2020 (6) TMI 270 - HC - Income Tax

Dead loss v/s bad debts - investment made by the assessee in a sister concern for purchase of equity shares which into liquidation - HELD THAT - From perusal of the order passed by the assessing officer, it is evident that assessing officer has not examined the fact whether or not the assessee has entered an amount as written off as bad debt. From the order passed by the Commissioner of Income Tax (Appeals) also it is evident that he has not recorded a specific finding that the assessee had written off the debt in the books of account. Tribunal also has not recorded a specific finding by assigning reasons that in the books of account the debts have been written off. Only in a single sentence, it is stated that the assessee had in its books of account written off its debt as irrecoverable. Entitlement benefit of capital loss - The issue with regard to loss of shares in a company, which went under liquidation was considered by Gujarat High Court in CIT VS. JAI KRISHNA 1997 (2) TMI 65 - GUJARAT HIGH COURT and it was held that a person who gets nothing on account of liquidation of a company and suffers loss, his loss has to be treated as capital loss by virtue of Section 46(2) of the Act. The tribunal has followed the aforesaid decision and has held that the assessee is entitled to benefit under Section 46(2) of the Act in respect of an amount for diminution of value of investment made in Gujarat Instruments Ltd - sister concern. We concur with the view taken by Gujarat High court. The impugned order passed by the Income Tax Appellate Tribunal is modified and the finding that the assessee is entitled to the benefit of capital loss is set aside. The matter is remitted to the assessing officer who shall decide the same in the light of law laid down by the Supreme Court in the case of T.R.F 2010 (2) TMI 211 - SUPREME COURT - In the result, both the substantial questions of law are answered accordingly. In the result, the appeal is disposed of.

Issues Involved:
1. Justification of writing off the investment in Gujarat Instruments Ltd. as bad debt.
2. Permissibility of treating the diminution in the value of investment as capital loss under Section 46(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Justification of writing off the investment in Gujarat Instruments Ltd. as bad debt:

The revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the Tribunal's decision that allowed the assessee to write off ?3,50,81,381/- as bad debt. The assessee, engaged in manufacturing field instrumentation, declared a loss of ?7,40,96,877/- for the assessment year 2001-02. The assessing officer disallowed the write-off, stating that no details were provided regarding the investment and utilization of funds in Gujarat Instruments Ltd., a sister concern. The Commissioner of Income Tax (Appeals) upheld this disallowance. However, the Tribunal, referencing the Supreme Court's decision in 'T.R.F LTD. VS. CIT', 323 ITR 397, held that writing off bad debt as irrecoverable in the accounts is sufficient for claiming deduction under Section 36(1)(vii) of the Act. The Tribunal's decision was contested by the revenue, arguing that the manner of writing off the debt was not examined properly and that the investment should be treated as capital loss.

2. Permissibility of treating the diminution in the value of investment as capital loss under Section 46(2) of the Act:

The second issue concerned the Tribunal's finding that the diminution in the value of investment, amounting to ?32,25,000/-, should be treated as capital loss under Section 46(2) of the Income Tax Act. The assessing officer initially disallowed this claim, stating that no particulars were furnished. The Tribunal, however, relied on the Gujarat High Court's decision in 'CIT VS. JAI KRISHNA', 231 ITR 108, which held that losses incurred due to the liquidation of a company should be treated as capital loss under Section 46(2) of the Act. The revenue argued that the Tribunal erred in recording a finding that the assessee is entitled to capital loss without proper examination of the nature of the investment.

Court's Analysis and Decision:

The Court considered the submissions from both sides and reviewed the relevant records. It noted that post-01.04.1989, it is not necessary for the assessee to establish that the debt had become irrecoverable; it is sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee, as per the Supreme Court's interpretation in 'T.R.F LTD. VS. CIT'. The Central Board of Direct Taxes issued Circular No.12/2016, clarifying this position. The Court observed that neither the assessing officer nor the Commissioner of Income Tax (Appeals) recorded a specific finding that the debt was written off in the books of account. The Tribunal also failed to provide detailed reasoning, merely stating that the debt was written off.

Regarding the capital loss, the Court concurred with the Tribunal's reliance on the Gujarat High Court's decision in 'CIT VS. JAI KRISHNA', affirming that the loss due to the liquidation of Gujarat Instruments Ltd. should be treated as capital loss under Section 46(2) of the Act.

Conclusion:

The Court modified the Tribunal's order, setting aside the finding that the assessee is entitled to the benefit of capital loss. The matter was remitted to the assessing officer to decide in light of the Supreme Court's decision in 'T.R.F LTD. VS. CIT'. Both substantial questions of law were answered accordingly, and the appeal was disposed of.

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