2008 (4) TMI 359 - AT - Income Tax

Interpretation of Statutes - Disallowance on Bad Debt u/s 36 - written off as bad debt during the pendency of suits u/s 138 of the Negotiable Instruments Act - Difference of opinion for the assessment year 2001-02 between ld AM and ld JM - Substantial question of law - Whether the addition with regard to bad debts should be deleted or the issue is required to be restored to the file of Assessing Officer for further verification of facts - business of leasing and hire purchase of equipment financing bill discounting loan placement etc - CIT(A) allowed the claim of bad debt and rejected the rest of the claim for the reason that the assessee could not file evidence in support of its claim that the charges given by the parties were not honoured and it was noticed by him that there was considerable recovery of bad debts. HELD THAT - ld AM has remanded the matter to the AO whereas the ld JM in his proposed order has directed that disallowance of bad debt be deleted. Third Member Order - The interpretation of section 36(1)(vii) of the Act was considered by this court in CIT v. Morgan Securities and Credits (P.) Ltd. 2006 (12) TMI 106 - DELHI HIGH COURT . In that case this court referred to the circular as well as another decision of the Gujarat High Court being Deputy CIT v. Patidar Ginning and Pressing Co. 1999 (10) TMI 727 - GUJARAT HIGH COURT and came to the conclusion that no substantial question of law arises for consideration. It has also been brought to our notice by learned counsel for the respondent that if an assessee writes off a debt as a bad debt without giving any reason he will not get any benefit from this. This is for the reason that by virtue of section 41(4) of the Act where a deduction has been allowed in respect of a bad debt which is irrecoverable and if the amount or a part thereof is subsequently recovered then that amount shall be deemed to be profits and gains of business or profession of that relevant previous year. Learned counsel for the revenue submits that the 1989 amendment incorporates only the year of allowability but it does not dispense with the requirement of the assessee to prove that the debt has become a bad debt. We cannot agree with this interpretation as it would take the situation to what was prevailing pre-1-4-1989. Taking all these factors into consideration we are of the opinion that no substantial question of law arises for our consideration. The appeal is dismissed. In my considered opinion principle laid down by their Lordship have been correctly appreciated by the learned Judicial Member in the proposed order. The net effect of change made in the statutory provision with effect from 1-4-1989 is that it was necessary for the assessee to establish that debt had become bad in the previous year before amendment whereas now for debts to be classified as bad the assessee has only to write it off as irrecoverable in its accounts. If subsequently any part of written off debt is recovered the same would be charged to tax by virtue of section 41(4) of the Income-tax Act. In holding that deduction of bad debts were rightly claimed the Judicial Member held that conditions of section 36(1)(vii) and of section 36(2) were fully satisfied in this case. There is no dispute as far as writing off of bad debt is concerned. The learned Judicial Member further noted and underlined relevant portion of the remand report dated 15-3-2005 of the Assessing Officer wherein he had clearly stated that income in respect of each debt involved was duly shown by the assessee in the assessment year under consideration or in earlier years. Therefore the conditions of section 36(2) were also satisfied. I have also noted the relevant portion of the remand report in earlier part of this decision to show that statement made by learned Judicial Member is factually correct. In fact even CIT (Appeals) in the impugned order has specifically admitted that income in respect of debt from SMS Constructions Udaipur was shown and allowed relief. The other debts are not allowed on the ground that income was not shown in terms of section 36(2) or the debts were not established to be bad . The finding of the CIT (Appeals) was factually incorrect as in the remand report the Assessing Officer has clearly accepted that income from all transactions was duly shown in the year under account or in earlier years. The assessee was also carrying business of financing. Thus conditions of section 36(2) were fully satisfied. Please see CIT v. T. Veerabhadra Rao K. Koteswara Rao Co. 1985 (7) TMI 2 - SUPREME COURT . I have also carefully considered the reasons given by the learned Accountant Member in his proposed order for remanding the case back to the Assessing Officer. In the first four paras he records the findings of the ld. CIT (Appeals) that assessee failed to produce the relevant evidence in support of its claim that cheques by the parties were dishonoured and secondly despite proper opportunity given by the lower authorities the assessee did not file copies of the relevant suits filed in Court to enable lower authorities to verify the relevant facts. I have already noted above that the assessee before the learned CIT (Appeals) had claimed that proper opportunity was not given to it by the Assessing Officer. As regards the non-filing of copies of action taken by the assessee against debtors even the learned Accountant Member has noted that copies of proceeding taken against the debtors were duly filed before the lower authorities. Therefore the statement made in the order of the CIT (Appeals) is not correct. Reason No. (iii) in Accountant Member s order that the assessee could not establish that written off debts had not been taken into account for determining the income of previous year as required by section 36(2) is also factually and legally incorrect. This point has been discussed in detail in this order how income of the debts written 9ff was taken into account in the previous year or in earlier assessment years and that conditions of section 36(2) are fully satisfied in this case. Reason (iv) in the proposed order of learned Accountant Member is not based on any material on record. It has been the case of the assessee that not a single penny has been recovered out of the debts claimed as bad debts. The learned CIT (Appeals) or the learned Accountant Member has not shown any material to establish alleged considerable recoveries in the subsequent years. At any rate if recoveries have been made of debts written off as bad then the same is to be taxed under section 41 (4) of the Income-tax Act as laid down by their Lordship of Delhi High Court in the decisions quoted. Bad debts could not be disallowed on this ground. Reason No. (v) has already been referred to above. It is therefore clear that all relevant material to decide the matter with reference to section 36(1)(vii) read with section 36(2) was available on record and it was not necessary for the Bench to remand the case to the file of the Assessing Officer. The learned Judicial Member has referred to the relevant material and I have also discussed how conditions of the statutory provisions were fully satisfied. It was contended by learned Departmental Representative that assessee even after the amendment has to establish that debt in question was bona fidely written off. Even assuming that above is the requirement of section 36(1)(vii) in my opinion above requirement in this case was fully satisfied. The assessee had written off debts in the year under consideration. The assessee also filed evidence in the shape of copies of action taken against the debts in proceedings before learned CIT (Appeals). The claim of the assessee that to this day not a single penny has been recovered has not been refuted on record. There is no material to show that writing off of bad debt was not bona fide action. The facts involved in the case in hand are quite different from the facts involved in the case of South India Surgical Co. Ltd. where the debtor was a Government agency and had shown its willingness to pay the debt. In spite of above fact the debt was written off in post date and claimed as bad . The facts involved here are quite distinguishable and there is nothing on record to show that debtors were ready to pay or had in fact paid any amounts to the assessee or the judgment of writing off of debt suffers from any mala fide. There is nothing on record to contradict the claim of the assessee that not a penny had been recovered by the assessee from the debtors till this day. Having noted the facts of the case I hold that there was no justification for remanding the case back to the file of the Assessing Officer. The learned Judicial Member was right in disposing of the matter on merit and I agree with his proposed order. The matter should now be placed before the regular Bench for disposal in accordance with law.

