Income Tax Appellate Tribunal - Mumbai
Kaivorla Securities And Financial ... vs Asstt. Cit on 28 February, 2007
ORDER
K.P.T. Thangal, Vice President
1. This appeal by the assessee is for the assessment year 1998-99.
2. First ground of objection by the assessee is directed against the order of the Commissioner (Appeals) in confirming the disallowance of depreciation of Rs. 4,17,107 made in respect of assets purchased by the assessee.
3. Assessee filed the return on 30-11-1998 declaring loss of Rs. 2,74,250. Assessee is a finance company. Assessee was asked why the depreciation claimed under Section 32 of the assets on lease given to Rajender Pipes Ltd. be allowed in view of disallowance in earlier years proceedings. It was stated that assessee had written off the lease rental as not recoverable from M/s Sarigram. Steels Ltd. The claim of the assessee was disallowed by the assessing officer on the basis of the discussions made in the order for the assessment year 1997-98, wherein after enquiries, Asstt. Director of IT (Inv.), Kanpur, concluded that the assets are really not in existence. This claim of the assessee was disallowed. The matter was carried before the Commissioner (Appeals).
4. It is seen that similar ground was agitated before the Tribunal in assessee's own case for the assessment year 1997-98 and the issue was remanded back to the file of the assessing officer by the order of the Tribunal dated 13-2-2006, observing as under:
In the light of the above discussion, we consider it fit and proper to remit the matter to the file of the assessing officer for ascertaining the interest element in the lease rental receipts and reduce balance amount, i.e. towards principal, from taxable income of the assessee. The assessee will furnish necessary information to the satisfaction of the assessing officer for the said purpose. The assessee gets relief accordingly.
Following the decision of the Tribunal in assessee's own case, we remand the matter back to the file of the assessing officer for fresh adjudication. Hence, this ground of appeal by the assessee is allowed for, statistical purposes.
5. Coming to the second ground (ground Nos. 2 and 3), it is directed against the order of the Commissioner (Appeals) in confirming an amount of Rs. 12,45,147 claimed by the assessee ~as bad debts in respect of lease rentals receivable from Mls Sarigram Steels Ltd. Assessee is also agitating disallowance of bad debts of Rs. 18,68,890 made by the assessing officer and confirmed by the Commissioner (Appeals) which was claimed as bad debts in respect of bills discounted recoverable from Mls Dhamendra Industries Ltd.
6. This issue has been dealt with by the assessing officer vide paras 2 and 3 of his order.
Assessee claimed these two items as bad debts but was disallowed by the assessing officer. When the matter was carried before the Commissioner (Appeals), it was submitted that assessee was to receive Rs. 12,45,146 as lease rental from Mls Sarigram Steels Ltd., in respect of assets which were leased out to them for a period of 36 months. Assessing Officer however, noticed that the assessee was having a security deposit of Rs. 16,48,000 outstanding. assessing officer's stand is that this impugned amount of Rs. 12,45,146, which is claimed as bad debts, would have been treated against security deposit received from Mls Sarigram Steels Ltd. It was submitted, in fact the asset was purchased in May, 1995, i.e. one set. of rolls consisting 14 numbers of rolls of Alloy Steel Dummy Rolls worth Rs. 41,86,000. Assessee was to receive a sum of Rs. 11,40,000 per year as lease rentals for 36 months, i.e. for 3 years Rs. 34,20,000. The security deposit received was Rs. 16,48,000, which was refundable at a future date on completion of lease period. M/s Sarigram Steels Ltd. paid lease rentals for two instalments: and the company accounted the same on accrual basis. After initial payment of security deposit of Rs. 16,48,000 and lease rental of Rs. 5,70,000, Mls Sarigram Steels Ltd. did not pay any amount to the assessee. It was submitted by the assessee before the Commissioner (Appeals) that after the receipt of Rs. 22,18,000 against total of Rs. 41,86,000 which was payable to the assessee, assessee failed to recover any amount from Mls Sarigram Steels Ltd. Assessee's efforts in filing a suit did not mateTialise as cheques issued by Mls Sarigram Steels Ltd. were dishonoured and the matter is still pending before the Hon'ble High Court. It was further contended that the assessing officer's view that security deposit ought to have been adjusted is untenable in law as security deposit was for the equipment, which was leased out to them.
