Income Tax Appellate Tribunal - Amritsar
Deputy Commissioner Of Income Tax vs The J And K Bank Ltd. on 9 June, 2006
Equivalent citations: (2006)104TTJ(ASR)593
ORDER
1. These are four appeals, out of which three appeals have been filed by the Revenue against orders of CIT(A), Jammu with Hqrs. at Amritsar for the asst. yrs. 1977-78, 1979-80 and 1980-81 and one appeal is filed by assessee against the order of CIT(A), Jammu with Hqrs. at Amritsar, for the asst. yr. 1983-84. Since the issue raised in all these appeals are common and inter-related, these were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. First, we take up three appeals filed by the Revenue, where identical grievance of the Revenue is that the learned CIT(A) was not justified in allowing deduction of bad debts amounting to Rs. 9,19,339, Rs. 12,68,576 and Rs. 9,90,000 for the asst. yrs. 1977-78, 1979-80 and 1980-81, respectively. The facts of the case relating to the asst. yr. 1977-78 are that the assessee is a banking company engaged in the business of advancing loans to the customers. In the return of income filed, the assessee claimed bad debts amounting to Rs. 9,19,339. The AO disallowed the claim on the ground that the assessee failed to establish that these debts had become bad. On appeal, the learned CIT(A) upheld the disallowance. The assessee carried the matter in appeal before the Income-tax Appellate Tribunal, Amritsar Bench (in short 'the Tribunal). It was argued before the Tribunal that both the AO and the CIT(A) did not examine each item of bad debts. It was submitted that the details of the bad debts were submitted before the authorities below. The Tribunal considered the submissions of the assessee and vide its order dt. 14th Oct., 1982 in ITA No. 57/Asr/1981 for the asst. yr. 1977-78 set aside the orders of the authorities below and directed the ITO to examine the claim of the assessee with reference to evidence in respect of each item.
3. Thereafter, the AO took up the set aside assessment and allowed the opportunity to the assessee to furnish details in respect of bad debts claimed in the return. It was submitted before the AO that the matter related to asst. yr. 1977-78 which was 15 years old and all the information relating to the date when these debts had become bad was not available. It was submitted before the AO that the details of the bad debts have been furnished which indicated that in most of the cases, these have been adjusted in subsequent years and the assessee has paid tax in the year in which such amount was recovered/adjusted. It was also submitted that in all cases, civil suits have been filed to recover the amount and in one case criminal proceedings have also been initiated. The AO considered the details and observed that in most of the cases, the hank had served legal notices upon the parties by way of recovery of the amount due. In one case, suit has been decreed in favour of the bank and execution of decree was under process. He also noticed that in some other cases also decrees had been granted in favour of the assessee and recovery of the amount was under progress. He also observed that the assessee had not written off bad debt after crediting to the accounts of the debtors and it simply created reserve for bad and doubtful debts and the amounts in question were credited to the said reserve by debiting P&L a/c. Thus, the AO observed that necessary condition that amounts should be written off in the accounting year relevant to the assessment year when these have become bad was not fulfilled. The AO further observed that so long as there was a ray of hope for recovery of the amounts, these debts could not have been written off as irrecoverable. Therefore, the action of the AO (sic-assessee) was premature and necessary condition laid down under Section 36(1)(vii) had not been fulfilled. He further observed that debts were also secured by collateral securities and it was also open to the bank to effect recovery out of the said securities. Thus, the AO disallowed the claim of the assessee for the asst. yr. 1977-78.
4. As regards the asst. yrs. 1979-80 and 1980-81, the assessee had claimed deduction of bad debts amounting to Rs. 12,68,576 and Rs. 9,90,000, respectively. In these assessment years also, the AO called upon the assessee to furnish details as to whether interest on the bad debts had been credited to the respective account and offered to tax, the steps taken to recover bad debts claimed and whether entries had been actually written off in the books of the account. The AO stated in the orders that the assessee expressed its inability to furnish the requisite details. Therefore, the AO disallowed the claim of the assessee for deduction under Section 36(1)(vii) for these two assessment years also.
