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TMI Blog2003 (2) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had written off the debt within a very short time, namely within 2 months only and this according to him was highly improbable for a money lender to do. He rejected the explanation of the assessee that the same was written off on humanitarian grounds. The claim for deduction of bad debts was, therefore, rejected. The CIT(A) deleted the addition on the ground that after the amendment in section 36(1)(vii) there was no need for the assessee to show as to what steps had been taken for recovery, and writing it off as irrecoverable was sufficient. 3. The contention of the ld. D.R. was that a bad debt can be written off only when it has become bad and that it has become bad has to be shown to the taxing authorities. Hence according to him simply writing off the debt would not entitle the assessee to claim deduction under section 36(1)(vii). The ld. counsel for the assessee, at the outset, clarified that the debt was not written off within two or three months of giving the advance, but it was written off two years after the date of advance. Further, the debt was written off because according to the assessee it had become irrecoverable and hence the deduction be allowed. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round that a suggestion was mooted to the Board by some of the Chambers of Commerce, to the effect that, in the case of banks, the Assessing Officer should give full deduction for all bad and doubtful debts actually written off in the books of the banks without any questioning, since the banks are in a better position to decide whether any of their debts are realisable or not. From assessment year 1989-90, the view of the Chambers of Commerce had been given statutory recognition in respect of all types of business. (page 2047 - Law of Income-tax by Sampath Iyenger - Vol. II, 8th Addition). 6. Another aspect of the matter is that, there always has been an attempt to bring taxable income closer to the real income. In this connection it may be worthwhile noting that the provision for deduction of bad debts was introduced in the Income-tax Law for the first time in 1939, but even prior to the insertion of such provision in the 1922 Act, the Privy Council in CIT v. Sir S.M. Chitnavis 6 ITC 453 had ruled that such bad debts were necessarily allowable as deduction on grounds of first principles of accountancy. At page 457 of the report, the Privy Council observed as follows : (as repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987, has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessees. 8. Thus on the basis of the above discussion, we are of the considered opinion that once the assessee has written off a debt as irrecoverable, the Assessing Officer need not enquire as to whether it has been properly written off or not. It is, undoubtedly, a liberal approach adopted by the Legislature to curtail litigation. This view is also reflected by the Ahmedabad Bench of the Tribunal in the case of ITO v. Ashokumar Lalit Kumar (1995) 53 ITD 326 . In the said case, the Tribunal did not allow the deduction a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the money was not forthcoming and the appellant was fairly certain that the same was irrecoverable, the amount was written off. This finding of the CIT(A) is not disputed by the department. Hence the deduction claimed by the assessee has to be allowed. 10. At this juncture, it is also worth considering the consequences that may follow if the assessee is not allowed deduction in the year of write off. Prior to its omission by the Direct Tax Laws Amendment Act, 1987, clauses (iii) and (iv) of sub-section (2) of section 36 read as follows : (iii)any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year (being a previous year relevant to the assessment year commencing on the Ist day of April, 1988, or any earlier assessment year), but the Assessing Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv)where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the Ist day of April, 1988, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(vii) for ever. Simultaneously, sub-section (6) of section 155 has also been omitted by the Amending Act 1987. This provisions enabled the Assessing Officer to allow deduction for the earlier previous year. Hence, we emphatically reiterate that by not allowing the deduction in the year of write off, the assessee is permanently deprived of the deduction. On the other hand, by allowing the deduction, the revenue is not permanently prejudiced. If the assessee recovers any debt of which he had claimed deduction earlier, it will be brought to tax by virtue of section 41(1) of the Act. 12. In majority of the decisions of the Tribunal available so far, the issue has been decided in favour of the assessee. The said decisions are as follows : 1. Dy. CIT v. Paks Trade Centre (1995) 53 ITD 313 (Cal.). 2. Jayanti Commerce Ltd. v. Asstt. CIT (1997) 61 ITD 183 (Cal.) 3. Pradeshiya Industrial Investment Corpn. of U.P. Ltd. v. Dy. CIT (1996) 86 Taxman 165 (Trib.) 4. J.D. Castings Forging P. Ltd. v. Asstt. CIT (1998) 100 Taxman 109 (Cal.) (Trib.). We do not wish to canvass the view that simply because majority of the Benches of the Tribunal have decided the issue in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fronting the affected parties have serious consequences of the decision being in violation of the principles of natural justice. In my humble view whereas it may be open to us to support our findings by the decisions of the jurisdictional High Court or that of the Supreme Court being of binding nature we will be violating principles of natural justice by relying upon some decisions affecting the other parties without giving them a chance of defence. Ordinarily I would have preferred to write an order taking an independent view on the basis of the pleadings of the parties and the material on record. However, the proposed order has placed addition burden upon me of dealing with the case law referred to in the proposed order. 