Income Tax Appellate Tribunal - Bangalore
K. Raheja Development Corporation vs Asstt. Cit on 28 March, 2005
Equivalent citations: [2005]2SOT744(BANG)
ORDER
Deepak R. Shah, A.M. This appeal by assessee is directed against the order of learned CIT(A)-VI, Bangalore dated 28-9-2004.
2. The first ground of appeal is against disallowance of a sum of Rs. 19,24,09,280 written off as bad debt being amount due by M/s. Vinayaka Enterprises to the assessee.
3. The facts are as follows :
The appellant is a partnership firm, which is carrying on the business of property development. As a part of its business operations, the appellant firm had advanced monies to the extent of Rs. 12 crores to one M/s. Vinayaka Enterprises of P. Dayananda Pai Group for acquisition of certain lands. There were certain difficulties, in as much as, Mr. P. Dayananda Pai (M/s. Vinayaka Enterprises) at the relevant point of time, could not get certain clearances for the appellant firm property and proceed with the development. Therefore, by mutual consent the (sic) agreement entered into between the appellant and M/s. Vinayaka Enterprises was cancelled the said M/s. Vinayaka Enterprises, agreed to pay a sum of' Rs. 6 crores by way of damages /compensation to the appellant firm. This compensation/ damages that was so arrived was offered as income of the appellant firm for the year ended 31-3-1999. Furthermore, it was agreed between the appellant firm and M/s. Vinayaka Enterprises that the amount payable after cancellation of the agreement would be paid within a stipulated time frame and M/s. Vinayaka Enterprises/ P. Dayananda Pai had also given cheques for due and lawful discharge of the total sum, so payable. M/s. Vinayaka Enterprises could not honour the commitments for repayment of the amount advanced together with damages/ compensation. However, for the year ended 31-3-2000, the interest accrued on the amount so receivable was also offered as income by the appellant firm and the same was subjected to tax. Thus, the total amount due to the appellant firm was Rs. 19,24,09,280 as at 31-3-2001 which comprises of the following:
(i) Principal amount paid to M/s. Vinayaka Enterprises 10,82,93,291
(ii) Compensation receivable 6,00,00,000
(iii) Interest till i.e. 31-3-2000 2,41,15,989 Total 19,24,09,280 3.1 The assessing officer disallowed the claim of bad debt on the ground that-
(i) the principle amount paid to M/s. Vinayaka Enterprises has not been taken into account in computing the income of the assessee in any earlier or previous years. The amount is not advanced in the course of business of banking or money lending.
(ii) The amount of compensation as well as interest has not become bad. The claim is premature. The debtor has not denied its liability to pay the amount prior to write off. The assessee has not initiated any legal action.
(iii) The debtors are not declared bankrupt or insolvents.
(iv) Sizeable sum is being paid after the assessee initiating legal action as well as prior to write off when the debt was rescheduled along with compensation payable.
3.2 Before learned CIT(A), it was pleaded that taking into consideration, the general depression in the trade and also the condition of Mr. P. Dayananda Pai ie., M/s. Vinayaka Enterprises, would could not pay this monies despite exposing itself to criminal proceedings under section 138 of the Negotiable Instrument Act, the said sum had became bad and irrecoverable according to the judgment of the appellant. Accordingly, taking into consideration the debtors inability to pay and honour the commitment, the same was written off as bad debts for the year ended 31-3-200 1. Further, the appellant firm after write off of the bad debt had also filed civil suit for the recovery of the said sum and criminal complaints under section 138 of the Negotiable Instrument Act, 1881 were also filed. During the pendency of the suits and complaints, Sri P. Dayananda Pai ie., M /s. Vinayaka Enterprises, had made certain payments in respect of the amount due to the appellant firm and it is also true that Sri P. Dayananda Pai (M/s. Vinayaka Enterprises) is desirous of repaying the money and that, it is not disputing the liability. However, he was and has not been in a position to pay the money due to the appellant, which is beyond his control and capacity in as much as, the real estate business itself had taken a beating, and that he could not pay inspite of the criminal proceedings under section 138 of the Act pay it. The decision of the appellant as on 31-3-2001 taking into consideration the circumstances of the debtor, the write off was a bona fide judgment and decision and that cannot be called into question by the subsequent recoveries or subsequent action on the part of the appellant in instituting the suit against M/s. Vinayaka Enterprises/P. Dayananda Pai.
3.3 Learned CIT(A) held that
(i) debt written off has to be necessarily a bad debt which is a precondition for allowability under section 36(1)(vii).
(ii) He held that though several cheques issued by M/s. Vinayaka Enterprises were dishonoured, it is also fact that between 30-7-1998 and 31-8-1999 Rs. 3 crores were paid to the assessee. Rs. 1 crore was paid to M/s. Chandru Raheja at Bangalore on behalf of assessee. After the legal action by way of civil and criminal proceedings, M/s. Vinayaka Enterprises paid a sum of Rs. 7.15 crores between 31-10-2002 and 19-9-2003. Thus the debtor had not become totally insolvent as on 31-3-2001.
