Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Gokaldas Pragji on 3 July, 1987
Equivalent citations: [1988]24ITD25(AHD)
ORDER
U.T. Shah, Judicial Member
1. In this appeal, the revenue is challenging the action of the Commissioner (Appeals) in deleting Rs. 4,65,121 being the amount disallowed by the ITO out of bad debt claimed by the assessee and in holding that no interest under Section 217 of the Act was chargeable.
2. The assessee is a firm and runs an oil mill and ginning and pressing factory. The assessment year is 1982-83 and the relevant previous year is S.Y. 2037 (ended on 28-10-1981).
3. The facts regarding the assessee's claim for deduction of Rs. 4,65,121 as summarized by the ITO and not in dispute, read as under:
The assessee sold CO., cotton to M/s. Radhakishan & Co., Ahmeda-bad as under :
Rs.
(1) Bill No. 133 of 18/6/81 100 bears 2,22,224
(2) Bill No. 133 of 14/7/81 100 bears 2,30,027
(3) Bill No. 139 of 14/7/81 100 bears 2,23,825
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6.76.076
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Cheque for Rs. 2,20,002 was realised. Two cheques of Rs. 2,30,000 each of 28-8-1981 on State Bank of Indore were dishonored as per bank's Memorandum dated 5-9-1981. Thus amount of Rs. 4,56,074 was due from the debtor. The assessee incurred some expenditure for recovery. Total due from the party amounted to Rs. 4,65,121. The assessee thereafter made inquiries at Ahmedabad and learnt that many others were also cheated by M/s. Radhakishan & Co., Ahmedabad. Cheques given to several other parties were also dishonored. It is further stated that local inquiries revealed that there was no ray of hope of any recovery and as the incident pertain to this year, the amount had to be written off against the profit of this year.
4. On the aforesaid facts, the assessee claimed deduction of Rs. 4,65,121 as bad debt or in the alternative as a business loss. The ITO, however, disallowed the assessee's claim for deduction of the said amount with the following observations :
7. The contention of the assessee that amount was not recoverable or there was no ray of hope of recovery does not seem good from the conduct of the assessee. The assessee has not written off the amount by credit to debtor's account. This very fact suggest that the assessee was hopeful of recovery. One cheque of Rs. 2,20,002 was in fact realised. The assessee was trying for recovery. Registered notice dated 15-9-1981 was sent. The assessee has proceeded to claim loss this year without giving effect of such claim to debtor's account and keeping reserved option for steps for recovery only on account of dishonourment of cheques and information that party has cheated several others also. The assessee has drawn attention to news item of Sputnik Weekly, dated 24-1-1982. This news item cannot be taken as authentic. Besides, news is of January 1982. The assessee has not said anything as to how it came to the conclusion that there was no hope of recovery. Information gathered on inquiries at Ahmedabad and from other victims is not made known. One may lose hope of recovery only when it is found that liabilities of debtor are in excess of assets. It is not known whether the assessee has inquired on this line. At least nothing is said about the nature and result of inquiry. The conduct of crediting the relevant amount to trading loss account and not to debtor's account is not understood. It is learnt that other creditors have filed suits for recovery. The assessee has also filed a suit for recovery in Civil Court at Morvi on 10-7-84 which is pending. From the above facts it is clear that assessee has claimed loss/bad debt though hope of recovery is not lost and efforts for recovery are continuing. The period of transactions and decision taking is very short. The claim is prematured. Such a claim can be allowed only when it is proved that debtor is not in a position to make payment and not when debtor is hesitant to pay or delaying, In the circumstances bad debt of Rs. 4,65,121 is disallowed. Even otherwise, a claim of bad debt can be allowed only when amount is written off in the books of account by debit to vatav account and credit to bad debt account.
Consequently, the ITO also charged interest under Section 217 of the Act.