16. The dispute in the appeal is relating to a claim of ₹ 1,83,500. The assessee had claimed loss in money-lending business of ₹ 1,83,500. The facts relating to this loss may be derived from Para 7 of the assessment order. A sum of ₹ 1,83,500 was claimed to have been advanced to Mr. Shankarlal, Proprietor of M/s. Anmol Fabrics, Ichalkaranji, on 3-1-1991 and 10-1-1991. This amount was written off on 31-3-1991. A letter written in Hindi by Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial crisis on humanitarian grounds, the deduction of which was not permissible under the provisions of the Act. 18. The assessee appealed to the CIT(A) and claimed that the finding of the Assessing Officer that the debt had been written off within two or three months of giving the advance was incorrect as the amount had actually been written off two years after the date of advance. It was further claimed that after the amendment of section 36 any amount written off by the assessee is allowable as a deduction. The findings and the conclusion of the CIT(A) is contained in Para Nos. 3 and 4 of his order. I consider it worthwhile to quote the same :- 3. The second ground relates to non-allowance of claim of bad debts amounting to ₹ 1,83,500. The Assessing Officer has discussed this issue at Para 7, Page 3 of the assessment order. It is admitted that the assessee is carrying on money lending business and in doing this business the assessee had claimed loss of ₹ 1,83,500. The assessee had advanced a sum of ₹ 1,83,500 to one Shri Shankarlal, Prop. M/s. Anmol Fabrics, Ichalkaranji, on 3-1-1991 and 10-1-1991. Necessary letters of confirmation are placed on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en off within two or three months of giving the advance, but it was written off two years after the date of advance. Further, the debt was written of because according to the assessee it had become irrecoverable and hence the deduction be allowed. On due consideration of the rival contentions and the material on record, we are inclined to accept the contention of the ld. counsel. Before clause (vii) of sub-section (1) of section 36 was amended with effect from 1-4-1989, the wordings of the said clause were any debt, or part thereof, which is established to have become a bad debt in the previous year. In place of these words, now the wordings are any bad debt or part thereof which is written off as irrecoverable.... 21. Though my learned Brother has observed that we are inclined to accept the contention of the learned counsel, yet he has not given any reasons for accepting the statement of the learned counsel that the debt was not written off within two or three months of giving the advance, but it was written off two years after the date of advance. I must admit my failure to appreciate the contention advanced on behalf of the learned counsel. As pointed out earlier t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of reducing the tax liability. If the decision of the CIT(A) is interpreted to have ignored the finding of the Assessing Officer, then that finding of the Assessing Officer becomes final as not having been controverted and rebutted by any evidence. Then the next question that arises is as to whether the claims made with a clear intention of reducing tax liability are allowable as a deduction simply on the basis of write off made by the assessee in the books of account. In my considered view the assessee will not be entitled to deduction in respect of any claim written off in the books of account unless the claim is established to be genuine. No material has been placed on record to rebut the finding of the Assessing Officer that the claim is not genuine. Therefore the assessee was bound to fail. The amendment of section 36(1)(vii) does not give a tool in the hands of the assessee for claiming a deduction of any amount written off in the books of account. 24. Section 36(1)(vii) before its amendment by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1-4-1989 provided for deduction in respect of any debt which was established to have become bad in the previous year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of K.P. Varghese v. ITO (1981) 131 ITR 5973 . 26. The learned Accountant Member in Para 9 of the proposed order has referred to the finding of the CIT(A). To quote in the case before us the CIT(A) has given the following findings :- since the money was not forthcoming and the appellant was fairly certain that the sum was irrecoverable the amount was written off. This finding of the CIT(A) is not disputed by the Department. Hence the deduction claimed by the assessee is to be allowed . 27. With due respects to the learned Accountant Member, I have a strong reservation regarding the aforementioned finding. This is an opinion given by the CIT(A) in the order and is not a finding based on any material. There was a gap of only two months between the advancing of the money and the end of the previous year and therefore there was no question of the money not being forthcoming and the appellant have been fairly certain that the sum was irrecoverable. It is to be borne in mind that the assessee is engaged in the money lending business. Advancing of money to parties is the business of the assessee. The assessee had advanced the money as a loan and the assessee was entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t were used, now the amended provision incorporates the words any bad debt . So it is evident from the language of post-amendment of section 36(1)(vii) that a deduction is permissible in respect of any bad debt and not of any debt. Every debt cannot be said to be a bad debt. Once it is established that there is a bad debt, then the assessee has the option of claiming the deduction in any previous year and the Assessing Officer shall