2003 (1) TMI 43 - HC - Income Tax

Allowance of bad debts - whether the debt in question had become a bad debt, and whether the deduction was admissible on the ground that it was validly written off as a bad debt in the context of the provisions of section 36(1)(vii) and sub-section (2) of section 36 of the Act - We, therefore, cannot subscribe to the observations of the Tribunal that section 43B would not be applicable to the assessee s case on the ground that the electricity duty recovered by it did not belong to it, but it was retained for a short time, as agent of the Government. The amendment inserting the first proviso to section 43B was brought about by the Finance Act, 1987, inserted with effect from April 1, 1988, is held to be having a retrospective effect, as per the decision in Allied Motors case - The Tribunal has referred to this proviso in its order. Therefore, the deletion of the addition made by the Income-tax Officer was justified under the said proviso, which had a retrospective effect, if the duty is actually paid by the due date envisaged under the said proviso to section 43B.

Issues Involved:
1. Allowance of bad debts for the assessment year 1983-84.
2. Allowance of bad debts for the assessment year 1984-85.
3. Deletion of the addition made by the Income-tax Officer for the assessment year 1984-85 under section 43B of the Income-tax Act, 1961.

Detailed Analysis:

1. Allowance of Bad Debts for the Assessment Year 1983-84:

The primary issue was whether the Appellate Tribunal was correct in law and on facts in accepting the assessee's claim for allowance of bad debts amounting to Rs. 47,79,259. The assessee, an electricity company, claimed bad debts mainly from five textile mills that had become financially distressed and had their electricity supply disconnected due to non-payment. The Income-tax Officer denied the claim, arguing that the mills had significant assets and were undergoing liquidation proceedings, thus the debts could not be considered bad. The Commissioner of Income-tax (Appeals) partially accepted the claim but rejected the majority on the grounds that no legal steps were taken for recovery.

The Tribunal, however, took into account several factors, including the honest and bona fide belief of the assessee that recovery was unlikely, the disconnection of power supply, and the subsequent takeover of the mills by the Government of Gujarat. The Tribunal concluded that all conditions under section 36(1)(vii) read with section 36(2) of the Income-tax Act were satisfied and directed the Income-tax Officer to allow the necessary relief after verifying the correct figures.

2. Allowance of Bad Debts for the Assessment Year 1984-85:

For the assessment year 1984-85, the assessee made a similar claim of bad debts amounting to Rs. 58,70,063. The Tribunal applied its decision from the previous assessment year, noting that out of sixteen industrial units with disconnected power supply, only four had revived, and no recovery was made from twelve units even after 4 to 6 years. The Tribunal held that the assessee's claim was justified and directed the Income-tax Officer to allow the necessary relief after verifying the correct figures.

3. Deletion of Addition under Section 43B for the Assessment Year 1984-85:

The third issue was whether the Tribunal was right in deleting an addition of Rs. 4,43,76,082 made by the Income-tax Officer under section 43B of the Income-tax Act. The Income-tax Officer contended that the amounts collected by the assessee as electricity duty were trading receipts and should be included in the total income. The Commissioner of Income-tax (Appeals) upheld this view.

The Tribunal, however, found that the assessee was merely a licensee acting on behalf of the State Government for collecting electricity duty, which was credited to a separate account and not included in the profit and loss account. The Tribunal also referred to the amendment effective from April 1, 1988, which allowed deductions for taxes and duties paid before filing income-tax returns, supporting the view that section 43B did not apply as the amounts were not statutorily payable during the accounting year.

The Tribunal concluded that the assessee was not liable to pay the duty if it was unable to recover the dues from the consumers, and the amounts collected were retained temporarily as a collecting agent. The Tribunal's decision was supported by the retrospective effect of the amendment as per the Supreme Court's decision in Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677.

Conclusion:

The Tribunal's decisions on all issues were upheld. The Tribunal's acceptance of the assessee's claim for bad debts for both assessment years and the deletion of the addition under section 43B were justified based on the facts and legal provisions. The reference was disposed of with no order as to costs.

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