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TMI Blog1989 (5) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction was permissible only on "maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities" and this clause permitted the expenditure only where the assessee Bank maintained an office outside India and exports certain goods or services or facilities and that the assessee Bank could not be said to be exporting any services or facilities outside India and that a mere setting up of a branch in London though it helped exporters or importers, did not amount to export of any services or facilities outside India. 3. The learned counsel for the assessee Shri M.L. Khanna, now points out that the view taken by the authorities below was totally unsustainable. It was pointed out to us by filing a copy of the note submitted to the Commissioner(A) at the time of the hearing of the appeal, that the branch in London performs various services among which the following were important :-- (a) The Foreign branch of the bank in helped Indian exporters in identifying prospective buyers inU.K.and elsewhere. (b) The Bank offers favourable terms to prospective foreign buyers for financing of imports fromIndia. (c) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 ITD 618 (Bom.) and Ferro Alloys Corpn. Ltd. v. ITO [1983] 6 ITD 521 (Delhi). 4. The learned Departmental Representative relied very heavily upon the orders of the authorities below. 5. But in our opinion the assessee is entitled to the claim and it is wrong to disallow it on the ground that the assessee was not exporting any services. Section 35B was enacted with a view to give impetus to the development of foreign markets, which will in the ultimate analysis facilitate more exports and bring in much needed foreign exchange. Section 35B only states that where an assessee being a domestic company or a person, he shall be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year. Such expenditure was referred to in section 35B(1)(b) and it states that the expenditure referred to is that incurred wholly and exclusively on (deleting the clauses with which we are not concerned) : "(iv) maintenance outsideIndiaof a branch, office or agency for the promotion of the sale outsideIndiaof such goods, services or facilities ;" Sub-clause (iv) only prescribes that there should be a branch outsideIndiaor an office or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in the above cases, with which we respectfully agree, we hold that the assessee Bank is entitled to the claim under section 35B but since no authority had examined the claim, we direct that the Commissioner(A) should verify the claim of the expenses and then allow the weighted deduction under section 35B in respect of those expenses, which are relatable to the maintenance of the London branch. 7. The first ground, which relates to the disallowance of bad debts consisted of 10 items, is as under : "2. That the learned Commissioner (Appeals) was not justified in not allowing the claim of the Bank in respect of write off of the following debts : Rs. (i) M/s A.K. Woollen Mills and Mini Enterprises. 12,44,000.00 (ii)PunjabElectrical General Industries. 60,264.00 (iii) Ganga Prashad Bachu Lal 16,61,271.00 (iv) Bharat Overseas Pvt. Ltd. 2,75,000.00 (v) Sethai Mills Ltd. 7,71,414.00 (vi) Bharat Dyes Chemical Ind. 1,65,771.00 (vii) Rayman Engineering Works 4,50,000.00 (viii) Model Mills Ltd. 33,18,097.15 (ix) V. Krishnamurthy Chettiar 47,137.00 (x) V. S. Sambha Swami, Oil Merchant 3,301.00 It is prayed that the above claim of the debts written off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t taken all necessary steps to realise the money. Even after obtaining the decree in 1980, when the Bank was unable to recover any money even till today, it could not be said that the debt had not become doubtful of recovery or its write off was premature. We are therefore of the opinion that this debt should not have been disallowed. 9. In respect of the second debt due from Punjab Electrical General Industries of Rs. 60,264, though it was disallowed on the ground that the write off was premature, on the detailed note given by the Bank to the authorities below, we find that the write off could not be said to be premature at all. The facts are that a suit was filed and a decree obtained on17-9-1976for Rs. 93,227, since the decree granted was not in conformity with the requirements of the bank, as the future interest from the date of suit till the date of payment was not allowed, a further appeal was filed in the High Court on23-5-1977. The High Court transferred the case back to the District Court, Rohtak. The appeal is still pending. In the meantime the decree obtained in 1976 could not be executed as there were no properties left with the debtor. It is also found that a sum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some other small recoveries, the balance outstanding was Rs. 8,44,083. In 1970 the position was again reviewed and evaluated and it was found that the value of the properties owned by the party was Rs. 5,59,000. Out of these properties, to the extent of Rs. 1,92,000 was mortgaged to the State Bank ofIndoreand another property worth Rs. 3 lacs was mortgaged to M.P. Financial Corporation. As against these assets, the liabilities of this party was found to be Rs. 49.97 lakhs. Therefore the sum of Rs. 8.44 lakhs was written off leaving a balance of Re. 1 in the account to keep the claim alive. This write off was made in the year 1970. However, a money suit was filed for the recovery Rs. 22.45 lakhs in the court of District Judge, Rohtak along with a suit for specific performance of contract of mortgage of the party's property in favour of the bank. The Branch Manager reported that, government dues amounting to Rs. 32 lakhs were pending and by putting some properties perhaps to sale, the Sales-tax Department could realise Rs. 6.05 lakhs. These facts clearly show that there was no asset left with the borrower against which the bank could proceed for the recovery of this sum even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment. The total assets of Alok Udyog Vanaspati Plywood