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TMI Blog2003 (1) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... under the said proviso to section 43B. - - - - - Dated:- 29-1-2003 - Judge(s) : R. K. ABICHANDANI., A. L. DAVE. JUDGMENT The judgment of the court was delivered by R.K. ABICHANDANI J.-The Income-tax Tribunal, Ahmedabad Bench "A", has referred under section 256(1) of the Income-tax Act, 1961, the following one question in Reference Application No. 746 of 1988 pertaining to the assessment year 1983-84 and two questions in Reference Application No. 751 of 1988 in respect of the assessment year 1984-85 at the instance of the Revenue arising from the appeals of the assessee Ahmedabad Electricity Co. Ltd. allowed by it. "Reference Application No. 746/Ahd of 1988 assessment year 1983-84: (1) Whether, the Appellate Tribunal is right in law and on facts in accepting the assessee's claim for allowance of bad debts amounting to Rs. 47,79,259? Reference Application No. 751/Ahd of 1988 assessment year 1984-85: (1) Whether, the Appellate Tribunal is right in law and on facts in accepting the assessee's claim for allowance of bad debts amounting to Rs. 58,70,063? (2) Whether, the Appellate Tribunal is right in law and on facts in deleting an amount of Rs. 4,43,76,082 being th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view to reflect in the audited accounts the correct state of affairs of the company's business, as also its assets and liabilities; that considering the financial position of the debtors, it was decided by the management of the assessee not to initiate legal action since that would mean throwing away good money for bad money; that the assessee had disconnected the power supply and none of the parties concerned approached it for restoration of the power supply or any compromise; that most of the defaulters were "sick mills" which were ultimately taken over by the Government of Gujarat and even after the takeover, there was no revival and no recovery with the exception of only one party, namely, Monogram Mills Co. Ltd., and that such subsequent recovery was offered for tax in the year concerned. The Tribunal held that all the conditions necessary for the claim to be allowed were satisfied under section 36(1)(vii) read with sub-section (2) of section 36 of the said Act. For coming to its decision, the Tribunal relied upon the decision of this court in Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166, decisions of the Bombay High Court in Jethabhai Hirji and Jethabhai Ramdas v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, for which it was getting commission, and that the amount collected was credited in a separate account, which appeared directly in its balance-sheet and not in its profit and loss account. The Tribunal found that the amount under consideration was not due for payment to the Government account till the subsequent assessment year. The Tribunal also referred to the amendment brought into force on April 1, 1988, permitting the deductions of taxes and duties paid before the filing of the income-tax returns and held that it supported the view that taxes and duties not statutorily payable during the accounting year did not fall to be disallowed under section 43B of the Act. The Tribunal then held in paragraphs 20 and 21 of its order that, section 4 of the concerned legislation clearly brought out the difference since in respect of the electricity duty the licensee/agent was not liable to pay the duty in cases where it was not able to recover the same from the consumer, and section 43B was not applicable to the facts of the assessee's case, because, the amount which was sought to be added did not belong to the assessee and was retained by it for a short time as a collecting agent or cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee, however, supported the claim mainly on the basis of the decision of the Supreme Court in Allied Motors (P) Ltd.'s case [1997] 224 ITR 677 for contending that the addition was not justified since the amount was paid by the due date. The first question, which is common in respect of both the assessment years, raises a controversy, whether the debt in question had become a bad debt, and whether the deduction was admissible on the ground that it was validly written off as a bad debt in the context of the provisions of section 36(1)(vii) and sub-section (2) of section 36 of the Act, which are reproduced hereunder: "36. Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--... (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year;... (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply:- (i) no such deduction shall be allowed unless such debt or part thereof- (a) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no reasonable likelihood that the debt will be paid are: (i) the length of time the debt is outstanding--the longer the debt is out standing, the more likely it will be considered to be bad debt by a prudent business person, (ii) the efforts that a creditor has taken to collect a debt-the greater the extent to which a person has unsuccessfully tried to collect the debt, the more likely will it be considered to be bad by a prudent business person, and (iii) information about the debtor--a creditor may have obtained reliable information about the debtor, such as, financial difficulties and defaults of the debtor towards other customers or insolvency, that would lead a prudent business person to conclude that a debt is bad. A debt can be considered bad on the occurrence of any of the following events: (i) The death of the debtor without leaving any assets from which the debt could be recovered; (ii) The debtor is a bankrupt or in liquidation and there are no assets from which the debt can be recovered in the forseeable future; (iii) The debt is statute barred; (iv) The debtor is not traceable despite various attempts and there are no known assets from which the deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision not to take legal action should be considered to be reasonable if it can be shown that the anticipated cost of any legal action is prohibitive in relation to the amount of the debt. For claiming deduction, it is not enough that the debt is bad. The bad debt must also be actually written off. Writing off the bad debt is important, because, that will fix the time at which the deduction can be made. A debt does not become a deductible debt, if and when it becomes a bad debt. It becomes deductible if it has been incurred in the production of assessable income, when it is written off. In other words, the crucial time when a debt becomes deductible is the time of writing off, not the time the debt becomes a bad debt. Necessary book-keeping steps must be taken to record that the debt has been written off. It is not possible to write off a debt as bad without making authorised journal entries in the books of account of the business which would clearly show that the debt has been actually written off as bad. If the creditor ceases to recognise the debt as an asset for accounting purposes by removing it from the accounting base records, it is written off. No matter what form a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court restricting the use of such property in any manner shall be deemed to have been withdrawn." The record also indicates that the assessee-electricity company had disconnected electricity supply of these debtors. Under section 24 of the Indian Electricity Act, 1910, it has been provided that, "where any person neglects to pay any charge for energy or any sum, other than the charge for energy, due from him to a licensee in respect of the supply of energy to him, the licensee may, after giving not less than seven clear days' notice in writing to such person and without prejudice to his right to recover such charge or other sum by suit, cut off the supply and for that purpose, cut or disconnect any electric supply-line or other works, being the property of the licensee, through which energy may be supplied, and may discontinue the supply until such charge or other sum, together with any expenses incurred by him in cutting off and reconnecting the supply, are paid, but no longer." Thus, one of the ways statutorily provided for effecting recovery of the dues was by discontinuance of the supply to the consumers. The assessee-electricity company did take such coercive measure of dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him to the State Government. As per the proviso to sub-section (1) of section 4, where the licensee has been unable to recover his dues for the energy supplied by him, he shall not be liable to pay the duty in respect of the energy so supplied. It is, thus, the obligation of the licensee to pay electricity duty to the Government in respect of energy supplied by the licensee to the consumers unless the licensee is unable to recover the dues for the energy supplied by it. If the licensee recovers his dues, but does not recover the amount of duty, in that event, the duty will be a first charge on the amount recovered by the licensee for the energy supplied. The provisions regarding recovery made under section 8 make it clear that if the sum due on account of electricity duty was payable under sub-section (1) of section 4, the sum together with interest thereon shall be recoverable either through the civil court or as an arrear of land revenue from the consumer, or subject to the proviso to sub-section (1) of section 4, from the licensee at the option of the State Government. Therefore, in cases where the proviso to section 4(1) is not attracted and the licensee cannot be said to h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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