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TMI Blog2003 (7) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of financing industrial enterprises, had not done any significant activity so as to get it reflected in the audit report except the fact that it had transferred the shares of Perfect Refractories Limited held as investment for consideration equal to the face value and that it had written off Rs. 3 lakhs which was given as loan to Moradabad Syntex Pvt. Ltd. It was also noticed by the Assessing Officer that the assessee had claimed administrative expenses to the tune of Rs. 1,24,749 as compared to Rs. 98,736 which was the amount claimed in the previous year. The Assessing Officer dealt with the facet of sale of shares and came to hold that the assessee had sold shares worth Rs. 5,40,640 of Perfect Refractories Limited to the directors of the company, Smt. Padma Maheshwari and Shri Rajesh Maheshwari, at the face value of Rs. 10 per share and then the transfer/sale had taken place a month before declaration of dividend. It was found on scrutiny of the accounts that the book value of these shares was Rs. 65 per share. In this backdrop, the assessee was specifically asked to show cause as to why the provisions of section 94 of the Act should not be invoked as there had been avoidan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten back unpaid interest of the loan amount. Being of this view the Assessing Officer added Rs. 91,748 as sale transaction of shares to Smt. Padma Maheshwari, Rs. 3 lakhs towards disallowance of written off bad debts of Moradabad Syntex Ltd. and interest of Rs. 59,512 towards accrued interest at the rate of 15 per cent. on the amount deposited with the above-company. It is pertinent to state here that some more amounts were added but we are not concerned with the same in the present appeal. Being aggrieved by the aforesaid order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Jabalpur. The first appellate authority took note of the reasoning of the Assessing Officer and came to hold that the activity of the company was required to be investigated and transfer of shares, etc., and to bring on record the reasons for its conclusion. With regard to report of bad debts of Rs. 3 lakhs the first appellate authority scanned the reasons ascribed by the Assessing Officer and concurred with him. However, as far as the addition of income of Rs. 59,512 as accrued interest is concerned the Commissioner of Income-tax (Appeals) came to hold that the addition was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In support of this appeal it is submitted by Mr. Rohit Arya, learned senior counsel for the Revenue, that the Tribunal has grossly erred in holding that the debit of Rs. 3lakhs was allowable under section 36(1)(vii), though no evidence was brought on record to show that there had been determination that the debt had really become bad. It is submitted by him that the first appellate authority had given adequate reasons and has rightly come to hold that the claim of the assessee is premature and has not ripened and the Tribunal has erred in dislodging the said finding. It is contended by him that a debt can become bad if it becomes irrecoverable and in the case at hand it was not barred by the law of limitation; that there was no denial by the loanee that it was incapable of paying or would not pay; that the authorities have given germane and cogent reasons, that the assessee had not initiated proceeding for recovery and the company had not gone for liquidation; that the loanee has shown the existing loan in its books of account; and that there is no proof of bad debt. As far as the second facet is concerned it is submitted by Mr. Arya that the assessee-company had not been involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall take up the issue with regard to the concept of bad debt. In this context section 36(1)(vii) is relevant. The said provision is reproduced for proper appreciation: "36. (1)(vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause; Explanation.--For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee." The submission of Mr. Rohit Arya is that the amount can be written off as bad debt if it is irrecoverable. He has referred to the order of the Assessing Officer to show that the reasons are cogent and germane. He has also drawn our attention to the order passed by the first appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) and 36(2) to rationalise provisions regarding allowability of bad debts.--The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability 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 assessee". In the aforesaid clause the purpose of the amendment has been highlighted as on the earlier provision the assessee was required to establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible that in the present case the assessee had written off the bad debt as the loanee company though has not admitted it as bad, as it expressed its financial condition by indicating that it is not in a position even to pay interest and they are approaching the BIFR in an effort to revive the unit. The company may not go into liquidation but when the financial condition is not good and that has been taken note of by the Tribunal and the assessee-company treats the loan as a bad one being in a position of irrecoverable, the same is a finding of fact and does not involve substantial question of law. Thus, we do not find any flaw in the order passed by the Tribunal. The second limb of controversy relates to justifiability of the conclusion that the assessee was entitled to the benefit of the provision of section 94(3)(b) of the Act in respect of the dividend on the shares transferred to one of its directors. The submission of Mr. Arya is that the director is the wife of the managing director of Perfect Refractories Ltd. and, therefore, it was known that the shares shall fetch more money and hence, there was avoidance of tax. It is also put forth by him, as has been indicated before, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoidance of tax must be by way of an exception to the regular practice of the assessee and must not be part of a regular practice followed by the assessee. The Revenue, however, pleaded that the word 'systematic' did not involve the idea of number and that it only meant that the avoidance must be according to plan or organized method, that is, must be designed or deliberate. But this construction cannot be accepted and there are several reasons why it does not appeal to us. One reason is that the requirement that the avoidance must be intentional or designed is already brought in by sub-section (2) and if the avoidance is not designed or deliberate it would not be avoidance within the meaning of that sub-section and section 44F would not apply and there would be no necessity to provide for exemption under the proviso. Secondly, if the Legislature wanted to prescribe in the proviso that the avoidance must not be designed or deliberate, the Legislature could have used the words 'designed' or 'purposeful' or 'deliberate' or 'intentional' but instead the Legislature used the word 'systematic'. Moreover it is a wellsettled rule of interpretation that where two or more words susceptible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be noted that section 44F was introduced in our Act by an amendment made in 1939 after the decision in Bilsland's case [1936] 20 TC 446; [1936] 2 All ER 616 (KB). The Legislature when it enacted section 44F must be taken to have been aware of the decision in Bilsland's case [1936] 20 TC 446; [1936] 2 All ER 616 (KB), interpreting the words 'exceptional and not systematic' and yet the Legislature retained the same phraseology as in section 33, sub-section (4). It may, therefore, be reasonably assumed that the words' exceptional and not systematic' were used by the Legislature in the proviso in the same sense in which they had been judicially interpreted in Bilsland's case [1936] 20 TC 446; [1936] 2 All ER 616 (KB). If this is the true meaning it is clear that the avoidance of tax in the present case was exceptional and not systematic, for there was only one instance of such avoidance in the accounting year and it is not possible to say that it was part of a regular practice followed by the assessee." We may state here that we have quoted extensively from the aforesaid judgment as the said decision in our considered view squarely applies to the present case. There has been no syste ..... X X X X Extracts X X X X X X X X Extracts X X X X
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