7. Commissioner (Appeals) held, on the basis of the material on record, it is not established that the recovery has really become bad and hence he held, the claim of the assessee for deduction of bad debts cannot be allowed under Section 36. He held, against the outstanding recovery of Rs. 12,45,146 assessee was having an amount of Rs. 16,48,000 received from the other party as deposit. He held even after adjustment assessee would have been left with a surplus of Rs. 4,12,000 on account of deposits. Hence, he confirmed the order of the assessing officer.
8. Coming to the next issue, Commissioner (Appeals) confirmed the disallowance of bad debts amounting to Rs. 18,68,890, vide para 4.2 of his order ' observing as under:
I have considered the forgoing submissions and I have also perused the impugned order of assessment. For the same reasons as recorded in respect of ground No. 3 above with reference to the applicability of provisions of Section 36 of the Income Tax Act, I am of the considered view that in respect of this ground also, the disallowance of Rs. 18,68,890, made by the assessing officer deserves to be confirmed. In fact, the claim of bad debt made by the appellant is squarely untenable. As per the appellant's own admission there is a steady recovery of the said amount of Rs. 18,68,890 all along in the immediately following successive three years to the extent of Rs. 9,75,000. In the mercantile system it is normal that income is booked as it accrues and recoveries follow. If there is some delay in recovery, such delay does not transform the same into bad debt. For claiming a deduction under Section 36 a debt has to be bad. In the appellant's case the material on record shows that even before the close of the previous year relevant to the assessment year under appeal, the managing director has given an understanding in writing dated 3-3-1998 for payment of all the outstanding dues to the appellant. A personal guarantee has also been furnished. On the facts, no interference, with the disallowance made by the assessing officer is called for and the same is confirmed."
Aggrieved, assessee is in appeal before the Tribunal.
9. The learned Counsel for the assessee submitted, the issue squarely stands covered in assessee's favour by the Special Bench decision of the Tribunal in the case of Dy. CIT v. Oman International Bank Sassessing officer G (2006) 102 M (Mumbai)(SB) 207 : (2006) 100 TTD 285 (Mumbai)(SB). Learned counsel submitted, in this case the Tribunal held that the expression "bad debts" does not mean that the assessee should establish that the debt has become bad. On the other hand, he submitted, it only clarifies that bad debt is entitled to be deducted if written off as irrecoverable. Learned counsel submitted further, in this case the Tribunal held that it is not obligatory on the part of the assessee to prove that the debt written off by him is indeed a bad debt for the purpose of allowance under Section 36(l)(vii).
10. Replying to the above, the learned departmental Representative submitted, the case of Oman International Bank SAOG (supra) has not considered the decision of the Hon'ble Madras High Court in the case of South India Surgical Co. Ltd. v. Assistant Commissioner (2006) 201 CTR (Mad) 289. Learned departmental Representative submitted, in this case the Hon'ble High Court held that "it is not sufficient for the assessee to say that he has become pessimistic about the prospect of recovery of debt in question. He must feel honestly convinced that the financial position of the debtor was so precarious and shaky that it would be impossible to collect any money from him. The question is really one of fact depending upon the various facts and diverse circumstances bearing on the debtor's pecuniary position, his commitments and obligations. The judgment of the assessee regarding the debt as bad must be an honest judgment and not a convenient judgment. The judgment of the assessee must be established to have been taken on relevant facts and circumstances, which should show that the debt is not realizable for some fault on the part of the debtor or some supervening impossibility on the part of the debtor to pay, but not possible difficulties or hurdles the assessee may have to incur to compel the recalcitrant debtor to pay. The assessee for his convenience may decide that the debt is too small and it is not worthwhile to pursue the debtor but that judgment would not be an honest judgment, which would establish that the debt has become a bad debt. A time-barred debt can be assumed to be bad, but is not necessarily bad because of expiry of limitation for recovery of the same". Hence, learned departmental Representative submitted, now the Tribunal cannot take cognizance of the decision of the Special Bench but it is bound to follow the judgment of Hon'ble Madras High Court, which has precedence over this Special Bench.