5. Being aggrieved by the order of the ITO, the assessee preferred an appeal before the Commissioner (Appeals) wherein, it once again claimed deduction of Rs. 4,65,121 either as bad debts or in the alternative as trading loss. It further claimed that no interest under Section 217 of the Act, could have been charged in its case. In support of its submissions, the assessee had relied on a number of decisions of the Hon'ble Gujarat High Court mentioned in the grounds of appeal taken up before the Commissioner (Appeals). During the course of hearing before the Commissioner (Appeals), the assessee had reiterated the submissions which were made before the ITO by elaborating the grounds of appeal taken up before him. It had also relied on the order of the Tribunal in the case of Ramnarayan Hariprasad v. IAC [1985] 11 ITD 398 (Ahd.) (TM). It was, therefore, urged that deduction of Rs. 4,65,121 should have been allowed by the ITO either as bad debt or as business loss. In this view of the matter, it was submitted that no interest could have been charged under Section 217 of the Act. The Commissioner (Appeals) accepted both the contentions of the assessee, in the following manner :
4. I have considered the submission very carefully. The Gujarat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166 have made an observation on the similar set of circumstances of the case. "When a businessman writes off an amount, there is prima facie evidence that the amount is irrecoverable, undoubtedly the department can rebut the prima facie inference by drawing attention to circumstances or by leading evidence to suggest that the position taken up by the assessee was not correct." It is also observed that "mere passing of a decree in favour of the assessee-company did not necessarily indicate that there was a possibility of recovering a debt. Subsequent events clearly showed that the assessee-company was justified in concluding that the amount was not recoverable in the year in question". The events and circumstances subsequent to the stage of writing off which are not irrelevant also amply justify the action of the assessee-company. The I.T.A.T., Ahmedabad Bench in the case of Ramnarayan Hariprasad y. I AC [1985] 11 ITD 398 (TM) had an occasion to consider the similar case. The cheques were dishonored in that case. The assessee has written off this amount as unrecoverable. The Full Bench has held that the assessee was justified in writing off the amount as there was no possibility of recovery of such debts. Here in this case, the assessee has written off the debt as irrecoverable and the claim has been made that the assessee suffered a heavy loss. Therefore, it may be either allowed as bad debt or it may be allowed by treating the same as trade loss during the year under consideration. The debtor is not at all traceable and many parties have filed suits against the debtor and local enquiry have revealed that the person is not traceable and even issue of the summons issued by the Court have not been served on the debtor. As the claim has been made in the assessment year 1982-83 i.e. S.Y. 2037 and till to-day i.e. S.Y. 2041 the party is not traceable and there is no recovery from the said debtor. In view of these facts and in view of the decision of the Gujarat High Court that the subsequent events have also to be taken into consideration the claim made for writing off of the debt is justified. In this case, after the lapse of five years of the event the assessee is not in a position to recover a single paisa and the criminal case has been filed but the Court is not able to proceed further because the debtor is not traceable. Thus, taking into account all these facts into consideration and also following the decisions of the cases on which the reliance has been made, I find that the ITO is not justified in not allowing the claim of the assessee. The ITO is, therefore, directed to allow the claim of bad debt to the tune of Rs. 4,65,121.
5. The next objection is with regard to the charging of the interest under Section 217 of the Act. The ITO since he has disallowed the claim of bad debt of Rs. 4,65,121 as well as since he has disallowed the claim of sales tax liability of Rs. 40,630, the assessee-firm has become liable for charging of interest under Section 217 of the Act, and accordingly he has levied the interest of Rs. 32,625. Against this, the learned counsel has objected and stated that the assessee cannot anticipate that the addition could be made by the ITO on account of various claims made of sales tax liability as well as the bad debts. Hence the ITO is not justified in levy of interest under Section 217. The reliance has been made on the decision in CIT v. Abdul Razak & Co. [1982] 136 ITR 825 (Guj.).
6. I have considered the submission very carefully. As stated above, the charging1 of interest under Section 217 has arisen due to the disallowance of the sales tax liability of the assessee of Rs. 40,630 and the bad debt claim of Rs. 4,65,121. I have already held that the claim of bad debt of the assessee is eligible and allowable during the year under consideration and if that amount of bad debt is allowed there could not be levy of any interest under Section 217. Thus, following the decision of the Gujarat High Court in the case of Abdul Rasak & Co. (supra) I direct the ITO not to charge the interest under Section 217 of the Act. In fact there could be no case for levy of such interest because of the claim of the assessee bad debt allowable as stated above.
