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TMI Blog2015 (8) TMI 573X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee Corporation also indicated that such a claim had been made in accordance with provisions of the I.T.Act. Further, I.T.Appellate Tribunal also noticed that no controverting material was brought on record by Revenue on this point, therefore, impugned order passed by learned CIT (A) deserved to be upheld also on that count. According to CIT(A) w.e.f. 1.4.1989, provisions of Section 36(1)(vii) with addition of explanation have undergone a change. Therefore, there was no requirement on the part of assessee to establish that any debt had become bad in the previous year. The only requirement on the part of assessee is to write off the bad debt as irrecoverable. As Assessee Corporation had never claimed any benefit under Section 36(1)(vii-a), the question of applicability of Section 36(2)(v) of the I.T. Act, 1961, would not arise. Thus, finding of Assessing officer was found to be erroneous. CIT(A) and I.T.A.T. are in agreement that such a claim of bad debt upon ‘write off’ is allowable under provisions of Section 36(1)(vii) and no part of this claim for deduction of bad debt, can be disallowed under Section 36(2). Writing off of bad debts by assessee unilaterally is sufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 2013 (ITA GHY No. 5 of 2013), assessment year as per record is 2004-2005 (previous year being 2003-2004) and assessment was carried out vide the assessment order under Section 143(3) of the Income Tax Act, 1961 (for short the I.T. Act, 1961 ) vide assessment order dated 28-12-2006. The amount of income assessed was ₹ 5,60,04,700/- and that of the tax demanded was ₹ 2,65,36,780/-. Assessing Officer upon examining records of case held that assessee respondent M/S Meghalaya Industrial Development Corporation Ltd. (For short MIDC ) had followed the Mercantile System of accounting, and added the interest amount of ₹ 582.66 lacs as taxable income on the ground that assessee company MIDC had maintained its account on accrual basis, and had not taken into account the said amount as interest on loans and advances, on the ground that it had followed the notification issued by Ministry of Industry (Department of Company Affairs) dated 16th May, 1989. The said Circular provided that the interest on loans and advances which is not accounted for in the books of accounts can be disclosed by way of notes in the annual accounts. However, the assessing officer found that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )), assessment year mentioned in record, is 2005-2006 (previous year being 2004-2005). Total amount of income assessed as reflected in order of CIT (A) (arising from Assessment Order dated 27.12.2007 under Section 143(3) of I.T. Act, 1961) is ₹ 8,66,31,460/- and tax demanded is ₹ 3,76,05,634/-. Assessee Company MIDC claimed bad debts of ₹ 25,66,56,134/- in profit and loss account. Not being satisfied there with, a notice was issued under Section 142(1) of I.T. Act 1961 on 23.10.2007, to Assessee Company. The Company filed a detailed reply. However, according to Assessing officer, the Assessing Authority must be satisfied on evidence that the debt had actually become bad during the relevant accounting year. Moreover, according to Assessing Officer, Assessee Company MIDC could not produce evidence to show that debtor companies had gone to BIFR or they had been ordered by Courts to be wound up or dissolved. Mere fact of insolvency is not a conclusive evidence of irrecoverability of debt . Money if advanced by Assessee Company to save other party from financial problems cannot be written off and claimed as a bad debt in the account of money lending business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrued but not credited or received from claimed doubtful loans . CIT (A) in appeal, however, did not agree with Assessing officer on both counts, and held that the additions were made by learned AO on certain incorrect assumptions. According to CIT(A), it is a fact that from 01.04.89, the provisions of Section 36(1)(vii) have undergone a change and thereby there is no requirement on the part of Assessee to establish that any debt has become bad in the previous year. The only requirement on the part of the assessee is to write off the bad debt as irrecoverable. It is also true that there is no apparent relationship between going to BIFR and claim of bad debts. Moreover, from the list of accounts written off as bad debts, it appears that out of fourteen parties whose outstanding debts were written off, only six are Corporate bodies who can apply for relief from BIFR and the rest are noncorporate bodies. All these corporate bodies are again Government Undertakings. These companies/bodies are in a predicament of losses and are either closed down or are on the verge of closure. Guaranteeing loans is usual business of a State Industrial/Financial Corporation. Clause 19 of the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clarifications as provided for by CIT(A) appear to be that apart from the fact that Assessing officer had already allowed the claim of bad debts of ₹ 1.81 crores, it was not the case of Assessee to have invested the amount in question namely ₹ 37,85,000/- in shares of said borrowers-companies as Capital investment, and that the intention of Assessee Company was to hold shares on agreement for advancing loans and not as Capital investment. It could just be a trade in shares. 8. While agreeing with reasons provided by CIT (A), I.T.Tribunal also noticed that it was nobody s case that sticky advance interest was to be rendered to tax in impugned assessment year. According to Tribunal, as per settled position in law, income on sticky advances was to be maintained as memoranda and disclosed by way of notes. And such income was to be taxed as and when it was received. If principal amount itself was doubtful, interest amount could not have been taxed. 9. Thus, order of CIT (A) was affirmed on that count by I.T.A.T. Gauhati. 