11. Replying to the above, the learned Counsel submitted, since the matter is fully covered in assessee's favour by the decision of the Tribunal, Special Bench in the case of Dy. CIT v. Oman International Bank SAOG (supra), Tribunal has no other go but to follow the Special Bench. Learned counsel further submitted that the decision in the case of South India Surgical Co. Ltd. v. Asstt. CIT (supra) is neither applicable nor binding upon the Bench for the following reasons:
(a) First of all, the question referred to the Hon'ble Madras High Court was whether the Tribunal was right in holding that the debt had not become bad, as it was recoverable from the Government. Thus the learned Counsel submitted, the issue before the Hon'ble Madras High Court really was whether the debt has become bad or not and certainly the issue was not whether the debt is required to be established to be bad.
(b) The Hon'ble High Court went into the facts of the case and held that the Tribunal was justified on the facts and the circumstances of the case in coming to the conclusion that in the case of the assessee the debt has not become bad.
(c) While holding so, Hon'ble Madras High Court, though reproduced the amended provisions of Section 36(l)(vii), has dealt with and fully relied upon various decisions at para 9 of the order, all of which were in respect of pre-amended law.
(d) All the, decisions noted at para 9 and discussed at paras 10 to 15 of the judgment are in respect of assessment orders prior to the assessment year 1989-90. In none of the decision, the court has considered post-amended legal position.
(e) At para 16, the Hon'ble Madras High Court held that they have arrived at the conclusion on the basis of earlier judgments referred to by them. However, as stated, the judgments referred by the Hon'ble High Court were all in respect of pre-amended law.
12. Learned counsel further submitted, without prejudice to the above submission and even assuming that the Hon'ble Madras High Court has decided the issue of onus of the assessee to establish that the debt has become bad, the decision of the Hon'ble Madras High Court is not binding on the Bench in the instant case of the assessee. Learned counsel submitted, as against this, the decision of the Special Bench in the case of Dy. CIT v. Oman International Bank SAOG (supra) is fully binding on the Hon'ble Bench. In support of the proposition that the decision of the co-ordinate Bench is binding, learned Counsel placed reliance upon the decision in the case of Smt. Pratima H. Mehta v. Dy. CIT in ITA 2203/Mumbai/2002, dated 25-5-2005.
13. In support of the proposition that the decision of non-jurisdictional High Court is not binding upon the Bench, assessee's counsel relied upon the decision of the jurisdictional High Court in the case of CIT v. Thana Electricity Supply Ltd. . Learned Counsel submitted that the earlier decision of the jurisdictional High Court in the case of CIT v. Godavaridevi Saraf has been considered in the later decision and came to this conclusion. Hence, learned Counsel submitted, this decision is to be followed. Learned counsel further relied upon the decision of the Tribunal, Mumbai Bench in the case of Associated Capital Market Management (P) Ltd. v. Jt. CIT in ITA Nos. 1103, 1104 and 3057/Mumbai/2001, dated 31-3-2003, wherein the Tribunal has not followed the decision of the Calcutta High Court but followed the decision of the Tribunal, Mumbai Bench as a precedent binding on the Tribunal. Learned counsel further submitted and brought our attention to the decision of the Tribunal in the case of Income Tax Officer v. Shreeji Exports in ITA No. 357/Mumbai/2001, dated 29-12-2006, wherein the Tribunal followed the decision of the Special Bench of the Tribunal in the case of Lalsons Enterprises v. Dy. CIT (2004) 82 TTJ (Del)(SB) 1048 : (2004) 89 ITD 25 (Del)(SB), in preference to contrary view expressed by the Hon'ble Punjab & Haryana High Court in the case of Rani Pahwal v. CIT . Hence, learned Counsel submitted, in any case, even if the Hon'ble Madras High Court has decided the issue against the dssessee, the said decision is not binding on the Tribunal against the decision of the Tribunal Special Bench.
