1991 (11) TMI 94 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of Rs. 8,95,277 as a trading loss under section 28.
2. Deduction of Rs. 8,95,277 as a bad debt under section 36(1)(vii) read with section 36(2).
3. Levy of interest under sections 139(8) and 217.

Detailed Analysis:

1. Deduction of Rs. 8,95,277 as a trading loss under section 28:

The assessee claimed a deduction of Rs. 8,95,277 as a trading loss, arguing that the amount outstanding against M/s Usha became irrecoverable in the previous year under consideration. The declaration of lockout of the factory of M/s Usha on 24-5-1983, dishonored cheques, and subsequent liquidation of the debtor company in 1985 were cited as evidence. The assessee relied on various judgments to support this contention.

The Tribunal analyzed the provisions of section 28 and concluded that profits and gains must be computed subject to certain express allowances and prohibitions of deductions. Since the debt in question represented a trade debt, the allowability of the deduction was governed by the specific provisions of section 36(1)(vii) read with section 36(2). The Tribunal held that the provisions of section 36 covered the entire field regarding the grant of deduction in respect of bad debts relating to such trade debts. Thus, the deduction could not be considered under section 28.

2. Deduction of Rs. 8,95,277 as a bad debt under section 36(1)(vii) read with section 36(2):

The Tribunal examined whether the conditions prescribed under section 36(1)(vii) and 36(2) were fulfilled. The conditions included:
(i) The debt should be in respect of a business carried on by the assessee in the relevant year.
(ii) The debt should have been taken into account in computing the income of the assessee of the accounting year or an earlier year.
(iii) The debt should have become bad in the year under consideration.
(iv) The debt should have been written off as irrecoverable in the accounts of the assessee for the accounting year in which the claim for deduction is made.

The Tribunal found that conditions (i) and (ii) were fulfilled. Regarding condition (iii), the Tribunal considered the declaration of lockout, dishonored cheques, and the subsequent liquidation of the debtor company as evidence that the debt had become bad in the accounting year. The Tribunal also noted that the assessee had not recovered any amount from the debtor company or the official liquidator.

For condition (iv), the Tribunal accepted the assessee's contention that the supplementary adjustment entries made at the time of filing the revised return were valid. The Tribunal held that the subsequent writing off of the debt as a trading loss was bona fide and the debt had become bad in the accounting year itself. The Tribunal concluded that the conditions for grant of deduction as a bad debt were fulfilled and directed the ITO to allow the deduction.

3. Levy of interest under sections 139(8) and 217:

The Tribunal noted that the CIT(A) had not given any finding in relation to the levy of interest under sections 139(8) and 217. The matter was restored back to the CIT(A) with the direction to decide the same afresh after providing reasonable opportunity to both parties.

Conclusion:

- ITA No. 1157/Ahd/88 was dismissed as not pressed.
- ITA No. 1594/Ahd/90 was partly allowed, directing the ITO to allow the deduction of Rs. 8,95,277 as a bad debt and restoring the issue of levy of interest under sections 139(8) and 217 to the CIT(A).