Income Tax Appellate Tribunal - Ahmedabad
Ajar Entrade (P) Ltd. vs Asstt. Cit on 28 February, 2005
Equivalent citations: [2005]2SOT571(AHD)
ORDER
R.C. Sharma, A.M. This appeal is filed by the assessee against the order of CIT(A) dated 19-3-2004 for the assessment year 2001 -02 in the matter of order passed by the assessing officer under section 143(3). The following two grounds of appeal were taken by the assessee :
"1. The CIT(A) has erred in confirming the disallowance of the bad debt by the assessing officer under section 36(1)(vii) of Rs. 13,23,598 written off during the year on the grounds that (1) the amount claimed as bad debt was recoverable as some amounts were received during the year and (2) for a running account, write off cannot be made.
1.1 On the basis of the facts and as per law, the bad debt of Rs. 13,23,598 written off by the appellant during the year be allowed as per section 36(1)(vii) of the Income Tax Act or in the alternative as business loss of Rs. 13,23,598 (being business debt) be allowed under section 28 of the Income Tax Act."
2. Rival contentions have been heard and record perused. In the course of assessment under section 143(3), the assessing officer observed that the assessee has claimed a sum of Rs. 13,23,598 as bad debts in the Profit & Loss Account. This amount pertains to loans and advances made to Chintan Poly Yarns Pvt. Ltd. Since the assessee is not a scheduled/nonscheduled bank, public financial institutions, State Financial Corporation or State Industrial Investment Corporation, the amount given as loans and advances should not be written off as that of bad debts.
3. The assessing officer observed that as per the provision of section 36(2)(i) the assessee is entitled to claim bad debts only when the amount subsequently accounted for as income in any of earlier year or during the previous year in which such account has been written off. Since this amount has not been accounted for as income in any of the earlier years, the assessee is not eligible for deduction under section 36(1)(vii) read with section 36(2) of the Income Tax Act.
4. The assessing officer further observed that in the balance sheet as on 31-3-2000 the assessee had shown the outstanding sum of Rs. 13,48,598. Out of this, the assessee has received a sum of Rs. 15,000 on 16-11-2000 and Rs. 10,000 on 27-3-2001, therefore, on going by the conditions mentioned in the section 36(1), the amount cannot be said to be bad debt. He, therefore, declined the assessee's claim for bad debts of Rs. 13,23,598.
5. By the impugned order, the CIT(A) held that the assessee was doing the business of "financing" for which there is no prohibition in any of the law and that there is no illegality in engaging in finance business. He further referred to the finding that the department in the assessment years 198889 and 1989-90 has taxed the income of the appellant, which has been generated out of the sharafi business and which has been taxed by the department in the concerned years, which proved from the accounts filed by the assessee and also from the assessment orders filed for the relevant assessment orders. He, therefore, held that the assessing officer was not justified in not accepting that the assessee cannot do sharafi business.
6. With reference to the disallowance of claim of bad debts, the CIT(A) confirmed the action of the assessing officer by observing that part of the amount debited was received by the assessee during the accounting year itself, which means the amount which claimed as bad debts is recoverable and since the claim of the bad debts against actual nature of bad debts, the claim of assessee is not acceptable, for a running account, the write off cannot be made. He, therefore, concluded that though the income from financial charges have been taxed by the department, as claimed by the assessee, but so far as reasonableness of the write off of account is concerned, it is not justified on the part of the assessee because during the relevant accounting year itself, the assessee has already received some amount.
7. Aggrieved by the order of the CIT(A), the assessee has approached us for further adjudication.
8. It was argued by the learned Authorised Representative that the assessee has already offered income from financial charges earned in the course of sharafi business in respect of impugned advance, and therefore, the assessing officer was not justified in declining the assessee's claim of bad debts on the fact that such debt was not accounted for as an income in any of the earlier previous years. He further submitted that assessee has taken all the steps for recovery of debts and even filed civil suit in the court of law and nothing was materialized and therefore, the assessee was compelled to write off of amount for which proper entry was passed in the books of account, which is pre-requisite for claiming deduction under section 36(1)(vii) of the Income Tax Act.
9. On the other hand, the learned Departmental Representative vehemently argued that the lower authorities were justified in disallowing assessee's claim for bad debts, insofar as the deduction claimed under section 36(1)(vii) is subject to provision of section 36(2) which clearly stipulates that no such deductions can be allowed unless the said debt or part thereof have been taken into account in computing income of the assessee of the previous year in which the account of such debt or part thereof is written off or of a earlier previous year. He submitted that this amount of advance had never been accounted for by the assessee in the income of any of the previous year, and, therefore, the lower authorities perfectly justified in declining the assessee's claim for bad debts in view of provisions of section 36(2)(1). As per the learned Departmental Representative, the receipt of amount during the year itself prove that the amount was not bad, and therefore, even on merits, the assessee is not eligible to claim the said amount as bad debts.