6. Being aggrieved by the order of the Commissioner (Appeals), the revenue has come up in appeal before the Tribunal. The learned representative for the department strongly relied on the order of the ITO and vehemently argued that the Commissioner (Appeals) was not justified in accepting the assessee's contention for deduction of Rs. 4,65,121 as bad debt and that no interest was chargeable Under Section 217 of the Act. In this connection, he filed before us a paper book containing certain material which was not mentioned in the order of the ITO. Further, he strongly urged that since this material is available on the record of the assessee, he should be allowed to rely upon the same with a view to support the action of the ITO in disallowing the assessee's claim for deduction of Rs. 4,65,121. Page 1 of his paper book contains letter dated 29-1-1985 of ITO, Ward-C, Surendranagar addressed to the ITO, Morvi, assessing the assessee giving certain particulars regarding transaction with M/s. Radhakishan & Co. by the firm of M/s. Karmali & Co., Dudhrej, assessed by the ITO Surendranagar. Pages 2 to 27 of his paper book contain Advocate's notice of M/s, Kunverji Mothibhai & Co. of Morvi to M/s. Radhakishan & Co., Ahmeda-bad, Indore and Bombay and the reply dated 30-11-1981 to the Advocate by M/s. Radhakishan & Co. According to this material, the learned representative for the department strongly argued that M/s. Radhakishan & Co. was not only traceable but could have been approached by the assessee for the recovery of the amount involved. He further submitted that since the assessee itself had filed a suit in Morvi Civil Court against M/s. Radhakishan & Co., Ahmedabad some time in 1984, it cannot be presumed that the assessee had lost last ray of hope of any recovery from the said party during the previous year relevant to the assessment year under appeal. According to him, in deciding the point at issue, we have to consider the age of the debt which in the instant case, was hardly less than a year. Further, we have to consider whether while claiming bad debt, the assessee had exercised its honest judgment to show that there was no chance of any recovery from the debtor. He farther submitted that in deciding the point at issue, it is not necessary to look into the subsequent events as to whether the assessee had in fact recovered any amount from the debtor. In support of his submissions, he relied on the decisions in the cases of B.D. Bharucha v. CIT [1967] 65 J.TR 403 (SO), B.C.G.A. (Punjab) Ltd. v. CIT [1937] 5 ITR 279 (Lahore), Devi Films Ltd. v. CIT [1963] 49 ITR 874 (Mad.), Jadavji Narsidas & Co. v. CIT [1963] 47 ITR 411 (Bom.) and, a decision reported in 1974 Taxation 18. He, therefore, urged that the order of the Commissioner (Appeals) on this point should be reversed. Consequently, the ITO had rightly charged interest Under Section 217 of the Act.
7. The learned counsel for the assessee, on the other hand, strongly supported the order of the Commissioner (Appeals). According to him, since the assessee had sold certain goods to M/s. Radhakishan & Co., which was its stock-in-trade and since the assessee had not recovered full amount from the said concern, the loss suffered by the assessee should be treated as business loss and accordingly should be allowed Under Section 28(i) of the Act, even if the same is not allowable as bad debt Under Section 36(1)(vii) read with Section 36(2) of the Act. In this connection, he made a statement at the Bar that even till to day not a single pie has been received from M/s. Radhakishan & Co. out of the outstanding due of Rs. 4,65,121. He further submitted that since two cheques in question were dishonored, the assessee made enquiries at Ahmedabad to find out the whereabouts of M/s. Radhakishan & Co. After failing to get any information in this regard, it wrote off the balance amount and claimed the same as a deductible item in computing its total income. In other words, he wanted to impress upon the Tribunal that the assessee had acted bona fidely and in honest manner in order to claim a deduction of Rs. 4,65,121. Accordingly, to decide the point at issue, it is not material to give too much importance to the "age" of the debt. The learned counsel for the assessee further submitted that it would be open to the assessee to rely on the subsequent events with a view to establish its claim for deduction of the outstanding due from the parties. Again, according to him, the mere fact that the assessee had filed suit in 1984 would not disentitle the assessee to claim deduction of Rs. 4,65,121 in the year under appeal. If, by any chance, the assessee would be lucky to recover certain amount from M/s. Radhakishan & Co. in future, the same would be offered for taxation as per the provisions of Section 41(1) of the Act. In other words, he wanted to impress upon the Tribunal that there would not be any loss to the revenue if the assessee's claim for deduction of Rs. 4,65,121 as allowed by the Commissioner (Appeals) is upheld by the Tribunal. He, therefore, urged that the action of the Commissioner (Appeals) should be upheld, even if the amount of Rs. 4,65,121 is treated as business/trading loss. Since the charging of interest Under Section 217 of the Act is consequential in nature, the learned counsel for the asses-see relied on the order of the Commissioner (Appeals) on this point. In support of his various submissions, he relied on the decision in the cases of Hindustan Trading Corporation v. CIT [1986] 160 ITR 15 (Guj.), CIT v. Abdul Razak & Co. [1982] 136 ITR 825 (Guj.), CIT v. Srivinayaga Pictures [1986] 161 ITR 65 (Mad.), Ishwarchand Gupta 27 ITJ 302, Arvind Kanchanlal 18 BCAJ 90 and Ramnarayan Hariprasad (supra).