Ltd. were valued at Rs. 15.03 lacs in March 1979 by authorised controller West Bengal Forest Development Corporation. The quality of finished plywood had completely deteriorated and it could only be used as firewood. In February 1981 preliminary decree was passed in bank's favour for Rs. 81,39,551.18 directing the defendants to pay the decretal amount within a period of 3 months. As the defendants failed to pay the decretal amount, application for passing the final decree has been filed. Till now nothing has been recovered and as the value of hypothecated goods is NIL and value of collateral security has also substantially depreciated, the chances of recovery are very remote." These facts clearly disclose a position that the assessee has taken all steps necessary to recover its money from the borrower and it was only after ensuring that the money could not be recovered from the debtor that the amount was written off as bad debt and on the facts it was not possible to say that the write off was premature. The conclusion reached by the bank that the amount could not be recovered from the debtor should have been accepted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a bad debt was not ex gratia or was dictated by considerations other than business exigencies. The facts mentioned above show to any reasonable mind that the debtor had no assets and that the bank had explored all possibilities to recover this sum and it was only on its satisfaction that there were no assets left to proceed against, that the amount was written off as a bad debt and a conclusion reached by a nationalised bank, which has no axes to grind from the tax angle, should be accepted as the conclusion reached on a correct and proper appraisal of all the relevant factors. 13. Then we go to the next debt due from Bharat Dyes Chemical Industries of Rs. 1,65,771. This debt was disallowed on the ground that this was prematurely written off. But we are unable to agree with this conclusion because the facts show a different picture. A cash credit limit of Rs. 3 lacs against pledge of dyes intermediates, finished dyes and caustic soda was sanctioned in favour of the above borrower. The pledged goods when checked in 1965 was found to be over-valued. It was also found on physical verification that the value of goods in 34 drums was found to be water. The book value of the remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee of that previous year or of an earlier previous year and the money must represent moneys lent in the ordinary course of the business of banking and the amount in question has been written off as irrecoverable in the accounts of the assessee for that previous year. So once it is established by the decision taken by a nationalised bank that the debt had become irrecoverable, whose decisions were subject to severe and intensive scrutiny by independent outside agencies like Reserve Bank of India, its decision must be accepted as justified and reasonable and when the amount was written off as bad debt, normally no further question should arise. If a reference is made to sections 36(1)(vii) and 36(1)(viia) of the Income-tax Act, though section 36(1)(viia) was inserted with effect from 1-4-1980, it is seen that even a provision made for bad and doubtful debt subject to a certain limit, is being allowed as a deduction, which meant the recognition on the part of the Legislature that write off of bad debts or even of doubtful debts is a common feature and a normal incidence of business in the case of banks and even a provision was thought of for being allowed as a deduction. Thus when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese observations are made. 14. The next bad debt is in relation to Rayman Engineering Works of Rs. 4,50,000. This amount also was not allowed as premature again. Here we find that the debtor was sanctioned a cash credit of Rs. 30 lacs against security of iron and steel goods. The debtor was engaged in the manufacture of wagons for railways. For want of adequate orders from the railways and for continued labour trouble, the financial position of the debtor deteriorate to such an extent that even the railways were compelled to lodge criminal proceedings and even filed a civil suit against the debtor for the recovery of a sum of Rs. 20.33 lacs. The assessee bank also filed a suit against the debtor and also against the guarantor in the Calcutta High Court, sometime in July, 1969. The value of the goods pledged with the bank was Rs. 12.02 lacs against a total dues of Rs. 22.31 lacs. After excluding the value of the goods over which the railways had a lien, the deficit came to Rs. 12.40 lacs. It was in these circumstances and estimating the value of the goods pledged to the railways over which it has a lien, a sum of Rs. 4.5 lacs was arrived at as bad debt of irrecoverable nature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 Debentures 13,26,075.00 Interest accrued on the debentures included in the income for earlier years. 6,39,872.00 ---------------------- Total 33,18,097.15 This mill had become a sick mill and it was taken over by the Government under the Sick Textile Mills Undertakings Act, 1974 as and from1-4-1974. Under the terms of the Act, all the assets of the said mill vests free from all encumbrances in the Central Govt. Only a compensation amount of Rs. 1,000 is payable to the company under the terms of the said Act. In the meantime two claims for Rs. 30,94,672 and Rs. 19,51,361 respectively were lodged with the Commissioner of Payments on27-4-1977. The Commissioner of Payments, Ministry of Commerce, Department of Textiles by letter No. 6/187/78-CP. VI. 17 (63) STM/81-C dated 11-6-1981 advised that compensation amount in respect of debtor Model Mills, was exhausted while meeting claims upto Category I and the claim of the bank falls under category IV of Second Schedule to the Sick Textile Undertakings (Nationalisation) Act, 1974 and according to that, in terms of section 22(2) of that Act, the claim of the bank was rejected. The matter was then referred to the Law Ministry of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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