10. We have considered the rival contentions and carefully gone through the orders of the lower authorities and found from the record that the assessee-company was engaged in advancing of sharafi loan and trading in different commodities. During the relevant assessment year under consideration, a sum of Rs. 13,23,598 was written off as bad debts in its profit & loss account which was claimed as deduction under section 36(1)(vii) of the Income Tax Act. From the record, we find that the said amount pertains to sharafi loan given to M/s. Chintan on 30-10-1986 of Rs. 20 lakhs, out of which, Chintan Poly Yarns (P) Ltd. returned only a part of the amount till April, 1987. The financial charges received against the sharafi loan were duly offered for taxation, as business income which has not been disputed by any of the lower authorities. We also find that for recovery of the said amount, civil suit was filed by the assessee on 30-8-1988. The suit was ultimately withdrawn on 15-11-2000 from the court since parties settled the matter amicably out of court by receiving, as full and final payment, a sum of Rs. 25,000; Rs. 15,000 was received on 10-11-2000 and Rs. 10,000 was received on 27-3-2001. The balance of Rs. 13,23,598 was written off as bad debts in the profit & loss account for the relevant assessment year 2001-02 under consideration and claimed the amount as bad debts eligible under section 36(1)(vii) of the Act. The main reason for disallowance by the assessing officer was that the company was not legally entitled to advance sharafi loan and that as per the provisions of section 36(2)(i) no such deduction of bad debts was allowable unless such debts or part thereof have been taken into account in computing the income of the assessee of the previous year or earlier previous year. So far as the first ground of disallowance of the assessing officer was concerned, the CIT(A) has recorded the finding at para 2.3 that the assessing officer was not justified in stating that the assessee-company cannot do sharafi business. Against this finding of the CIT(A), the department has not gone any further appeal to the Tribunal, therefore, finding recorded by the CIT(A) has attained finality. Now only grievance of the assessing officer which remains for disallowance of the assessee's claim of bad debt is that as pet the provisions of section 36(2)(i), the amount of debt has not been accounted for as income in the previous year. In respect of these observations of the assessing officer, the CIT(A) hold that the department has accepted the financing activity in the assessee's case and has taxed the financial charges as business income in the past. However, ultimately, the CIT(A) has confirmed the disallowance on the plea that during the accounting year itself, some of the amount was recovered by the assessee which means, the amount which was claimed as bad debts is recovered and since the claim of bad debts is against the actual nature of bad debts, the claim of the assessee is not acceptable. He further stated that for a running account, write off cannot be made.
11. Thus, it is clear from the order of the CIT(A) that he has confirmed disallowance only on the ground that outstanding debt debited to the profit & loss account was not actually bad during the year in view of some of the amounts received by the assessee pertaining to the same loan given to the party. As per our considered view, the assessing officer has totally misconceived the provisions of section 36(2), according to which restriction for accounting of debt as income in the earlier year is not applicable, where such debt represents loan in the ordinary course of business of banking or money-lending which was carried on by the assessee. As per our considered view, the conditions that the deduction can be allowed in respect of the amount which has already been taken into account in computing total income of the assessee of the previous years, is applicable where the assessee is engaged in some trading and industrial undertaking and debt arises out of the sale made by it. Intention of the legislature is that the assessee should not get double deduction of the amount, where at the time of purchase of goods, which are debited to the trading account and at the time of write off of such amount, when the buyer fails to pay the amount. Therefore, to ensure this, the conditions have been imposed that such debt has already been accounted for as income in the form of sales in the previous year or any of the earher previous years, in which such debt has been written off. However, in case of assessee engaged in money-lending business, the amount of money, used for business of money-lending, is not debited to the trading account and is not charged as expenditure, therefore, there is no reason to put a condition that such amount of loan has already been accounted for as income in the previous year. Whenever such loan given in the course of money-lending business, is not being realised, it will be sufficient for claiming deduction under section 36(1)(vii), that amount of such debt is being written off as bad debts in the books of account. The provisions of section 36(2)(i) read as under :
"In making any deduction for a bad or part thereof, the following provisions shall apply
(i) no such deduction shall be allowed unless such debtor 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,' (Emphasis here italicised in print supplied)
12. It is crystal clear from the language of section 36(2)(i) that in the case of assessee engaged in money-lending business, the deduction shall be allowed if the amount of debt represents the money lend in the ordinary course of business of money-lending carried on by the assessee. We, therefore, do not find any merits in the action of the lower authorities for declining the assessee's claim for bad debts in respect of money advanced in the course of its money-lending business, the financing income arisen out of which have already been found and accepted by the department to be credited to the profit & loss account as its business income in the earlier years and offered for taxation.