8. The learned representative for the department, in his reply, submitted that since the Commissioner (Appeals) has allowed the assessse's claim for deduction of Rs. 4,65,121 as bad debt and since the assessee has not come up in appeal or cross objection, the assessee should not be allowed to argue that the said amount could be treated as business/trading loss.
9. We have carefully considered the rival submissions and we find considerable force in the submissions made on behalf of the assessee. At the outset, we would like to reproduce below the observations of the Hon'ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710, at page 713, which are very illuminative :
Under Sub-section (4) of Section 33 of the Indian Income-tax Act, 1922, the Appellate Tribunal is competent to pass such orders on the appeal "as it thinks fit". There is nothing in the Income-tax Act which restricts the Tribunal to the determination of questions raised before the departmental authorities. All questions whether of law or of fact which relate to the assessment of the assessee may be raised before the Tribunal: If for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him.
[Emphasis supplied]
10. In view of the aforesaid observations, we do not find any substance in the stand taken on behalf of the revenue that since the Commissioner (Appeals) has decided the deduction of Rs. 4,65,121 on the basis that it was a bad debt, it would not be open for the assessee to argue before us that the same may be allowed as business/trading loss. We make this observation as we find from the records that both before the ITO as well as before the Commissioner (Appeals), the assessee had made alternative claim for deduction of Rs, 4,65,121 either as bad debt or as business/trading loss. Further, no additional material is required to decide that Rs. 4,65,121 is business/trading loss.
11. It is pertinent to note that the assessee in the course of its business had sold certain goods to M/s. Radhakishan & Co. It had, in fact, realised Rs. 2,20,002 out of the total sales of Rs. 6,76,076. However, the subsequent two cheques of Rs. 2,30,000 each dated 28-8-1981 issued by M/s. Radhakishan & Co. were dishonored. In other words, out of Rs. 6,76,076, the assessee could recover only Rs. 2,20,002 and the balance amount could not be recovered from the said party. Since this loss had sprung out of business dealing with M/s. Radhakishan & Co., we fail to appreciate why the assessee cannot get deduction of the said sum Under Section 28(0 of the Act, even if for the sake of argument, it can be held that the same could not be allowed Under Section 36(1) (vii) read with Section 36(2) of the Act. The aforesaid observations of the Hon'ble Supreme Court clearly help the assessee's case in this regard. It is an undisputed fact that even till to-day, the assessee has not recovered a single pie out of Rs. 4,65,121. We entirely agree with the submissions made on behalf of the assessee that suppose by chance it could recover certain amounts from M/s. Radhakishan in future, the same could be brought to tax Under Section 41(1) of the Act. In other words, the revenue would not suffer even if deduction of Rs. 4,65,121 is allowed Under Section 28(0 of the Act. In our view, the various reported decisions relied on behalf of the assessee clearly support the stand taken on behalf of the assessee that Rs. 4,65,121 could be allowed either as bad debt or as business/trading loss. In this view of the matter, we have no hesitation in upholding the order of the Commissioner (Appeals) in accepting the assessee's claim for deduction of Rs. 4,65,121, though on different ground.
12. In view of our aforesaid decision, we do not find any infirmity in the order of the Commissioner (Appeals) holding that no interest could be charged Under Section 217 of the Act. In other words, we would uphold the order of the Commissioner (Appeals) on both the issues involved in the present appeal.
13. In the result, the appeal is dismissed.