2011 (12) TMI 359 - HC - Income Tax

Disallowance u/s 36(1)(vii) - Rectification of mistake - Held that it is found that undisputedly the bad debts represent advances made by the assessee as long back as 10 years prior to the period under consideration and they were not required to be examined in those periods as the assessee has not claimed them as allowable expenditure of the business - , learned counsel for the petitioner submitted that even the assessing authority was not justified in rejecting the said claim of bad advances and bad debts on the ground that the said advances were partly made to concerns of one Rajendra Porwal Group against whom upon search operation carried out under s. 132 - The requirement on the part of the assessee to establish that debts in question had really turned bad is no longer there after ast April, 1989 and it is left to the business prudence of the assessee to claim such deduction by merely writing off such advances or debts as bad debts in the books of accounts and debiting the same in the P and L a/c of the assessee - Held that Tribunal apparently fell into an error in not rectifying the said mistake apparent on the face of record, which is nothing more than a mistake of fact and even if it is construed to be a mistake of law, it is apparent mistake of law, which would also fall within the scope of rectifiable mistake under s. 254(2) - Petition is allowed

Issues Involved:
1. Disallowance of deduction for bad advances and bad debts under Section 36(1)(vii) of the IT Act, 1961.
2. Rejection of rectification application under Section 254(2) of the IT Act, 1961.
3. Maintainability of writ petition versus alternative remedy under Section 260A of the IT Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction for Bad Advances and Bad Debts:
The petitioner-assessee claimed a deduction of Rs. 2,29,70,959 for bad advances and bad debts for the assessment year 1999-2000. The assessing authority disallowed the deduction under Section 36(1)(vii) of the IT Act, 1961. The CIT(A) allowed the deduction, but the Tribunal reversed this decision, stating that the assessee failed to establish the nexus of the advances with its business and the computation of profit in the relevant year. The Tribunal emphasized that both the relationship to the business and the inclusion in the profit computation were not demonstrated by the assessee.

2. Rejection of Rectification Application under Section 254(2):
The assessee filed a rectification application under Section 254(2) of the IT Act, 1961, seeking correction of the Tribunal's order dated 30th May 2008. The Tribunal rejected this application on 27th April 2010. The Tribunal maintained that the assessee did not meet the criteria for claiming the deduction, as it failed to prove the connection between the advances and the business operations, as well as their consideration in profit calculations.

3. Maintainability of Writ Petition versus Alternative Remedy under Section 260A:
The Revenue argued that the writ petition was not maintainable as the assessee had an alternative remedy under Section 260A of the IT Act, 1961. The Court, however, held that an order under Section 254(2) rejecting a rectification application is not appealable under Section 260A. The Court cited precedents from the Bombay High Court and the Madras High Court, which supported the maintainability of a writ petition in such circumstances.

Detailed Analysis:

Disallowance of Deduction:
The Tribunal disallowed the deduction for bad advances and bad debts on the grounds that the assessee did not establish the necessary connection to its business activities and the inclusion in profit computations. The Tribunal's decision was based on the premise that both elements were required for the deduction to be allowable.

Rejection of Rectification Application:
The Tribunal rejected the rectification application, stating that there was no apparent mistake on the face of the record. The assessee argued that the Tribunal failed to consider the amendment to Section 36(1)(vii) effective from 1st April 1989, which allowed deductions for bad debts merely by writing them off in the books of accounts. The Tribunal's oversight of this legal change was a key point in the assessee's argument.

Maintainability of Writ Petition:
The Court addressed the preliminary objection regarding the maintainability of the writ petition. It clarified that orders under Section 254(2) are not final orders and thus not appealable under Section 260A. The Court referenced the case of Apex Metchem (P) Ltd. and other judgments to support this view. Consequently, the writ petition was deemed maintainable.

Conclusion:
The Court found that the Tribunal erred in not considering the legal position post-amendment of Section 36(1)(vii). The amendment allowed for the deduction of bad debts by merely writing them off in the books of accounts. The Tribunal's failure to rectify this mistake warranted judicial intervention. The Court allowed the writ petition, set aside the Tribunal's order dated 27th April 2010, and remanded the matter back to the Tribunal for fresh consideration under Section 254(2) within six months.

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