5. Being aggrieved, the assessee filed appeals against the assessment orders before the CIT(A) challenging the disallowance of bad debts for all the assessment years. It was submitted before the CIT(A) that the assessee was engaged in the business of banking and bad debts claimed were incidental to assessee's business. It was submitted that the assessee had furnished party-wise details of the amounts due from them and also steps taken to recover the amounts from the parties. In fact, in almost all the cases, suits had been filed. Relying on the judgment of Hon'ble Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT and the judgment of Hon'ble Bombay High Court in the case of CIT v. Jwala Prasad Tiwari , it was submitted that once the assessee had posted entries in the P&L a/c and corresponding entries were made in the "bad debts reserve account", the same amounts to due compliance with the provisions of Section 36(1)(vii). It was also submitted that the assessee had furnished complete details about the parties that their financial position was bad. Relying on the judgment of Bombay High Court in the case of CIT v. Goodlass Nerolac Paints Ltd. . it was submitted that once two facts were established that the debt was a trade debt and it had become bad, the Court should not interfere with the decision of the assessee in writing off the amount in a particular year unless there was anything patently wrong with the assessee's decision. Reliance was also placed on the judgment of Hon'ble Rajasthan High Court in the case of CIT v. Shree Bhagpatia Food Industries and some other decisions referred to on p. 4 of the impugned order for the asst. yr. 1977-78. The learned CIT(A) considered these submissions and allowed the claim of the assessee for the asst. yr. 1977-78 by recording following findings in para 5 of the impugned order:
5. After hearing the learned Counsel and considering the legal and factual position, I am convinced that the appellant had taken all the requisite steps to enforce the recovery in respect of debts under reference. When there was no hope left, the amounts were rightly written off and claimed as bad debts. The AO is mainly influenced by the fact that the bank had obtained a decree and the execution of that was under process. The mere possession of decree could not convert a bad debt into a good debt. The decree only provided a legal sanction for enforcing the recovery of the assets from the borrower. However, if the borrower is not traceable and there are no assets, the decree remains ineffective and the debt becomes bad which is only to be written off as irrecoverable. The law was amended at a later stage considering all such aspects of the matter and although the order under reference has to be governed by the old law, the subsequent amendment cannot be fully ignored. Thus, considering the totality of facts and circumstances, I hold that the appellant fulfilled all the requisite conditions for claiming the amounts under reference as bad debts, and there is no justification for not allowing the same. The addition so made amounting to Rs. 9,19,339 is, therefore, deleted. The appeal is allowed.
This order was followed for the subsequent two assessment years. The Revenue is aggrieved with the orders of the CIT(A). Hence, these three appeals before us.
6. The learned senior Departmental Representative, Sh. Darshan Singh, referred to the provisions of Section 36(1)(vii) of the Act and submitted that these provisions as existed for the relevant assessment years required that the assessee would be entitled to the claim of bad debts only if it is established that such debts had become bad in the year when these were claimed and these must be written off as irrecoverable debts in the books of account of the assessee. He submitted that until these two conditions were satisfied, the assessee would not be entitled to claim deduction of the same. He submitted that subsequent amendment to the provisions of Section 36(1)(vii) where the amount could be claimed and allowed on the basis of writing off the same in the books of account should not be made applicable to the assessment years under reference. Thus, he submitted that in the present case, the assessee had failed to establish that these debts had become bad in the accounting years relevant to assessment years under reference and, therefore, the learned CIT(A) was not justified in allowing deduction for the same.