14. Learned counsel further submitted, the decision of the Third Member in the case of Dy CIT v. Pasupati New Tec. Ltd. (2006) 7 SOT 107 (Del)(TM) cannot be relied for the following reasons:
(a) The said decision has not laid down any ratio against the decision of the Hon'ble Special Bench in the case of Dy. CIT v. Oman International Bank SAOG (supra). At the highest, there are some observations of the Hon'ble Third Member, which are merely in the nature of obiter dicta. It is submitted that the obiter dicta are not binding upon the Hon'ble Bench and cannot be relied upon in preference to the decision of the Special Bench.
(b) In the said decision, the difference of opinion, which was referred by the Hon'ble President to the Third Member, clearly shows that the issue was in respect of business loss and not bad debts. From the reading of the order, it is very clear that two Members of the Tribunal had not dealt with the provisions of Section 36 and in fact the dispute was in respect of interpretation of Section 37 as is evident from para 3 (page No. 36 of the paper book) of the order.
(c) In the argument of the counsel for the assessee, it has nowhere been stated that the deduction is to be allowed under Section 36 of the Act. It is only at para. 11 (page No. 41 of the paper book) the Hon'ble Third Member has made certain remarks in respect of Section 36 of the Act. However, at para 12, on the next page, the Hon'ble Third Member himself has mentioned that this issue is not relevant for the disposal of the appeal. It is submitted that an observation on the issue, which is not relevant for the disposal of the appeal, can never be the ratio decidendi of the judgment and does not have any binding force.
(d) It is further, submitted that, having noted at starting of para 11 that there are diversions of opinions amongst various Benches of the Tribunal, the Hon'ble Third Member ought not to have made any remark, more particularly when the decision of the Special Bench in the case of Dy. CIT v. Oman International Bank SAOG (supra) was reversed at that point of time. In any case, the Hon'ble Third Member was bound by the decision of the jurisdictional High Court in the case of P.C. Puri v. CIT , according to which, the Third Member decision is as good as decision of the Special Bench. Therefore, the Hon'ble Third Member ought to have followed the decision in the case of Income Tax Officer v. Anil H. Rastogi (2003) 80 TTJ (Mumbai) (TM) 696 : (2003) 86 ITD 193 (Mumbai) (TM)
(e) In any case, the decision of the Hon'ble Third Member is merely an observation, as the two Member Bench has not dealt with the issue at all. In the light of this, the decision is not a decision of 'Third Member Bench' proper.
15. Learned counsel submitted, it is incorrect to say that the Tribunal in the case of Dy. CIT v. Oman International Bank SAOG (supra) has stated that writing off of bad debt in the books of account is merely a prima facie evidence of debt becoming bad. This would be inconsistent interpretation of the order, which would be very clear when we read the following abstract from page No. 288 of the order (page No. 48 of the paper book):
The act of writing off a debt as irrecoverable in the accounts of the assessee is deemed to be discharging the onus of the assessee in holding a debt as bad. When the statute has provided the mode of discharging the onus of proof by writing off the debt as bad debt, it is not incumbent on the revenue to call for further evidence. The rule regarding the deductibility of bad debt provided in Section 36(l)(vii) after the amendment is a statutory rule by itself and, therefore, there declared the rule of deduction of bad debt. If it is again necessary to prove by demonstrative proof that the debt has become bad, then there is no necessity to insert a statutory rule. The onus of proving the debt as bad debt has been prescribed by the statutory rule. Once that statutory rule is satisfied by following the prescribed method, no further obligations remain on the assessee to be discharged."
16. Hence, learned Counsel submitted, the Tribunal in the case of Dy. CIT v. Oman International Bank SAOG (supra) since rightly interpreted the decision, the said decision is to be followed and the issue be decided in assessee's favour.
17. We heard the rival submissions and gone through the orders of the revenue authorities and the decisions relied upon by the contending parties. The case of the revenue, in short, is that the Special Bench decision of the Tribunal in the case of Dy. CIT v. Oman International Bank SAOG (supra) has no sanctity after the decision of the Hon'ble Madras High Court in the case of South India Surgical Co. Ltd. v. Asstt. CIT (supra). This is also in view of the fact that the decision of the Special Bench of the Tribunal has no precedence over the decision of the Hon'ble High Court, even if it is not jurisdictional High Court.