Summary

Issues Involved:
1. Disallowance of bad debts claim.
2. Treatment of stale cheques as income under Section 41(1).
3. Disallowance of depreciation on leased cars.
4. Disallowance of diminution in the value of re-possessed stock.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debts Claim:
The primary issue was the disallowance of the assessee's claim of bad debts amounting to Rs. 85,69,350. The assessee argued that the debts were written off based on the management's decision and that legal action was not necessary for claiming bad debts. The AO disallowed the claim due to the lack of evidence such as relevant books of accounts and details regarding the period the debts remained outstanding. The CIT(A) partially allowed the claim for Rs. 5,00,682 but rejected the rest due to insufficient evidence that cheques were dishonored and lack of specific confirmations. The Tribunal noted that the assessee had provided relevant documents in the paper book, which were not duly considered by the lower authorities. Thus, the Tribunal directed the AO to re-examine the evidence and decide the issue afresh, treating the ground as allowed for statistical purposes.

Separate Judgment:
One of the members disagreed with the remand, stating that the remand report of the AO already clarified that income from the debts was accounted for, and non-furnishing of suits was irrelevant post the amendment to Section 36(1)(vii). The member cited judicial precedents and concluded that the bad debts claim should be allowed based on the remand report, without further verification.

Third Member's Decision:
The third member agreed with the judgment that there was no need for remand, emphasizing that all relevant materials were already on record. The decision was based on the satisfaction of conditions under Sections 36(1)(vii) and 36(2), and the principle that once a debt is written off, it is allowable as a deduction.

2. Treatment of Stale Cheques as Income Under Section 41(1):
The AO added Rs. 58,689 appearing as stale cheques in sundry creditors to the income under Section 41(1), citing cessation of liability. The CIT(A) upheld the addition, reasoning that the cheques were not encashed, and the liability ceased to exist. The assessee argued that there was no cessation of liability and the amount was offered for tax in the subsequent year. The Tribunal upheld the CIT(A)'s decision, noting that the liability ceased in the year the cheques were considered stale, and directed appropriate action in the subsequent year's assessment.

3. Disallowance of Depreciation on Leased Cars:
The assessee's claim of depreciation on five leased cars was disallowed. The CIT(A) upheld the disallowance, and the assessee did not press this ground of appeal before the Tribunal. Consequently, this ground was dismissed.

4. Disallowance of Diminution in the Value of Re-possessed Stock:
The assessee claimed a diminution in the value of re-possessed stock amounting to Rs. 13,34,586. The AO rejected the claim due to the absence of a valuation report or evidence supporting the decreased value. The CIT(A) upheld the disallowance, citing unreliable and unprescribed revaluation methods. The Tribunal observed that the lower authorities did not properly examine the claim regarding the diminished value due to wear and tear and technological obsolescence. The Tribunal restored the issue to the AO for re-examination, treating the ground as allowed for statistical purposes.

Conclusion:
The appeal was partly allowed, with specific issues remanded for re-examination by the AO, while other grounds were either upheld or dismissed based on the provided evidence and legal principles.