(iii) The appellant had not initiated any proceedings before write off. After writing off, the assessee filed a suit for recovery as well as criminal complaint under section 138 of Negotiable Instrument Act. Thus write off as on 31-3-2001 is not bona fide.
(iv) When civil and criminal proceedings were initiated, the debtor paid the balance dues. If similar steps were taken before write off, the debtor would have responded and started paying of the amount. Hence, without exploring legal avenue, write off of the huge sum is not a honest decision. The assessee wrote off only because it had otherwise earned huge income of over Rs. 15 crores and the write off was merely to differ the tax liability.
(v) When the amount was advanced, the assessee entered into an agreement dated 1-2-1995. As per the agreement, clause 27 - a charge was created on the land sought to be acquired. When the second agreement was entered into in 1998, the appellant continue to have charge on the land of 84 acres and 23 guntas. Thus the assessee was fully secured. The assessee filed application before the court directing restrain on the debtors from alienating the property being 84 acres and 23 guntas and another property of 44 acres and 3.5 guntas. The total value of both these lands was over Rs. 21 crores. The assessee initiated the action after write off and not before write off. Thus the claim of bad debt is not genuine or bona fide.
(vi) The debtors never disputed the liability. On the contrary they acknowledged the debts even when the firm M/s. Vinayaka Enterprises merged into M/s. Canara Housing Development Corporation. The total liability to the appellant firm was also acknowledged by new firm.
(vii) Since the debts are fully secured and since the debtors are not declared insolvent, the action of appellant to write off without considering the debtors position and any step to realize the debt cannot be construed as bona fide
(viii) Since the decision to write off is not bona fide and since debt has not become bad as on 31-3-2001, the decision of Hon'ble Gujarat High Court in Kamla Cotton Co. v. CIT (1997) 226 ITR 605 (Guj) and that of Hon'ble Calcutta High Court in CIT v. Coats of India Ltd. (1998) 232 ITR 324 (Cal) is not applicable. He accordingly upheld the action of assessing officer.
4. Learned counsel for assessee Shri Venkatesan submitted that after the failure of M/s. Vinayaka Enterprises to deliver the land, actions were taken to realize the debt. A fresh agreement was entered into under which M/s. Vinayaka Enterprises also agreed to pay compensation of Rs. 6 crores. This itself prove that the position of debtors was not good. Neither the principle nor ' the interest was paid for the year 1999-2000. The payment made to Chandru Raheja at Bombay is not on behalf of assessee. Several cheques issued by the debtor were dishonoured. This itself proves that the debtor is unable to pay the debts. This leads the assessee to believe that the debt had become bad which is required to be written off. Only after the criminal proceedings were initiated, the payments were received. Thus as on 31-3-2001 when the amount was written off, the fact remains that the debt was bad and the action of assessee is bona fide.
4.1 He further submitted that the amount was advanced in the course of business of property development. The amount was advanced to purchase a large piece of land. Since the amount was advanced in the course of its business of property development and since such sum has become bad, the same can be allowed as deduction as bad debt. Reliance was placed on the decision of Hon'ble Mysore (Karnataka) High Court in CIT v. Y.V. Sreenivasa Murthy (1967) 63 ITR 306 (Kar). He further submitted that after the amendment of section 36(1)(vii) with effect from 1-4-1989, the assessee is not required to prove the year in which the amount has become bad. Write off in the account is a sufficient compliance.
5. Learned Deartmental Representative CIT Ms. Neeraj Bhansal heavily relied upon the order of assessing officer as well as learned CIT(A). She firstly submitted that under section 36(2), it is a pre-condition that the debt should have been taken into account in the income of assessee either of the accounting year or for earlier accounting year. Since the principal sum advanced is not taken into account in computing the income, the claim is not allowable. As regards other debts, the claim is allowable in respect of bad debts and not debt simpliciter. Thus the assessee has to somehow demonstrate that the debt has become bad and irrecoverable. The write off should be bona fide and not a mere guess work. The assessee wrote off only to save tax on huge profit earned by it during the year. The debtor has paid the sum in earlier year as well as in subsequent years. The amount was paid subsequent to initiation of civil and criminal action. The assessee could have resorted to such action and exhaust the remedy available under law prior to the write off. The ordinary prudent man will not write off the sum merely because some cheques were dishonoured. When a claim is made for bad debt, the condition prescribed under section 36(1)(vii) read with section 36(2) is required to be fulfilled. Since the conditions are not fulfilled the claim is not admissible.
6. In reply Shri Venkatesan submitted that the position as prevailing as on the date of write off is to be seen. If in any subsequent year the assessee has recovered the sum, the same is chargeable to tax as per provisions of the Act. However, when several cheques bounced the assessee gets a first hand bona fide impression that the debtor was unable to pay and hence, debt has become bad.