On the other hand, the stand of the assessee, in short, is that in spite of the decision of the Hon'ble Madras High Court in the case of South India Surgical Co. Ltd. v. Assistant Commissioner (supra), the decision of the Special Bench of the Tribunal in the case of Dy. CIT v. Oman International Bank SAOG (supra) still holds the field. Since it is not the decision of the jurisdictional High Court, according to the assessee, it has no precedence over the decision of the Special Bench of the Tribunal.
18. First we deal with the decision of the Hon'ble Madras High Court in the case of South India Surgical Co. Ltd. v. Assistant Commissioner (supra). This appeal was, relevant for the assessment year 1996-97. The questions of law referred to the Hon'ble High court read as under:
1. Whether, on the facts and circumstances of the case, the Tribunal was right in disallowing the claim relating to the variation in exchange rate in respect of the liability due to the foreign suppliers taking a view that it is applicable only to the bankers and persons carrying on money-lending business ?
2. Whether the Tribunal was right in holding that the debt had not become bad as it was recoverable from the Government ?"
The Hon'ble High Court declined to answer question No. 1 as it was not pressed. Coming to the second question, the Hon'ble High Court held that the assessee's claim for deduction of bad debts could not be allowed as all its debtors are either Government hospitals or other reputed hospitals, having acknowledged the debts and have not refused to pay the dues; no case is made out that these debts'are irrecoverable. Vide para 9 of, its order, the Hon'ble High Court considered the following decisions:
(1) Devi Films Ltd. v. CIT (1963) 49 ITR 874 (Mad);
(2) Sarangpur Cotton Manufacturing Co. Ltd. v. CIT (1982) 31 CTR (GuJ) 247 (1993) 143 ITR 166 (Guj);
(3) Kamla Cotton Co. v. CIT ;
(4) A.W. Figgis & Co. (P) Ltd. v. CIT (2002) 172 CTR (Cal) 635 (2002) 254 ITR 63 (Cal);
(5) Jhunjhunwala Co. v. Asstt. CIT ;
(6) T.S.PI.P. Chidambaram Chettiar v. CIT (1967) 64 ITR 181 (Mad).
All the above decisions dealt with the pre-amended law though, as rightly contended by the learned Counsel for the assessee, vide para 8 of its order, the Honble High Court has reproduced the amended law. After discussing the issue on the liasis of the above decisions, their Lordships held that it was not sufficient for the assessee to say that he has become pessimistic about the prospect of recovery of debt in. question. He must feel honestly convinced that the financial position of the debtor was so precarious and shaky that it would be impossible to collect any money from him. The question is really one of fact depending upon the various facts and diverse circumstances bearing on the debtor's pecuniary position, his commitments and obligations. Their Lordships, vide para 19 of the order, considering the above decisions and taking note of the peculiar facts of the case, decided the issue against the assessee as under:
19. On the facts of the above said factual position, except the unilateral act of the assessee to write off the debts as bad debts in the books of account for the previous year relevant to the ' assessment year, the assessee has not made out any case to regard the debts as irrecoverable. The judgment of the assessee in regarding the debts as bad debts is only regarded as convenient judgment to suit his claim, but not an honest judgment having regard to the financial position of the hospitals. We are of the view that the Tribunal is right in law in holding that the debt claimed by the appellant as bad had not become bad and thus not allowable as deduction under Section 36(l)(vii) of the Income Tax Act. The appeal has to be dismissed and accordingly the same is dismissed."
We have to agree with the proposition of the learned Counsel for the assessee that first of all the Hon'ble Madras High Court was dealing with the preamended law and secondly the decisions considered to arrive at the conclusion were also dealing with the pre-amended law. As such, the decision has no applicability after the amendment brought in Section 36(l)(vii).