7. The learned Counsel for the assessee, Sh. K.K. Mehra, on the other hand, heavily relied on the orders of the CIT(A) and reiterated the submissions which were made before the authorities below. He submitted that assessee is a banking company engaged in the business of advancing loans to its customers. He, therefore, argued that these debts were incidental to carrying on assessee's business. He submitted that during the course of assessment proceedings, the assessee had furnished complete party-wise details indicating the date on which debts had been written off in the books of account, the amount of debts, nature of security against debts, reason for debts becoming bad or financial position of the party and the legal action taken against the party. He further stated that the position regarding amounts received in the subsequent period/adjusted against the accounts were also filed. Relying on the judgment of Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT (supra) and the judgment of Hon'ble Bombay High Court in the case of CIT v. Jwala Prasad Tiwari (supra), the learned Counsel submitted that if the amounts due to assessee have been written off by the assessee by debiting P&L a/c and crediting 'bad debts reserve account' the same is sufficient compliance with the statutory requirements for writing off the debts in the books of account. Therefore, the objection of the AO that these were not written off by crediting the amounts of bad debts to the individual accounts of sundry debtors was untenable, as the Department has not doubted that amounts were actually written off by debiting to the P&L a/c and crediting to reserve for doubtful debts. As regards the other requirement that these debts must have become bad or irrecoverable in the accounting years relevant to assessment years under consideration, the learned Counsel submitted that relevant details were submitted before the AO which indicated the name of the party, amount of bad debts, nature of security obtained against loan, the reason why such debt could not be recovered and action taken by way of filing a suit, the present position of the case were furnished. He submitted that in a case where subsequently the amounts were recovered and adjusted, the position in this regard was indicated and the respective amounts were offered to tax in respective assessment years. Reliance was placed on the following judgments in support of the contention that the assessee satisfied the condition that the amounts had become irrecoverable and bad in the accounting years relevant to assessment years under consideration and, therefore, rightly written off:
(i) CIT v. Shree Bhagpatia Food Industries (supra), where it was held that in a case where the amounts were written off because despite legal registered notices served on the debtors, no payment was received, it was not necessary that insolvency proceedings must be initiated or suit must be filed before debt could be said to be a bad debt. In such a case, the assessee would be entitled to deduction of bad debts.
(ii) CIT v. Goodlas Nerolac Paints Ltd. (supra), where it was held that where two conditions were satisfied, i.e., debt was a trade debt and it had become bad, the Court should not interfere with the decision of the assessee in writing off the amount in a particular year.
(iii) CIT v. Srivinayaga Pictures , where it was held that merely because legal proceedings were not initiated because of prohibitive cost of litigation does not mean that debts had not become bad.
(iv) Sarangpur Cotton Manufacturing Co. Ltd. v. CIT (1982) 31 CTR (Guj) 247 : (1983) 143 ITR 166 (Guj), where it was held that when a businessman writes off an amount, it is prima facie evidence that the amount is irrecoverable. Mere passing of decree in favour of the creditor does not necessarily indicate about the possibility of recovery of debt. Considering the facts of that case, the Hon'ble High Court held that the assessee was justified in writing off debt in the assessment year in which these were claimed.
(v) Jethabhai Hirji & Jethabhai Ramdas v. CIT it was held that in a case where legal proceedings initiated culminated in decree of admission did not mean that debts had (sic-not) become bad. In such a case, claim for bad debts could not be considered as premature.
7.1 He further submitted that this is a case of banking company owned by the State Government, subject to checks and regulations by the RBI. Even basis of writing off bad debt is a subject-matter of scrutiny by the statutory auditors as well as by the Government. Therefore, once a decision has been taken based on evidence and material on record to write off bad debts which are incidental to the carrying on business of the assessee, the decision should be accepted. He relied on the decision of the Tribunal, Delhi Bench in the case of Punjab National Bank v. IAC (1989) 34 TTJ (Del) 359 : (1989) 30 ITD 245 (Del), where it was held that it must be left to the discretion of the bank as to when an amount should be written off as bad debt and unless there is circumstances to show that the write off was for considerations other than banking considerations, no attempt should be made normally to question the decision of the nationalized bank and disallow the amount. He also relied on the decision of the Tribunal, Ahmedabad Bench in the case of State Bank of Saurashtra v. ITO (1988) 30 TTJ (Ahd) 371 : (1988) 24 ITD 97 (Ahd), where it was held that quantification of bad and doubtful debts and provision there is a necessary process and in the process of drawing up of the P&L a/c and balance sheet of the bank. As per the provisions of the Banking Regulation Act, 1949, the provision of bad and doubtful debts has to be to the satisfaction of the statutory auditors of the bank. The Tribunal held that to disbelieve any portion of the bad debt claim of banking company as premature requires clear and cogent evidence on the basis of which it can reasonably be said that the decision in respect of write off of the debt is erroneous.
