off as irrecoverable in its accounts.

While making the amendment as above, the CBDT issued a circular bearing No. 551, dt. 23rd Jan., 1990 1(1990) 82 CTR (St) 325], wherein it is stated in paras 6.6 and 6.7 that the earlier provision generated a considerable amount of litigation on the issue whether the assessee had been able to establish that the debt had become bad. It was to overcome this that the amendment was made resulting in a bad debt 'now being straightaway allowed in the year of write off.

The interpretation of Section 36(1)(vii) of the Act was considered by this Court in CIT v. Morgan Securities & Credits (P) Ltd. (2007) 210 CTR (Del) 336 : (2007) 292 ITR 339 (Del) in IT Appeal No. 1442 of 2006 decided on 7th Dec, 2006. In that case, this Court referred to the circular as well as another decision of the Gujarat High Court being Dy. CIT v. Patidar Ginning & Pressing Co. (1999) 157 CTR (Guj) 177 and came to the conclusion that no substantial question of law arises for consideration.

We are of the view that there is no error in the view taken by the Tribunal. The amendment made to Section 36(1)(vii) of the Act was a conscious decision taken to eliminate litigation with regard to establishing what is bad debt.

It has also been brought to our notice by learned Counsel for the respondent that if an assessee writes off a debt as a bad debt without giving any reason, he will not get any benefit from this. This is for the reason that by virtue of Section 41(4) of the Act, where a deduction has been allowed in respect of a bad debt which is irrecoverable and if the amount or a part thereof is subsequently recovered, then that amount shall be deemed to be profits and gains of business or profession of that relevant previous year.

Learned counsel for the Revenue submits that the 1989 amendment incorporates only the year of allowability but it does not dispense with the requirement of the assessee to prove that the debt has become a bad debt. We cannot agree with this interpretation as it would take the situation to what was prevailing pre 1st April, 1989.

Taking all these factors into consideration, we are of the opinion that no substantial question of law arises for our consideration. The appeal is dismissed.

In my considered opinion, principle laid down by their Lordships have been correctly appreciated by the learned JM in the proposed order. The net effect of change made in the statutory provision w.e.f. 1st April, 1989 is that it was necessary for the assessee to establish that debt had become bad in the previous year before amendment, whereas now for debts to be classified as 'bad', the assessee has only to write it off as 'irrecoverable' in its accounts. If subsequently any part of written off debt is recovered, the same would be charged to tax by virtue of Section 41(4) of the IT Act. In holding that deduction of bad debts were rightly claimed, the JM held that conditions of Section 36(1)(vii) and of Section 36(2) were fully satisfied in this case. There is no dispute as far as writing off of bad debt is concerned. The learned JM further noted and underlined relevant portion of the remand report dt. 15th March, 2005 of the AO wherein he had clearly stated that income in respect of each debt involved was duly shown by the assessee in the assessment year under consideration or in earlier years. Therefore, the conditions of Section 36(2) were also satisfied. I have also noted the relevant portion of the remand report in earlier part of this decision to show that statement made by learned JM is factually correct. In fact even CIT(A) in the impugned order has specifically admitted that income in respect of debt from SMS Construction, Udaipur was shown and allowed relief of Rs. 5,00,682. The other debts are not allowed on the ground that income was not shown in terms of Section 36(2) or the debts were not established to be 'bad'. The finding of the CIT(A) was factually incorrect as in the remand report the AO has clearly accepted that income from all transactions was duly shown in the year under account or in earlier years. The assessee was also carrying business of financing. Thus conditions of Section 36(2) were fully satisfied. Please see CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. . The other ground for disallowance of large portion of claim was the failure of the assessee to file copies of suit filed by him against debtors. This ground of CIT(A) is also wrong. A reference to proposed order of learned AM would show that copies of Court proceedings were filed before the learned CIT(A). The matter in issue is fully covered by decisions of jurisdictional High Court, which we are duty bound to follow. Having regard to material on record, there was no scope to remand the matter.