19. Considering the rival submissions, we find not much conflict between the decision relied upon by the revenue in the case of South India Surgical Co. Ltd. v. Asstt. CIT (supra) and the Special Bench decision relied upon by the assessee in the case of Dy. CIT v. Oman International Bank SAOG (supra). Hereinabove vide para 18 of our order, we have noted the observation of the Hon'ble Madras High Court. On the basis of the facts recorded by the Tribunal, the Hon'ble High Court came to the conclusion that the write off by the assessee was not an honest judgment having regard to the financial position of the hospitals. Hospitals were of the Government and they have acknowledged the debts and the postponement in the settlement of dues was possibly, their Lordships observed, either due to paucity of allocated funds and fund flow problem. Coming to the decision of the Special Bench of the Tribunal in the case of Dy. CIT v. Oman International Bank SAOG (supra), in para 48 of its order, Tribunal observed as under:
48. Now coming to the expression 'bad debt' in Section 36(l)(vii), it may be pointed out that strict proof of establishing the debt to have become bad is unnecessary if we were to look to the plain meaning of the term 'bad debt'. According to Chambers 20th Century Dictionary 'a bad debt' means a debt that cannot be recovered. According to Mtra's Legal & Commercial Dictionary a debt becomes bad when the creditor has no reasonable chance o ' f recovering it from the debtor. In The Law Lexicon, the definition is that a debt that is not reasonably collected, a debt about which there is no reasonable expectation of recovery, a debt believed to be unrecoverable. It is within the personal knowledge of the businessman whether a debt has become bad or not. His decision as long as it is bona fide cannot be disputed by demanding from him a demonstrative proof to establish that the debt has actually become bad. The write off of a bad debt, according to us, is a prima facie evidence, on the part of the assessee with whom the information rests, and is a sufficient Tequirement of the amended provision."
The underlined portion of the above observation of the Special Bench of the Tribunal makes the points clear. First the write off must be bona fide. If it is bona fide, then the revenue cannot demand from the assessee further demonstrative proof to establish that the debt has actually become bad, whether in the year under consideration or before that. Tribunal further observed, the write off of the bad debt itself is a prima facie evidence on the part of the assessee that it has become bad. This means the write off is a prima facie evidence that the debt has become really bad. But this also means that the write off is only prima facie evidence.
20. To really understand the difference between the dissenting order of the JM and the majority, we quote the reasoning of the dissenting Member. Para 21 is relevant. It reads as under:
21. In view of the above discussions, it is held that mere writing off the debt is not sufficient for claiming deduction under Section 36(l)(vii) of the Act effective from 1-4-1989. In addition, the assessee is also under obligation to show, at least prima facie, that the debt has become bad. Whether a debt has become bad or not would depend on the facts of each case. The observations of the Hon'ble Bombay High Court in the case of Jethabhai Hirfl & Jethabhai Ramdas 1978 CTR (Bom) 415 : (1979) 120 ITR 792 (Bom) would be a guiding factor for determining such question of fact."
JM held that "mere writing off the debt is not sufficient for claiming deduction under Section 36(l)(vii) of the Act effective from 1-4-1989. In addition, the assessee is also under obligation to show, at least prima facie, that the debt has become bad. Whether a debt has become bad or not would depend on the facts of each case". The real difference between the majority and the dissenting order is that according to the JM (dissenting), even after the amendment that brought in Section 36(l)(vii) with effect from 1-4-1989, the assessee should prima facie establish that the debt has become bad; whereas according to the majority view, revenue cannot demand from the assessee a demonstrative proof to establish that the debt has actually become bad after the write off. The writing off by the assessee is a prima facie evidence itself. In other words, the difference between the minority view and that of majority is the onus of proof that lies on whom, even after the write off of the debt ? According to the majority, revenue cannot demand a demonstrative proof further once the debt is written off, whereas according to the JM, the assessee has still to prove prima facie that the debt has become bad. In short, now as per the Special Bench, it is for the revenue to prove that the debt has not become bad and the write off of the debt by the assessee was not bona hde. If the revenue proves that the write off was not bona flde on the facts brought on record, the write off is of no use.