8. We have heard both the parties at some length and given our thoughtful consideration to the rival contentions with reference to facts, evidence and material placed on record. The claim of the assessee relates to the asst. yrs. 1977-78, 1979-80 and 1980-81, respectively. Therefore, the provisions of Clause (vii) of Sub-section (1) of Section 36 relevant to the assessment years under reference shall apply for considering the claim of the assessee for bad debts. Section 36(1)(vii) as it stood at the relevant time provided that subject to the provisions of Sub-section (2), the amount of any debt, or any part thereof, which is established to have become a bad debt in the previous year, shall be allowed as deduction in computing the income referred to in Section 28. Sub-section (2) of Section 36 provided that for the purpose of allowing deduction for bad debt, the debt or part thereof must have been taken into account in computing the income of the assessee of the previous year, or of an earlier previous year, or represents money lent in the ordinary business course of banking or money lending which was carried on by the assessee and such debt has been written off as irrecoverable in the accounts of the assessee for that previous year. Thus, in order to entitle the assessee to claim deduction for bad debts, it was necessary that the assessee must fulfil the following conditions:
(i) The debt must have been a trade debt or incidental to carrying on the business of the assessee,
(ii) The same must have been taken into account while computing the income of the earlier assessment years,
(iii) It must have been written off in the books of account of the assessee, and
(iv) The debt must have become irrecoverable or bad in the year when it was written off.
There is no doubt that the assessee is engaged in the business of banking and these debts were incidental to the carrying on the business of the assessee. Even the Revenue has not disputed this fact. It is also a fact that the income from these debts was taken into account in the earlier assessment years. The objection of the Revenue is that these were not written off by crediting the amount of respective debts in the individual account of the debtors rather these were written off by debiting P&L a/c and crediting the 'doubtful and bad debts reserve account'. This objection of the Revenue is untenable. In the cases of Vithaldas H. Dhanjibhai Bardanwala v. CIT (supra), CIT v. Jwala Prasad Tiwari (supra) and CIT v. General Insurance Co. of India , it has been held that if the assessee had posted entries in the P&L a/c and had made corresponding entries in the bad debts reserve account, this amounts to compliance with the statutory provisions of Section 36(1)(vii) of the Act. There is no requirement under the law that amounts must be written off by crediting the account of respective debtors. Therefore, this objection of the Revenue is devoid of any merit.
8.1 The next aspect of the case which requires consideration is whether the assessee fulfilled the other condition that these debts had become irrecoverable in the accounting year relevant to assessment years under consideration. We have referred to the details filed by the assessee and placed on record. The same showed the dates when these were written off, amount, nature of security against the debt, reason for debt becoming bad and legal action taken against the party. This shows that in most of the cases, the amounts in question were very small. The nature of security obtained was hypothecation of stock, which in many cases was a stock of poultry birds. The reason for becoming debt as bad was the natural calamity i.e., business loss, death of the birds, death of a debtor etc. The mere fact that assessee has filed suits in most of the cases where the amount involved was substantial, itself shows that the assessee has taken adequate steps to recover the amounts due from the party keeping in view the commercial expediency and the cost of litigation. In most of the cases, the amounts realized were adjusted and offered to tax in subsequent assessment years. It is not in doubt that the assessee is a banking company belonging to the State Government. The accounts of the assessee are subject to due check by the statutory auditors, internal auditors of the company and the management including the State Government. Therefore, the claim for bad debt is also subject to scrutiny by these agencies and further the bank is also governed by the RBI guidelines and regulations. The very fact that in some of the cases decrees have been awarded in favour of the assessee and amount was in the process of realization does not mean that these debts had not become irrecoverable in the accounting years under reference. The judgment of Gujarat High Court in the case of Sarangpur Cotton Manufacturing Co. Ltd. v. CIT (supra), two judgments of Bombay High Court in the cases of Jethabhai Hirjee & Jethabhai Ramdas v. CIT (supra) and CIT v. Goodlas Nerolac Paints Ltd. (supra) and the judgment of Rajasthan High Court in the case of CIT v. Bhagpatia Food Industries (supra) supports the case of the assessee. Further, the decision of Tribunal, Delhi Bench in the case of Punjab National Bank v. IAC (supra) and Tribunal Ahmedabad in the case of State Bank of Saurashtra v. ITO (supra) also support the case of the assessee. Since the assessee was also subject to scrutiny under the Banking Regulations Act, 1949, statutory auditors and internal auditors, management and the State Government, the decision to write off the bad debt as irrecoverable and the facts placed on record support the claim of the assessee that these debts had become bad and were written off after due scrutiny and check. Thus, we are of the considered opinion that the assessee has been able to discharge the onus in establishing that these debts have become bad and irrecoverable in the assessment years under reference. Therefore, we do not find any justification to interfere with the orders of the CIT(A), which are in conformity with the provisions of the Act. The same are upheld and the respective grounds of appeal of the Revenue are dismissed.