13. Going to the assessing officer's observation regarding the amount of debt not having become bad in view of part of the amount having been received during the year under consideration. Here, it is pertinent to note that the provisions of section 36(1)(vii) have been amended by the Finance Act, 1987 with effect from 1-4-1989. Before the amendment the words used were "any debt or part thereof, which is established to have become a bad debt in the previous year". The words" any bad debts or part thereof which is written off as irrevocable in the accounts of the assessee for the previous year" have been inserted by the amendment brought in' by Finance Act, 1987. It is clear from the substitution itself that the intention of the legislature was to lay it to the prudence of businessmen to judge himself as to whether a particular debt has become irrevocable or not? Previously the words used were "any debt or part thereof which is established to have become a bad debt". It is significant in the sense that it was obligatory for the assessee to prove or to say with demonstration that such debt has become bad. By taking away these words "which is established to have become bad" the intention of the legislature is clear that it did not want to burden the assessee to prove that debt has become bad. It is left to the prudence and judgment of the businessman to consider it as bad and irrevocable debts and write off the same in the books of account. If, he writes it off as irrevocable in his account in the previous year, it is sufficient compliance of the provisions to claim deduction under clause (vii) of section 36(1). Thus, onus is of course on the assessee to show that he has written off the debts, which is permission under amended provision. Under these circumstances, as per our considered view it is not obligatory for the assessee to place demonstrative proof for establishing a debt as bad. However, if he has taken steps to write off in the previous year, left to his prudence and is sufficient compliance for claiming debt as bad debts under section 36(1)(vii). In the instant case, on perusal of the material placed on record, we are of the considered view that debt was given more than 13 years ago and after putting his all efforts, the assessee could only got back a part of the amount. However, even though a civil suit was filed, but nothing could be materialized and ultimately the assessee has made out of court settlement in which out of total outstanding amount of Rs. 13,48,598 the assessee has received Rs. 25,000 as full and final payment against the said debt. The balance amount of Rs. 13,23,598 was debited by the assessee in its books of account as bad debts. There is no reason to doubt the genuineness of the amount debited to the profit & loss account. As the amount was returned as bad debts after all the efforts for recovery was undertaken, as per the amended provisions, which is now inserted, the assessee to prove that debt has become bad during the relevant previous year. If the assessee prudently decided as a businessman that there is no hope of realization of the debt and decided to write off, would be sufficient compliance for claiming deduction under section 36(1)(vii). It is pertinent to mention here that in various judgments, it has been held that even filing of the suit also not necessary to claim debt as bad debts.
14. For this purpose, reliance may be placed on the judgment of Hon'ble Calcutta High Court in A.W. Figgis & Co. (P) Ltd. v. CIT (2002) 254 ITR 63 (Cal), ITAT order Presswell Engg. Works v. ITO (1983) 17 TTJ (Bom) 204, Shriram Pistons & Rings Ltd. v. Inspecting Assistant Commissioner (1991) 39 TTJ (Del) 132 and ITO v. Vigyan Chemical Industries (1991) 40 TTJ (Del) 81. Similarly it has been held in various cases that pendency of suit or legal proceedings does not disentitle the assessee to claim bad debts as has been held in ITAT orders at Hindustan Commercial Bank Ltd. v. ITO (1983) 16 TTJ (All) 65, V.D. Swami & Co. Ltd. v. Dy. CIT (1993) 44 ITD 91 (Mad) and Sutlaj Cotton Mills Ltd. v. Assistant CIT (1998) 96 Taxman 29 (Del).
15. However, even prior to amendment while dealing with assessment year 1983-84, Hon'ble Calcutta High Court in the case of CIT v. Karnani Finance Enterprises Ltd. (1996) 87 Taxman 229 (Cal), observed that even prior to the amendment, the department cannot insist on demonstrative proof of the fact which must satisfy the test of infallibility. All that required is an honest judgment on the part of the assessee at the time when he makes the entry of write off. Gujarat High Court in the case of 123 ITR 166 (sic) has held that bad debt is allowable even when the assessee has obtained decree but even then money could not be recovered. ITAT Calcutta Bench in the case of Jayanti Commerce Ltd. v. Asst. CIT (I997) 61 ITD 183 (Cal) observed in respect of assessment year 1989-90 that the only precondition for write off debt is that the assessee should bona fide believe that debts are not recoverable and the same is written off in the books of account. ITAT Ahmedabad Bench in case of Dy. CIT v. Gobind Glass Industries Ltd. (2000) 110 Taxman 109 (Ahd-Trib) observed that after the amendment the assessing officer was not justified in not allowing the claim of bad debts on the ground that the assessee could not prove that debts have become bad. It was held that in view of the amended provisions of section 36(1)(vii) the assessee need not establish that debt has become bad and considering that the assessee had not been able to recover any amount despite filing suit and obtaining decree, there was no chance of recovery of the said debts and, therefore, CIT(A) had correctly allowed the assessee's claim. ITAT, Delhi Bench in the case of Vigyan Chemical Industries (supra). In Vigyan Chemical Industries' case (supra) observed that where legal remedies were not perused institution of legal suit for recovery of due is not condition precedent for allowance of bad debts. Mere fact that legal proceedings were not instituted, does not warrant conclusion that debts have not become bad.
16. In view of the above discussion, we are inclined to reverse the findings of the lower authorities and direct the assessing officer to allow the assessee's claim for bad debts amounting to Rs. 12,23,598.
17. In the result, appeal of the assessee is allowed.