I have also carefully considered the reasons given by the learned AM in his proposed order for remanding the case back to the AO. In the first four paras he records the findings of the learned CIT(A) that assessee failed to produce the relevant evidence in support of its claim that cheques by the parties were dishonoured and secondly despite proper opportunity given by the lower authorities, the assessee did not file copies of the relevant suits filed in Court to enable lower authorities to verify the relevant facts. I have already noted above that the assessee, before the learned CIT(A), had claimed that proper opportunity was not given to it by the AO. Queries on bad debts were raised only in February, 2004 vide order sheet entry dt. 9th Feb., 2004. In response thereto the assessee had furnished details of bad debt vide letter dt. 19th Feb., 2004. It was again fixed on 27th Feb., 2004 and on that very date, the assessment order was passed. The learned CIT(A) accepted that proper opportunity was not given. The assessee, therefore, placed further evidence before the learned CIT(A) and on that, CIT(A) asked for a remand report. The relevant portion of the remand report has been noted above.

As regards the non-filing of copies of action taken by the assessee against debtors, even the learned AM has noted that copies of proceedings taken against the debtors were duly filed before the lower authorities. Therefore, the statement made in the order of the CIT(A) is not correct.

Reason No. (iii) in AM's order that the assessee could not establish that written off debts had not been taken into account for determining the income of previous year, as required by Section 36(2) is also factually and legally incorrect. This point has been discussed in detail in this order, how income of the debts written off was taken into account in the previous year or in earlier assessment years and that conditions of Section 36(2) are fully satisfied in this case.

Reason (iv) in the proposed order of learned AM is not based on any material on record. It has been the case of the assessee that not a single penny has been recovered out of the debts claimed as bad debts. The learned CIT(A) or the learned AM has not shown any material to establish alleged considerable recoveries in the subsequent years. At any rate, if recoveries have been made of debts written off as bad, then the same is to be taxed Under Section 41(4) of the IT Act as laid down by their Lordships of Delhi High Court in the decisions quoted (supra). Bad debts could not be disallowed on this ground.

Reason No. (v) has already been referred to above.

It is, therefore, clear that all relevant material to decide the matter with reference to Section 36(1)(vii) r/w Section 36(2) was available on record and it was not necessary for the Bench to remand the case to the file of the AO. The learned JM has referred to the relevant material and I have also discussed how conditions of the statutory provisions were fully satisfied.

32. It was contended by learned Departmental Representative that--assessee even after the amendment has to establish that debt in question was bona fidely written off. Even assuming that above is the requirement of Section 36(1)(vii), in my opinion, above requirement in this case was fully satisfied. The assessee had written off debts in the year under consideration. The assessee also filed evidence in the shape of copies of action taken against the debts in proceedings before learned CIT(A). The claim of the assessee that to this day, not a single penny has been recovered, has not been refuted on record. There is no material to show that writing off of bad debt was not bona fide action. The facts involved in the case in hand are quite different from the facts involved in the case of South India Surgical Co. Ltd. v. Asstt. CIT (supra) where the debtor was a Government agency and had shown its willingness to pay the debt. In spite of above fact, the debt was written off in post-date and claimed as "bad". The facts involved here are quite distinguishable and there is nothing on record to show that debtors were ready to pay or had in fact paid any amounts to the assessee or the judgment of writing off of debt suffers from any mala fide. There is nothing on record to contradict the claim of the assessee that not a penny had been recovered by the assessee from the debtors till this day. Having noted the facts of the case, I hold that there was no justification for remanding the case back to the file of the AO. The learned JM was right in disposing of the matter on merit and I agree with his proposed order.

33. The matter should now be placed before the regular Bench for disposal in accordance with law.

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Income Tax Appellate Tribunal - Delhi

Zauri Leasing And Finance Ltd. vs Income Tax Officer on 8 April, 2008

Equivalent citations: (2008)115TTJ(DELHI)721