21. Coming to the instant case of the assessee, the learned departmental Representative brought our attention to the observation of the learned Commissioner (Appeals), particularly para 3.2, which reads as under:
3.2 I have considered the foregoing submissions and I am unable to agree with the same. Although under Section 36 it is not necessary for an assessee to establish that a debt has become, bad, but that does not mean that it is legally permissible to an assessee to claim any amount of recoverable as bad. What is allowable under Section 36 as a deduction is a bad debt : Therefore, if on the facts of a case it is already established on the basis of the material on record that recovery is not bad, in my considered opinion, no deduction for bad debt can be allowed under Section 36. The facts in the appellant's case are very clear that the amount shown as irrecoverable is in fact not so. Against the outstanding recovery of Rs. 12,45,146 on account of lease rent from M/s Sarigram Steels Ltd., the appellant is already in possession of an amount of Rs. 16,48,000 received from the same party as a security deposit. In the appellant's own version the security deposit was refundable to the said party. Therefore, the appellant has not spelt out any good reason to show that while the said amount of Rs. 16,48,000 was already available with the appellant, what prevented the appellant to recover/adjust the lease rent of Rs. 12,45,146 from the said amount of Rs. 16,48,000. Even after recovery of lease rent of Rs. 12,45,146 from the said deposit amount of Rs. 16,48,000 the appellant would be left with a surplus of Rs. 4,03,000. On the basis of these glaring and indisputable facts staring in the face, there is absolutely no rhyme and reason for the appellant to claim a bad debt which does not e~dst. Sec. 36, like any other provision of the Income Tax Act relating to deductions, it goes without saying, is meant for claiming genuine and legally tenable claims and not for enabling an assessee to resort to manipulative devices resulting in either evasion of tax or deferment of the tax liability to some future year or years. Sec. 36 cannot be allowed to be misused for claiming deduction of an amount-by projecting a sum as irrecoverable even though the facts show that the amount is squarely recoverable. In the appellant's case facts are still more glaring inasmuch as against the outstanding recovery of Rs. 12,45,146 from Sarigram Steels Ltd. The appellant already has a much bigger amount for adjustment as discussed earlier. As such, the disallowance made by the assessing officer is confirmed and this ground of appeal is confirmed."
According to the learned Commissioner (Appeals), the assessee was to receive an amount of Rs. 12,45,146 on account of lease rent. As against this, the assessee is having a deposit of Rs. 16,48,000 from the same party, i.e. M/s Sarigram. Steels Ltd. as a deposit. Learned counsel for the assessee, rebutting this view, submitted that the deposit is against an asset costing a sum of Rs. 41,86,000, which was leased out to Mls Sarigram Steels Ltd. Assessee was also to receive Rs. 11,40,000 per annum as lease rental for the next three years amounting to Rs. 34,20,000, The security deposit of Rs.- 16,48,000 was refundable after the completion of the lease period. According to the learned Counsel, the deposit received is not against the lease rental but it is a security, connected with the purchase costing Rs. 41,86,000. It is further seen from the written submission given by the assessee before the Commissioner (Appeals) that the cheques issued by M/s Sarigram Steels Ltd. were dishonoured and the matter was pending before the Hon'ble Bombay High Court. Under these circumstances, we are of the view that the finding of the learned Commissioner (Appeals) that the debt had not become prima facie bad, is to be rejected.
