Patna High Court
M/S Lawlys Enterprises (P) Ltd vs Commissioner Of Income Tax,Pat on 30 July, 2008
Author: Ravi Ranjan
Bench: Chandramauli Kumar Prasad, Ravi Ranjan
TAX CASES No.7 OF 1999
(Reference against the statement of case of M/S Lawlys Enterprises (P) LTD Vs.
The Commissioner of Income Tax, Patna which has been drawn on 21.4.1999 by
Income-Tax Appellate Tribunal, Patna Bench Patna in R.A. No. 120 (Pat)/98)
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M/S LAWLYS ENTERPRISES (P) LTD--------------------------- (Appellant)
Versus
THE COMMISSIONER OF INCOME TAX,PATNA------------ (Respondent)
For the Appellant :- Mr. Ajay Rastogi
For the Respondent:- Mr. Harshwardhan Prasad, Sr. Standing Counsel
Mr. Rishi Raj Sinha, Jr. Standing Counsel.
PRESENT
THE HON'BLE MR. JUSTICE CHANDRAMAULI KUMAR PRASAD
THE HON'BLE (DR.) MR.JUSTICE RAVI RANJAN
Prasad & This matter has come up before us on a
Ranjan,J.J.
reference made by the Patna Bench of Income-Tax Tribunal
at the instance of the assessee.
Assessee is a Private Limited Company and
derives income from dealing in motor vehicles and hotel
business. For the assessment year 1990-91 it filed return
showing loss of Rs. 23,40,873/-. However, the assessment
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was completed reducing the loss to Rs. 11,26,676. It has
resulted on account of disallowance of various expenses
including bad debts amounting to Rs. 1,48,219/-. The
Assessing Officer did not allow the bad debts because in its
opinion there was no evidence to establish that debts had
actually become bad during the relevant accounting period.
The assessee carried the matter in appeal, but did not
succeed. It carried the matter in second appeal before the
Patna Bench of the Income-Tax Tribunal. The Tribunal
examined the controversy of writing off the debts in the
light of the amendment made by Direct Tax Laws
(Amendment) Act, 1987 with effect from 1.4.1989 and
observed that the assessee would have been entitled for
deduction of the bad debts if, writing of the bad debts was
done fairly, reasonably and bonafidely. The Tribunal
accordingly found that the provisions of Section 36 (1) (vii)
is not attracted in the case of assessee. The tribunal while
coming to the aforesaid conclusion had also taken into
consideration, that the debts were coming in the books of
account from earlier years, but the bills and other details
were not furnished.
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On these facts the Tribunal had referred the
following questions for our opinion:-
"1. Whether on the facts and in the
circumstances of the petitioner's case, the Tribunal
was justified in confirming disallowance of Rs.
1,01934/- under the head bad debts the nature of
which was remission ?
2. Whether on the facts and in the
circumstances of the petitioner's case the Tribunal
was correct in disallowing the bad debt on the
ground of absence of bill No. and date in respect of
the fact that the appellant's accounts are duly
audited by reputed Chartered Accountants and the
method of accounting has always been accepted
including the year under appeal?"
Mr. Ajay Rastogi, appearing on behalf of
the assessee, submits that inadvertent error has crept in
question No.1 of the reference made and he submits that the
only question which required to be answer is as to whether
the Tribunal erred in confirming disallowance under the
head bad debts. Accordingly, we re-frame question No.1 as
follows:-
"1. Whether on the facts and in the
circumstances of the petitioner's case, the Tribunal
was justified in confirming disallowance of Rs.
1,01934/- under the head bad debts ?
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Mr. Rastogi submits that Section 36 (1)
(vii) of the Income-Tax Act before its amendment by Direct
Tax Laws Amendment Act,1987 provided deduction of the
account of any debt or part thereof which is established to
have become a bad debt in the previous year. Section 36 (1)
(vii) before its amendment by the Direct Tax Laws
Amendment Act, 1987 read as follows:-
"Section 36:- Other deductions - (1) The
deductions provided for in the following clauses
shall be allowed in respect of the matters dealt with
therein, in computing the income referred to in
Section 28:
x x x x x x
(vii) Subject to the provisions of sub-
section (2), the amount of any debt, or part thereof,
which is established to have become a bad debt in
the previous year;"
x x x x x x
It is relevant here to mention that by
Direct Tax Laws Amendment Act, 1987, which was made
effective from 1.4.1987, amendments and substitutions have
been made in Section 36 (1) (vii) of the Act. Section 36 (1)
(vii) of the Act after its amendment by the Direct Tax Laws
Amendment Act, 1987 reads as follows:-
"Other deductions.
36. (1) The deductions provided for in the
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following clauses shall be allowed in respect of the
matters dealt with therein, in computing the income
referred to in Section 28-
x x x x x x
(vii) Subject to the provisions of sub-
section (2), the amount of any bad debt or part
thereof which is written off as irrecoverable in the
accounts of the assessee for the previous year.
Provided that in the case of an assessee to
which clause (viia) applies, the amount of the
deduction relating to any such debt or part thereof
shall be limited to the amount by which such debt
or part thereof exceeds the credit balance in the
provision for bad and doubtful debts account made
under that clause.
Explanation - For the purposes of this
clause, any bad debt or part thereof written off as
irrecoverable in the accounts of the assessee shall
not include any provision for bad and doubtful
debts made in the accounts of the assessee;"
Mr. Rastogi submits that the account of any
bad debt or part thereof which is written off as irrecoverable
in the accounts of the assessee for the previous year itself
shall entitle the deduction. He submits that earlier an
assessee was required to establish that amount of any debt or
part thereof has become a bad debt, but now assessee shall
be entitled for deduction under the head bad debt, amount
which is written off as irrecoverable in the accounts of the
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assessee for the previous year.
Mr. Prasad appearing on behalf of the
Revenue however submits that there is no evidence on
record to show that assessee took any steps to realise the
account and as such it cannot be said to be a bad debt.
We find substance in the submission of Mr.
Rastogi. The law, as is stood prior to amendment provided
that the debt must be established to have become bad in the
previous year. It seems that it led to enormous litigations on
the question of allowability of bad debt in a particular year.
In order to eliminate the disputes, the Legislature intervened
and amended the law and permitted deduction of the amount
of any bad debt or part thereof, which is written off as
irrecoverable in the accounts of the assessee for the previous
year. It is not in dispute that the assessee has written off the
bad debt. In that view of the matter the condition precedent
for seeking deduction has been made out.
We are of the opinion that the assessee
would be entitled to a deduction of the amount of any bad
debt which has been written off as irrecoverable in accounts
for the previous year.
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It is worth mentioning that the Department
has issued Circular No. 551, dated 23rd of January, 1990 (see
[1990] 183 ITR (Statute) 7) which also lends support to the
view which we have taken. It reads as follows:-
"6.6 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 (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
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
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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."
Accordingly, the answer to the first
question is in the negative against the Revenue and in favour
of the assessee and it is held that the Tribunal was not
justified in confirming disallowance under the head bad
debts.
Mr. Rastogi submits that in view of the
answer to the first question, second question sent for our
opinion has become redundant.
Accordingly we refrain to give our opinion
on this question.
Let, our opinion be forwarded to the Patna
Bench of the Income-Tax Tribunal.
(Chandramauli Kumar Prasad,J.)
(Dr. Ravi Ranjan,J.)
Patna High Court
Dated 30th July, 2008
A.F.R./P.K/