9. We now take up appeal of the assessee filed against the order of the CIT(A) for the asst. yr. 1983-84. The first issue raised in this appeal is that the learned CIT(A) was not justified in sustaining the disallowance of bad debts of Rs. 64,95,154. The facts of the case are that the assessee had filed the return of income declaring therein income of Rs. 5,70,21,160 after claiming deduction of bad debts of Rs. 64,95,154. The AO disallowed the claim on the ground that the amounts were written off by debiting the P&L a/c and crediting the provision for bad and doubtful debts. According to him, the amounts were not written off by crediting the bad debts to the respective accounts of the sundry debtors. Thus, the AO was of the view that the first condition had not been satisfied. He further observed that the assessee failed to furnish complete information i.e., individual case files to show that amount had become irrecoverable in the accounting year under reference. The bad debts appeared in the names of 940 parties. The assessee furnished details in the form of name of the party (Branchwise), date when written off, amount of debt, nature of security, nature of calamity, action taken to recover the amount and the outcome of such action. Since the amounts in question were comparatively of small amounts and the number was very large, the assessee furnished complete details of 67 parties which have been extracted in Annex. A to the assessment order. The AO noticed that in most of the cases the suits have been pending in the Courts and, therefore, writing off the amount of bad debts in the books was premature. He was of the view that since debts have not become irrecoverable, the assessee did not fulfil the requisite conditions. Accordingly, he disallowed the claim.
10. Aggrieved, the assessee filed an appeal before the CIT(A). The submissions made before the AO were reiterated. This appeal was decided by the CIT(A) on 18th Sept., 1987, i.e., much before the appeals for the asst. yrs. 1977-78, 1979-80 and 1980-81 were decided. The learned CIT(A) observed that in this case, the IAC (Asst.) had given a reasonable time to the assessee to explain each and every item in accordance with Board's Circular to show that this had become bad, but the assessee could not do so. He, therefore, upheld the disallowance. The assessee is aggrieved with the order of the CIT(A). Hence, this appeal before us.
11. The learned Counsel for the assessee, Sh. K.K. Mehra, submitted that the facts of the case and the submissions of the assessee are the same as for the earlier assessment year. He, therefore, submitted that the appeal of the assessee may be allowed by taking into account such submissions.
12. The learned Departmental Representative also referred to his submissions made in the earlier assessment years.
13. We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material placed on record. We have referred to the details in respect of 940 parties and found that the assessee had furnished branchwise detail in respect of the parties and all other details as referred to above for the earlier assessment years. We have also observed that the amounts involved in respect of these parties were comparatively small and the nature of security was also hypothecation of stock. The reasons for non-recovery was loss in business, fire to the shops, death of borrowers, dissolution of the firm. In most of the cases, the assessee had also filed suits which were pending before the Court. In some of the cases, the amounts were received subsequently and adjusted against the income of the subsequent years. Since the facts of the case for the assessment year under consideration are identical to the facts of the case for the asst. yrs. 1977-78, 1979-80 and 1980-81, the findings recorded in the preceding paragraphs shall equally apply to the facts of the case for the assessment year under consideration. Therefore, for parity of reasons, we set aside the order of the CIT(A) and delete the impugned disallowance of bad debts. This ground of appeal is allowed.