7. We have carefully considered the relevant facts and argument advanced. Section 36(1)(vii) and section 36(2) has amended by Taxation Laws (Amendment) Act, 1987 with effect from 1-4-1989. Circular No. 551 issued by CBDT dated 23-1-1990 explained the effect of amendment. The said circular- reads thus :
"The old provisions of clause (vii) of sub-section (1) read with 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 assessing officer 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 (vit) of sub-section (1) and clause (1) 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.
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 Income Tax Officer 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 assessment year 1988-89."
From the above amendment an d explanation thereof, it is clear that the write off in the books of account is to be treated as a sufficient compliance and it is no more required to prove that the debt has become bad only in the particular year. This view has been adopted by Hon'ble Gujarat High Court in the case of Dy. CIT v. Patidar Ginning and Pressing Co. (1999) 157 CTR 177 (Guj) and in the case of CIT v. Girish Bhagwat Prasad (2002) 256 ITR 772 (Guj.). However, in both the cases it is seen that the genuineness of write off was not in doubt.
7.1 The decision of Hon'ble Mysore (Karnataka) High Court in Y.V Sreenivasa Murthy case (supra) will not be applicable under the present law. The decision was rendered in the context of Indian Income Tax Act, 1922 wherein under section 10(2)(xi), there was no condition that for claim of bad debt, the debt should have been taken into account in computing income either of the current year or of the earlier years. At the same time such a bad debt would be allowable as a loss incidental to business on ordinary principle of commercial accounting. Thus the decision of Hon'ble Mysore (Karnataka) High Court will be considered in the context that though the claim is not admissible under section 36(1)(vii) but can be claimed under section 28/37 of the Act. In the present case it is seen that the amount was advanced in the course of business of property development. The amount was advanced for acquiring certain lands for development. Thus the advance is in the course of business and accordingly to be allowed if otherwise proved to be a bona fide write off. We shall therefore examine whether the write off is bona fide or not.
7.2 section 36(1)(vii) as amended from assessment year 1989-90 grants deduction in respect of any bad debt which is written off as irrecoverable in the accounts of the assessee for the previous year. The requirement of establishing that debt has become bad in the relevant accounting year as dispensed with. All that the assessee has to show is that the bad debt has been written off as irrecoverable. However, the subject-matter of clause is still "any bad debt" and not "any debt". The consequence of the amendment are:
(i) the assessee cannot arbitrarily, irrationally or without bona fide belief treat any debt as bad debt. If the assessee's action is bona fide and reasonable, the assessing officer cannot substitute his own subjective judgment rather he should accept the action of assessee as to the quality of debt as conduct of business is to be carried on by the assessee himself and which cannot be the prerogative of assessing officer.
(ii) The year in which the amount is to be written off is to be decided by I the assessee.
7.3 In the light of above, let us examine the conduct of assessee. From the facts it is seen that M/s. Vinayaka Enterprises firstly defaulted in honouring the first agreement. A fresh contract was entered into and the debtor also agreed to pay compensation. The compensation was to be paid in the year 1998. After 31-8-1999 nothing was paid till October, 2002. In between several cheques issued by the debtor bounced. There were more than 24 such instances of bouncing of cheques. During this period there was a general recession in property market. This can lead the assessee to believe that the debt has become bad. The position has to be looked into as on the date of write off, and not on the possibility of recovery at a subsequent uncertain date. Even till date of filing return of income, nothing was received, nor any hope revived. The initiation of legal proceedings is not a condition precedent for claim of bad debt. At the same time there is no prohibition for initiation of legal proceedings subsequent to write off. The decision has to be arrived at on the common sense and as to what a prudent business man will arrive at. The civil proceedings were only to restrain the debtor from alienating its property. However, it was not subject to charge by the assessee. Thus the criteria like
(i) The debtor has not become insolvent.
(ii) The debt is acknowledged by the debtor.
(iii) Legal remedy is not exhausted.
(iv) Subsequent legal action forces the debtor to pay becomes irrelevant as on the debt of write off.
The debtors will see that the cheque do not bounce but for genuine difficulty in payment of sum. It is clear that bouncing of cheque will attract criminal proceedings against the debtor and no person will face any criminal proceedings but for the genuine hardship and financial crunch. Series of events like 24 in number can lead any reasonable man of ordinary prudence to believe that the debt has become bad. We accordingly hold that when the assessee wrote off the sum, he was under a bona fide belief and hence, the debt written off as bad debt is allowable. The principal sum is allowable as loss under section 28/37 of the Act. The compensation and interest component is allowable under section 36(1)(vii) read with section 36(2) of the Act.
8. The next ground of appeal is regarding charge of interest under section 234B.
8.1 The assessee filed return of income declaring loss of Rs. 3,51,66,754. The loss was arrived at after claim of bad debt amounting to Rs. 19.24 crores. Since the assessee was under bona fide belief that it has incurred loss, it was not under obligation to pay advance tax as per provision of section 208 of the Act. Since the assessee is not liable to pay advance tax under section 208 interest under section 234B is not leviable. We accordingly delete the interest charged under section 234B. in the result the appeal is allowed.