have no jurisdiction to question the year of allowability of the claim. However, it is necessary for the assessee to establish that a debt had become bad. If the debt is not a bad debt, the same cannot be claimed as a deduction under section 36(1)(vii). If every debt were to be allowed as a deduction, then the assessee interested in evasion of tax would get a free hand which is not intended nor is it desirable to interpret the law in such a manner so as to give a tool in the hands of tax evaders. In my considered view section 36(1)(vii) permits a deduction of bad debt and not of any debt. With due respects to the learned Accountant Member I differ with his opinion and hold that it is necessary for the assessee to establish when called upon to do so th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not genuine. In view of this finding the claim of the assessee does not fall under section 36(1)(vii). The claim is therefore disallowable on that ground especially when the CIT(A) has not recorded any finding to the contrary. 32. As already pointed out, even if we have to fall back on section 36(1)(vii), the claim is not allowable. My learned Brother has referred to the decision of the Bombay High Court in the case of Jethabhai Hirji Jethabhai Ramdas (supra) and has quoted the following observation :- While the onus of establishing that the write-off of the alleged bad debt is proper and permissible in the circumstances of the case is undoubtedly upon the assessee, the department cannot insist on the demonstrative proof which is quite infallible. 33. Whereas the decision recognized the fact that there can be no infallible evidence to show that the write off is proper and permissible in the circumstances of the case, the decision does not support the proposition that the assessee is not required to give any evidence whatsoever. In Para 6 of the order my learned Brother has touched upon the bringing of taxable income closer to the real income. Since I have highlighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been given a go-by. Similarly reference has been made to the decision of the Delhi Bench of the Tribunal in the case of India Thermit Corpn. Ltd. (supra). My learned Brother has quoted from Page No. 311 as under :- Therefore, in our considered opinion the debt written off has to be bad debt. It is the prior condition for allowability of the deduction under section 36(1)(vii) even after the amended provision. Once the debt is established to be bad, deduction will have to be allowed for the year in which the assessee writes of the same. Assessing Officer cannot question the year in which the debt becomes bad. (Italicised by us). 35. A plain reading of the quotation should not leave one in doubt that the Bench has highlighted that it is the prior condition for allowability of the deduction under section 36(1)(vii) even after the amended provision that what is allowable as a deduction is a bad debt. Once the debt is established to be bad (Italicised mine) the deduction will have to be allowed for the year in which the assessee writes off the same. The decision clearly supports my view. In Para No. 9 my learned Brother has pointed out that in Para 5 we have observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g has not been rebutted by any evidence. The CIT(A) has also not specifically recorded any finding regarding the genuineness of the transaction to the contrary. (3) That the Assessing Officer is empowered to demand evidence in support of the claim of deduction. Section 36(1)(vii) read with section 36(2) as amended by the Amendment Act of 1987 has taken away the power of the Assessing Officer to question the year of allowability of a deduction relating to a bad debt. The deduction permissible under section 36(1)(vii) is in regard to a bad debt and if the assessee fails to establish on being asked to do so that the debt had become bad, the Assessing Officer is justified in disallowing the claim. (4) That in this case it is a matter of fact that the assessee did not establish that the loan advanced to Shri Shankarlal was a genuine loan and had become bad debt as on the end of the previous year. The Assessing Officer was thus justified in disallowing the claim of ₹ 1,83,500. The decision of the CIT(A) that after the amendment of section 36(1)(vii) and section 36(2) by the Income-tax Amendment Act of 1987, the deduction is permissible in respect of any debt written off by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Judicial member, on the other hand, has held that the aforementioned amendment has brought about only one change, i.e., the year of allowability. The assessee has to establish when called upon to do so that the debt was a bad debt and his failure would warrant a disallowance. 5. The dissenting orders and necessary records are forwarded alongwith this Reference. THIRD MEMBER ORDER Per Shri J.P. Bengre, Vice-President.-There being a difference of opinion between the Members constituting the Division Bench, the Hon ble President has referred, under section 255(4) of the Income-tax Act, 1961, the following points of difference to me as a Third Member to resolve the controversy : (1)Whether the assessee had written off a debit within the period of less than three months at the end of the previous year from the date of advance or more than two years from the date of advance? (2)Whether the assessee is entitled to deduction in respect of the claim of a debit notwithstanding the uncontroverted finding of the Assessing Officer that the claim was not genuine? (3)Whether the assessee is entitled to deduction of any debt written off in the books of account as a bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear. Therefore, now it is not necessary for the assessee to satisfy the tax authority with evidence that the debt has become bad. If the assessee in his prudence writes off in his books of account, the debt as a bad debt it is sufficient compliance of the