2009 (12) TMI 99 - HC - Income Tax

Can interest amount be allowed as bad debts rectification of mistake error apparent on records - For the assessment year 1983-84, an order of assessment was passed by the assessing officer disallowing the deductions sought for by the assessee towards the bad debts for a sum of Rs.51,19,096/- and also the interest for a sum of Rs.15,85,017/-. The assessee has sought deduction for the above said amount of Rs.51,19,096/- out of the total amount of Rs.66,82,375/- which is inclusive of the interest amount of Rs.15,85,017/- kept by the assessee in the suspense account. The assessee has been following the mercantile system of accounting and the interest has been accounted on accrual basis. Since the assessee has been disputing that the interest is not exigible to tax he has not included the said amount in the bad debts claimed by the assessee. CIT(A) and ITAT allowed the deduction of whole amount as bed debts Assessee consequent to CIT(A) order filed an application for rectification u/s 154 to claim deduction of Rs. 15,85,017/- as bed debt which was not claimed earlier AO and CIT(A) held there was no error apparent on record and rejected the application u/s 154 ITAT allowed the rectification u/s 154 held that - The record for the purpose of section 154(1) is the record available to the authorities at the time of initiation of proceedings for rectification and not merely the record of the original proceeding sough to be rectified decided against the revenue

Issues Involved:
1. Whether the Tribunal was right in allowing the interest amount as bad debt under Section 154 of the Income-tax Act, 1961, despite it not being claimed during the original assessment.
2. Whether the issue of bad debt is allowable under Section 154, given that it is not debatable.
3. Whether the Tribunal was right in allowing the assessee's petition under Section 154 for an additional amount as bad debts, considering the provisions of Section 154 (1A).

Detailed Analysis:

Issue 1: Allowance of Interest Amount as Bad Debt under Section 154
The Tribunal held that the interest amount could be allowed as a bad debt under Section 154 due to a 'mistake apparent on record,' even though the assessee did not claim it during the original assessment. The assessee followed the mercantile system of accounting, and the interest was kept in a suspense account. The First Appellate Authority's observation allowed the assessee to claim the entire interest as a bad debt later when recovery was not possible. The Tribunal concluded that the assessing officer should have allowed the gross amount, including the interest, as bad debts. The Tribunal's decision was based on the premise that failing to rectify this mistake warranted the exercise of power under Section 154.

Issue 2: Debatability of Bad Debt Allowance under Section 154
The Tribunal determined that the issue of bad debt was not debatable and hence could be rectified under Section 154. The Tribunal noted that the mistake was apparent and did not require a long-drawn process of reasoning. The First Appellate Authority and the Tribunal had previously allowed the net amount as bad debts, implying that the gross amount should also be allowed. The Tribunal emphasized that the mistake was glaring and apparent on the record, thus justifying rectification under Section 154.

Issue 3: Assessee's Petition under Section 154 for Additional Bad Debts
The Tribunal allowed the assessee's petition under Section 154 for an additional amount of Rs.15,85,017/- as bad debts, despite the provisions of Section 154 (1A). The Tribunal reasoned that the issue raised in the rectification application had not been decided earlier and thus could be raised under Section 154. The Tribunal rejected the Revenue's contention that the doctrine of merger applied, as the issue of gross bad debts was not addressed in the earlier proceedings. The Tribunal also clarified that the term 'record' in Section 154 should be given a wider interpretation, including all relevant records available with the assessing officer.

Contentions and Judgments Referenced:
The Revenue argued that there was no mistake apparent from the record, and the assessee could not include the entire gross amount by invoking Section 154. They cited several judgments, including those from the Supreme Court, to support their contention that Section 154 could not be invoked for debatable issues or issues already decided.

The assessee countered that the power under Section 154 could be exercised to rectify apparent mistakes, and the interest amount kept in the suspense account should be included as bad debts. They relied on the Supreme Court judgment in T.S. Balaram v. Volkart Brothers to support their argument.

Court's Conclusion:
The Court concluded that the Tribunal was correct in its decision. It held that the substantial questions of law raised by the Revenue should be answered in the affirmative and against the Revenue. The Court emphasized that the mistake was apparent and did not involve a debatable issue, thereby justifying rectification under Section 154. The appeal was dismissed, and the Tribunal's order was upheld.

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