22. Learned counsel for the assessee, subsequent to the hearing of the matter, made available a copy of the order of the Honble Delhi High Court in the case of CIT v. Morgan Securities & Credits (P) Ltd. in IT Appeal No. 1442 of 2006, dated 7-12-2006. In this case the Honble High Court held "a bad debt should be allowed as soon as it is written off in the books of account under provisions of Section 36(1)(vii)" after the amendment brought in Section 36(1)(vii) with effect from 1-4-1989. Before coming to the above conclusion, the Honble High Court observed that the assessee had taken legal steps against the debtor. Issued legal notice, filed winding up petition, legal notice under Section 138 of the Negotiable Instruments Act was issued, initiated arbitration proceedings and also filed a criminal complaint under the Negotiable Instruments Act. In the next para, i.e. para 4, the Honble High Court observed as under:
4. The assessing officer, however, added back the bad debts amounting to Rupees six cores together with interest accrued thereon, holding inter alia that their writing off as bad was not predicated on an honest opinion formed by the assessee and further that the provisions could not be used as a carte blanche to treat any debt as bad during the year in which it had become exigible to tax. By the time the matter came up for consideration of the Commissioner (Appeals) prosecutiorr under the Negotiable Instruments Act had also commenced. The Commissioner (Appeals) had expressed the self-evident opinion that the provisions of Section 36(l)(vii) read with Section 36(2) of the Income Tax Act would come into play only if (1) the amount of loan or part thereof which is claimed as a deduction should be established to have become bad, and (2) the amount should be shown to have become irrecoverable and written off in the accounts of the assessee for that accounting year in which the claim for deduction is mad~. -In our opinion, a debt becoming bad or irrecoverable are but two sides of the,same coin. The Commissioner (Appeals) had endorsed the reasoning of the assessing officer to the effect that assessee has merely written off the debts at the end of the year and so that its ~axable income gets reduced. The Commissioner (Appeals) as well as the assessing officer were influenced by the fact that there had been no previous dealings between the assessee and Shithir -Housing & Construction (P) Ltd.; no security was taken for the loan and the sequence of events from the advance of the loan to its writing off did not span across even one year. To the contrary, it appears to us that these factors would be relevant if the stand of the department is that the transaction itself was sham or false. Once it is accepted that the transaction actually took place, these factors would, in fact, quell a doubt that the decision to write off the loan as a bad debt was a consequence of an honest judgment. Any prudent person, on learning that an unsecured loan had become perilously unrecoverable, would expeditiously initiate each and every legal remedy available to him, as has been manifested itself in the present case. The Commissioner (Appeals) accepted the assessee's decision to write off as a bad debt the sum of Rupees two crores relating to S. Kumar National Wide Foundation Ltd. but sustained the addition in respect of Shithir Housing & Construction (P) Ltd. The Tribunal, in the impugned order, has deleted the disallowance of the said amount of Rupees four crores treating it to be irrecoverable. It further held that since the principal is not recoverable, there is no reason or justification to charge interest on this sum. "
23. The Hon'ble Delhi High Court, in agreement with the view taken by the Hon'ble Gujarat High Court in the case of CIT v. Girish Bhagwat Prasad , held as under:
Our learned Brothers had pointedly observed that the genuineness of the claim predicated on s 36(1)(vii) of the Income Tax Act was not in doubt. Where the loan transaction is itself shrouded in uncertainty other provision of the statute would immediately come into play. Our learned Brothers further observed that prior to the amendment from 1-4-1989, the allowance under the said section was confined to debts and loans which had become irrecoverable in the accounting year. Without advertising to the above extracted circular, it was opined that with effect from 1-4-1989 all that the assessees 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."
After discussing the issue thus the Hon'ble Delhi High Court held that "the circular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as bad or recoverable no sooner it was written off in the books of assessee concerned". Therefore, now there is no alternative but to allow the claim of the assessee once the assessee has written off the debt as bad.
24. Now coming to the Special Bench decision of the Tribunal in the case of Dy. CIT v. Oman International Bank (supra), majority held that once the assessee has written off the debt as bad, the revenue cannot any more demand a demonstrative proof to establish that the debt has actually become bad. On the contrary, it is for the revenue to establish that the debt has not become bad. In the instant case of the assessee, the learned departmental Representative's contention is that the assessee is in possession of Rs. 16,48,000 received from the same party as a deposit. According to the assessee, this amount is against the goods leased to M/s Sarigram Steels Ltd., therefore, it is not possible to adjust the amount against the lease rent. This argument of the assessee cannot be faulted with. Thus, we are of the view that the write off by the assessee is to be accepted 'and the stand of the revenue that the amount should have been utilised against the deposit has no merit. Hence, this ground of appeal by the assessee is allowed.
25. Coming to other contention of the learned Counsel with regard to precedent of the Special Bench over the decisions of the other High Courts, other than jurisdictional High Court, it is not necessary to deal with since we have allowed the claim of the assessee on merit.
26. In the result, appeal of the assessee stands allowed for statistical purposes.