14. The second ground relates to sustaining a disallowance of entertainment expenses. The facts of the case are that the AO disallowed the expenditure of Rs. 6,64,872 under Section 37(2A) of the Act being entertainment expenditure after allowing an amount of Rs. 30,000 allowable under the Act. On appeal, the learned CIT(A) upheld the disallowance by relying on the order for the asst. yr. 1982-83. The assessee has now come up in appeal before this Bench.
14.1 The learned Counsel for the assessee submitted that this claim of the assessee is covered by order dt. 29th June, 2005 of Tribunal, Amritsar Bench in the case of the assessee in ITA No. 841/Asr/1988 for the asst. yr. 1985-86. A copy of this order was placed at pp. 38 to 42 of the paper book. He submitted that out of total entertainment expenses of Rs. 6,64,872, the amount allowable as per Tribunal's order works out to Rs. 2,30,049 i.e. l/4th of expenses of Rs. 2,18,618 which worked out to Rs. 72,782 incurred on the employees, Rs. 13,552 being inauguration expenses, the expenditure of Rs. 13,624 incurred on annual general meeting and other meetings and expenditure to be allowed under Section 37(2) is Rs. 30,000. Thus, he submitted that the deduction of Rs. 2,30,049 should be allowed.
14.2 The learned Departmental Representative simply relied on the orders of the authorities below.
14.3 We have heard both the parties and carefully considered the rival submissions. We find that similar issue came up before the Tribunal in the case of the assessee for the asst. yr. 1985-86, where by relying on the earlier order of the Tribunal, Amritsar Bench dt. 28th Feb., 2002 in assessee's own case in ITA Nos. 645 & 734/Asr/1987 for the asst. yrs. 1982-83 and 1984-85 and also order for the asst. yr. 1986-87, in ITA No. 634 of 1999, it was held that assessee was entitled to deduction for a sum of Rs. 2,33,812 including Rs. 50,000 allowed by the AO. In this case also, deduction of Rs. 30,000 was allowed by the AO. We, therefore, set aside the order of the CIT(A) and direct the AO to allow deduction of the claim of the assessee by following the order of the Tribunal for the asst. yr. 1985-86. This ground of appeal is partly allowed.
15. Last ground relates to sustaining a disallowance of Rs. 50,773 in respect of bonus paid to staff. The facts of the case are that during the course of assessment proceedings, the AO called upon the assessee to furnish complete details regarding bonus claimed at Rs. 17,98,000. These details were furnished. As per the details, the AO noticed that the actual working allocable worked out to Rs. 17,47,227. The balance amount was disallowed. On appeal, the same was upheld. The assessee has now brought this issue in appeal before the Tribunal.
15.1 The learned Counsel for the assessee submitted that this issue is squarely covered in favour of the assessee and against the Revenue by order dt. 29th June, 2005 for the asst. yr. 1985-86 (supra).
15.2 The learned Departmental Representative simply relied on the order of the AO.
15.3 Having considered the rival contentions, we are of the view that the addition sustained by the CIT(A) deserves to be deleted. The AO has disallowed the claim merely on the ground that the same was paid in excess of statutory limit of 8.33 per cent. However, relying on the judgment of Hon'ble Madras High Court in the case of Kumaran Mills Ltd. v. CIT , the Tribunal has held vide its order dt. 29th June, 2005 for the asst. yr. 1985-86 (supra) that the additional amount paid on the ground of commercial expediency was allowable under Section 37 of the Act. The facts of the case for the assessment year under consideration are the same as for the asst. yr. 1985-86. Therefore, respectfully following the order of the Tribunal, we set aside the order of the CIT(A) and delete the impugned disallowance. This ground of appeal is allowed.
16. In the result, the three appeals filed by the Revenue are dismissed and the appeal filed assessee for the asst. yr. 1983-84 is partly allowed.