provision. Therefore, he after considering various decisions such as Jethabhai Hirji Jethabhai Ramdas (supra) Sir S.M. Chitnavis (supra); Circular No. 551 dated 23-1-1990 issued by the Central Board of Direct Taxes as appearing in 183 ITR 7 (Statute) and the decisions of the Tribunal Benches, viz., Paks Trade Centre (supra), Jayanti Commerce Ltd. (supra), Pradeshiya Industrial Investment Corpn. of U.P. Ltd. (supra) and J.D. Castings Forging (P.) Ltd. (supra) and also taking support from the decision of the Hon ble Supreme Court in P.J. Chemicals Ltd. (supra), came to the conclusion that the assessee would be entitled for deduction if he writes off the debt in the books in the year under consideration and it is not necessary for him to establish that the debt has become bad. Therefore, he held that the assessee is entitled for deduction under section 36(1)(vii) of the Act. 4.1 The learned Judicial Member, first of all, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee must satisfy the Assessing Officer that in fact the debt or the loan became irrecoverable in the year of account. In this connection, reliance was placed on the decision of the Bombay High Court in Raja Bahadur Mukundlal Bansilal v. CIT (1952) 22 ITR 94. She further contended that before the amendment, the assessee was to prove that the debt had become bad in the relevant previous year. Such requirement led to enormous litigation and, therefore, the amendment was brought, so as to eliminate the controversy with regard to the year in which the debt had become bad. If the debt had become bad, it would be allowed in the year in which it was written off by the assessee. However, nowhere did it say that any debt could be written off and claimed as a bad debt. Had that been the intention of the Legislature it would have mentioned any debt or part thereof which is written off as irrecoverable. On the contrary the amended clause mentions any bad debt . In support whereof, reliance was placed on the decision of the Delhi Bench of the Tribunal in India Thermit Corpn. Ltd. (supra). She has also referred to the decision of the Ahmedabad Bench of the Tribunal in Dy. CIT v. Gobind Glas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egislature is clear that it did not want to burden the assessee to prove that the debt has become bad. It is now left to the prudence and judgment of the businessman to consider it as a bad and irrecoverable debt and write off the same in his books of account. If he writes it off as irrecoverable in his accounts in the previous year, it is sufficient compliance of the provisions to claim the deduction under clause (vii) of sub-section (1) of section 36 of the Act. The onus is of course on the assessee to show that he has written off the debt which is permissible under the amended provisions. But the department cannot insist on a demonstrative proof of the same. Here I would like to mention that in the case of Jethabhai Hirji Jethabahi Ramdas (supra) at page 805, the Hon ble jurisdictional High Court has observed as under : While the onus of establishing that the write-off of the alleged bad debt is proper and permissible in the circumstances of the case is undoubtedly upon the assessee, the department cannot insist on the demonstrative proof which is quite infallible. The learned Accountant Member has relied upon the decisions of the Privy Council in Sir S.M. Chitnavis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, some of which are cited by the learned Counsel for the assessee and have been mentioned above. In a recent decision in CIT v. Girish Bhagwatprasad (2002) 256 ITR 772 , the Gujarat High Court has also taken a similar view. In that case, the assessee had written off an amount of ₹ 4,36,307 on account of its having become a bad debt. The Assessing Officer held that the assessee could not prove that the debt had become bad and that the assessee did not try to recover the amount and further that mere delay in recovery did not convert the debt into a bad debt. On appeal, the CIT(A) found that the amended provisions of section 36(1)(vii) of the Act were applicable under which the assessee was not required to establish that the debt had become bad in the previous year and mere writing off of the amount as bad debt was sufficient. Even on the merits, the first appellate authority found that there was no chance for the assessee to recover the amount and hence, the debt really became bad. The Tribunal also upheld the contention of the assessee on the basis of the provisions of section 36(1)(vii) of the Act which came into force from April 1, 1989. On an application filed under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other goods and also in money-lending, had transactions for several years with a Bombay firm, one of whose partners, having a 16% share, was the father of three partners of the assessee. The assessee had dealings for several years with the Bombay firm. The Bombay firm become debtor of the assessee and there was a flow of monies from the assessee to the Bombay firm till March 10, 1952. In April, 1952, the Bombay firm became insolvent. In section 200B ending with October 18, 1952, the assessee wrote off the sum of ₹ 2,68,385 due from the Bombay firm as irrecoverable and claimed deduction thereof as a bad debt. On these facts, the Hon ble Supreme Court has laid down the principle that a bad and doubtful debt due to an assessee in respect of banking or money-lending business is allowable under section 10(2)(xi) of the Indian Income-tax Act, 1922, if it is a debt written off as irrecoverable in respect of loans made in the ordinary course of such business. A bad and doubtful debt in respect of a business other than banking or money-lending is allowable even if it is not in respect of a loan; but a debt due in the course of the business of money-lending is not allowable unless it i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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