1988 (12) TMI 167 - AT - Income Tax

Issues Involved:

1. Admissibility of a claim of loss of Rs. 20 lakhs as trading loss and/or bad debt for the assessment year 1978-79.
2. Disallowance of law charges amounting to Rs. 63,803.
3. Addition of interest on bad and doubtful debts amounting to Rs. 9,42,696.
4. Treatment of interest of Rs. 3,90,165 for the assessment year 1979-80.
5. Admissibility of new evidence for the assessment year 1981-82.

Issue-wise Detailed Analysis:

1. Admissibility of a Claim of Loss of Rs. 20 Lakhs as Trading Loss and/or Bad Debt for the Assessment Year 1978-79:

The primary issue revolves around whether the loss of Rs. 20 lakhs, claimed by the assessee-bank due to embezzlement by its employees, should be allowed as a trading loss or as a bad debt under Section 36(1)(vii). The bank had shown Rs. 20 lakhs as bad debts by debiting this amount to the interest and discount account. The fraud involved unauthorized withdrawals by two firms, M/s India Fertilizer Industries and M/s Digvijay Fertilizers, in collusion with the Branch Manager and Accountant of the bank's Mandvi branch. The bank's Board of Directors passed a resolution to write off Rs. 20 lakhs as irrecoverable in the accounting year ending 31st December 1977. The Income Tax Officer (ITO) disallowed the claim on the grounds that the loss was not incurred in the ordinary course of business and that the debt had not become bad during the year of account as recovery proceedings were still pending.

The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's contention that the deduction was either a loss incidental to trade or alternatively a bad debt. The CIT(A) relied on Supreme Court decisions in Badridas Daga vs. CIT and CIT vs. National Bank, concluding that the loss was incidental to the trade. The Tribunal upheld the CIT(A)'s decision, stating that the loss arose from the fraud committed by the bank's employees and was incidental to the business. The Tribunal also noted that the necessary conditions under Section 36(2) for claiming the amount as a bad debt were satisfied.

2. Disallowance of Law Charges Amounting to Rs. 63,803:

As a consequence of disallowing the claim for loss, the ITO also disallowed the claim for deduction of law charges amounting to Rs. 63,803. The CIT(A) allowed the deduction, reasoning that the expenditure was incurred in the course of business for recovering the outstanding amount. The Tribunal confirmed the CIT(A)'s decision, stating that the expenses were necessary for protecting the business's assets.

3. Addition of Interest on Bad and Doubtful Debts Amounting to Rs. 9,42,696:

The ITO included interest on bad and doubtful debts not charged in the accounts in the total income, amounting to Rs. 9,42,696. The CIT(A) held that the assessee could not be taxed on income that had not accrued, following the decision of the Madras High Court in CIT vs. Motor Credit Co. (P) Ltd. The Tribunal upheld the CIT(A)'s decision, distinguishing the facts from the Supreme Court decision in State Bank of Travancore vs. CIT, where the bank had not written off the sticky loans but had taken the interest to a suspense account.

4. Treatment of Interest of Rs. 3,90,165 for the Assessment Year 1979-80:

The departmental appeal for the assessment year 1979-80 was restricted to the treatment of interest of Rs. 3,90,165. The Department relied on the Supreme Court decision in State Bank of Travancore vs. CIT. The Tribunal distinguished the facts of the present case from those before the Supreme Court, noting that the amount of Rs. 20 lakhs had been written off and no interest had been charged in the books. The Tribunal confirmed the CIT(A)'s decision, stating that the Supreme Court decision did not apply.

5. Admissibility of New Evidence for the Assessment Year 1981-82:

For the assessment year 1981-82, the issue concerned the admissibility of new evidence regarding the claim of bad debt of Rs. 29,09,012. The CIT(A) had set aside the order on the limited issue of allowability of Rs. 21,09,012 for verification by the ITO. The Tribunal noted that Section 46A(4) authorizes the CIT(A) to direct the production of any document or examination of any witness to dispose of the appeal. Since the claim for bad debt was the same as that for the assessment year 1978-79, the Tribunal dismissed the departmental appeal as redundant.

Conclusion:

The Tribunal dismissed the departmental appeals for the assessment years 1978-79, 1979-80, and 1981-82, upholding the CIT(A)'s decisions on all the issues. The loss of Rs. 20 lakhs was allowed as a trading loss and/or bad debt, the law charges were treated as business expenditure, and the interest on bad and doubtful debts was not added to the total income.

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