10. Regarding holding of shares amounting to ₹ 37,85,000/- in companies to which loan advances had been made, since they were part and parcel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd by Revenue on this point, therefore, impugned order passed by learned CIT (A) deserved to be upheld also on that count. Consequently, both the appeals filed by Revenue were dismissed by Tribunal. 15. We have carefully examined the discussions made by Assessing Officer, CIT (A) and I.T.Appellate Tribunal in their orders as aforesaid. Learned counsel for the parties have not advanced any fresh arguments, except, what they had canvassed before the lower forums. 16. Having given out anxious consideration to the issues in question in the light of orders passed by Assessing Officer and Appellate authorities, we may say that these authorities have decided the contentions primarily on the premises of (i) Circular No. 41(V-6) D of 1952 dated October 6, 1952,(Central Board of Direct Taxes) (ii) Circular dated June 20, 1978, (Central Board of Direct Taxes),(iii) Circular dated October 9,1984,(Central Board of Direct Taxes), (iv) 1989 Amendment in Section 36(1)(vii), (v) Judgment of Kerela High Court in State Bank of Travancore vs. CIT (1977) 110 ITR 336 and (vi) judgments of Hon ble the Apex Court in State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC) and UCO Bank vs CIT (1999) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding what is doubtful debt and directed all Income Tax Officers to treat such accounts as not forming part of income of assessee until realized. Circular of 1984, was found not to travel beyond powers of CBDT exercised under Section 119 of the I.T. Act. Hon ble the Apex Court in the judgments in K.P.Varghese vs. ITO (1981) 131 ITR 597; Navnitlal (C) Javeri V. K.K.Sen (1965) 56 ITR 198, and Keshavji Ravji Co. Vs. CIT (1990) 183 ITR 1, has reiterated this view and also held that Circulars of Central Board of Direct Taxes are legally binding on Revenue and this binding character is attached to such Circulars even if they are found, not to be in accordance with correct interpretation of Section and they seem to depart and deviate from such construction. Such Circulars are issued just in order to tone down the rigour of law and are issued in exercise of statutory powers under Section 119. Thus, they are binding on authority in the administration of I.T. Act. In the case of State Bank of Travencore(1986), since CBDT Circular of October 9, 1984, which was made applicable for and from assessment year 1979-80, was not brought to the notice of the Hon ble Court, therefore, the Court procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision for doubtful debt . After 1.4.1989 under Section 36(1)(vii), a distinction has been made between write off and provision for doubtful debt . It is for assessee to establish that the provision for doubtful debt was made as the loan was irrecoverable. 20. In a later three Judge Bench Judgment in Catholic Syrian Bank Ltd vs. Commissioner of Income Tax, Thrissur (2012) 3 SCC 784, Banks would be entitled to both deductions, one under Section 36(1)(vii) on the basis of actual write off and the other under Section 36(1)(vii-a) of the I.T. Act, on mere making provision for the kind of bad debts specified therein. Such deductions do not amount to double benefit in view of proviso to Section 36(1)(vii) of the I.T.Act. 21. A bare reading of provisions of Sections 36(1)(vii) and 36(1)(viia) would show that they provide for separate items of deductions. 22. Provisions of Section 36(1)(vii) would come into play in the grant of deductions, subject to limitation contained in Section 36(2) of the I.T.Act. Any bad debt or part thereof which is written off as irrecoverable in the accounts of assessee for previous year is the deduction which the assessee would be entitled to g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere provision without insisting on actual write off is enough. It has been classified by Circulars of CBDT that Clause (vii-a) applies only to rural advances. 29. Once CIT(A) and I.T.A.T having considered judgments on issues and examining relevant Circulars issued by CBDT and facts and provisions of law, and also upon being satisfied that requirements on Sub-Section 36(1)(vii) and Sub-Section 36(2), have been adequately met, have held that the claims on deduction on the ground of write off of bad debts of assessee corporation, having become irrecoverable are covered by provisions of Sub-Section 36(1)(vii) and not under Sub- Section 36(1)(vii-a) of the I.T.Act,1961, we do not find any justification to reopen the issues. Moreover, Sub-Section 36(1)(vii) deals with general deductions available to bank and even non-banking business upon their showing that an amount had become bad and written off as irrecoverable in the account of assessee for the previous year satisfying the requirements contemplated in that behalf under Section 36(2). On the other hand, Sub-Section 36(1)(vii-a) of the I.T.Act deals with bad and doubtful debts in case of rural advance. Circulars of CBDT as ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer has placed reliance upon judgment in State Bank of Travancore (1986) which was not reiterated in the case of UCO Bank (1999). 31. Assessing Officer allowed the write off of ₹ 1,81,838.78 as bad debt which also included ₹ 37,85,000/- claimed to be irrecoverable on account of investment in equity and preference shares in some companies to which as per loan agreement, Assessee Corporation had given loan/advances. Thus, assessee company MIDC claimed, that these shares being a part of bad debts have ceased to have any value. They were not held as a capital investment but were held as stock in trade. CIT(A) held that since investment in capital of an industrial enterprise is an integral part of carrying the business operation, such investment has to be considered as a stock in trade. There was hardly any difference between loan extended or equity / preference capital assistance given to small industrial units/enterprises as both fall within business activity of Assessee Corporation. If writing off of term loan to sick and defunct units was accepted by Assessing Authority, there was no reason why investments of ₹ 37,85,000/- in equity/preference capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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