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TMI Blog1987 (9) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of bad debt as allowable expenditure and was allowed treating it as bad debt. Again certain amounts which were considered as good were also claimed as bad debts in the statement of information regarding the bad debt filed. In view of this, there was an underassessment of income and therefore, notice u/s 148 was served on the assessee on 27-3-1982 but the assessee filed the return in response to this notice on 29-4-1982 showing the loss figure as it was shown in the revised return at Rs. 24,54,110." 2.2 The assessee raised the objection against the reopening before the IAC u/s 144B of the Act but the same was rejected as follows as stated in IAC's direction : "It is seen that originally some wrong claims put forth by the assessee were allowed which was not in accordance with the law and the same are required to be seen properly and in light of the relevant provisions of the Act. This cannot be said as mere change of opinion of the present ITO in respect of the issue involved." 2.3 On appeal also the Commissioner (Appeals) confirmed the validity of the reopening, vide para 2 of his order, the relevant portion of the order is reproduced below : "The Income-tax Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e debt outstanding from M/s. Gayatri Cast (Bhavnagar) as far as the claim regarding the bad debt was concerned. He, therefore, drew our attention to page 62 of the paper book and submitted that in fact no such claim was made in respect of the bad debt and, therefore, there was no question of allowing the same. Besides, in respect of the various debts usually the Income-tax Officers ask the details regarding the history of the debt, steps taken and the status of the debt and the same were given together with the return of income filed originally and it was highlighted that all the necessary details so as to enable the Income-tax Officer to evaluate the claim regarding bad debt allowance was given and the Income-tax Officer had after application of the mind allowed the same. Not only that usually the Income-tax Officers ask the assessee to submit the details in respect of the debts exceeding an amount of Rs. 1 lakh but in this case even the debts for which lesser amounts were outstanding were also called for certain details and the same were supplied. The Income-tax Officer was also apprised of the facts regarding writing off of the debts by the bank because the fool-proof system wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all for evidence regarding the same only. This being the position it was stated that the original assessment completed by the Income-tax Officer had to be read in the context of above clarifications. Again, nowhere specific reasons are given by the Income-tax Officer for assuming jurisdiction u/s 147(b) of the Act. What was the specific information with the Income-tax Officer is nowhere stated. It is not the case of the department that the assessee filed inaccurate particulars and therefore, reopening was justified u/s 147(a) of the Act. He went to the extent of saying that in fact there was no change of opinion even by the income-tax Officer but because of certain audit observation he was constrained to invoke the provisions of sec. 147. 2.5 With regard to the necessary provision having been created and the amount lying to the debit of the respective debtors not having been written off it was stated that such compliance is as per the law for which reliance was placed on in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95 (Guj.). In that decision even the Circular issued by the SBDT is also considered and if appropriate provision is made in the accounts it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully governed the facts of the case. Further, reliance was also placed on in the cases of United India Fire General Insurance Co Ltd. v. CIT [1985] 153 ITR 81 (Mad.), Smt. Saraswati Devi Lohia v. CIT [1964] 51 ITR 491 (All.) and ACED v. Balakrishna Menon [1967] 64 ITR 223 (Ker.)(FB). 2.8 While concluding this ground, the learned representative of the assessee clarified that even with regard to the loss from business the same was required to be treated as claim in respect of the bad debt as per the relevant Circular, instruction issued by Reserve Bank of India/ Finance Ministry. Again, the decision in Smt. Saraswati Devi Lohia's case was not at all applicable to the facts of the case since there was further information Bringing to out notice the reassessment order, he drew our attention to the words "so allowed treating it as bad debt" mentioned in the first paragraph of one of the assessment orders implying thereby that Income-tax Officer had fully applied the mind when originally the claim was allowed. 3. In our opinion, jurisdiction for reopening of assessment has not been legally assumed and therefore, the reassessment has to be cancelled. The reasons are as follows. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rring month. The necessary details with regard to the bad debt claim as was usually asked for in assessee's case in past was also asked for while making the assessment for this year and the same was supplied with appropriate details. We do not know the time when and how the Income-tax Officer came to know about non-application of mind with regard to the aspect of the bad debt because the reopening is also made for other ground viz. that mere provision was made in the accounts instead of writing off of the bad debt itself. Again, there is no clear case of any wrong allowance in respect of the bad debt because the instances which were highlighted during the course of submissions only were in respect of certain debts where either the legal suits were pending in the Court or no amount was recovered in spite of the decree in favour of the bank or nothing can be recovered from the guarantor. From the material which was filed at the time of original assessment it cannot be said that such claim as made could not be considered as bad if considered in the context of system in which the bank evaluates the financial aspects of the irrecoverable debts. During the course of assessment proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reby or (ii) from other enquiry or research into facts or law. We do not find any material clearly pointed out on the basis of which it can be stated that any investigation of the material on record or the facts disclosed or any inquiry or research into facts or law was ever undertaken by the Income-tax Officer. Had it been so he would have stated so in the reasons recorded u/s 148. It is not done and therefore, we refrain to presume that the same was done. Therefore, the mandatory condition prescribed u/s 148(2) is not complied with validly. Since this is the position, even applying the ratio laid down by Kalyanji Mavji Co.'s case the conclusion has to be reached in favour of the assessee because the same decision further holds on page 288 that where the Income-tax Officer had no subsequent information but merely proceeded to reopen the original assessment without any fresh facts or materials or without any inquiry into the materials, provisions of section 34(1)(b) would not apply. 3.2 The learned Departmental Representative further submitted that decision in the case of Indian Eastern Newspaper Society overruled only a particular part of the decision rendered in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptember, 1984 u/s 143(3) / 144B/ 147(b) the basis on which the Income-tax Officer sought to disallow the claim of the assessee as stated in the draft assessment order passed on 14th March, 1984 is as under :- "The assessee has claimed a sum of Rs. 26,97,891 as bad and doubtful debts written off by debiting the same to the commission account. The total bad debts are shown at Rs. 54,26,000 out of which Rs. 27,28,109 have been added back by the assessee but the remaining amount of Rs. 26,97,891 have been thus claimed as admissible by not adding it back to the result disclosed. The claim of the assessee is that the amounts are written off to the commission account after due consideration by the Highest Authority of the Bank and finding it to be not recoverable at any future date. It is however admitted that this is mere provision in the sense that the corresponding accounts of the parties concerned are not credited with the relevant amount and the recovery proceedings against each of the parties involved are in progress; and in that sense the debts cannot be said to have been completely written off in the books of account. It is, therefore, not deductible expenditure from the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill considered as good law. 4.5 It appears to be the main contention of the learned counsel of the assessee that once the assessee has determined a debt or part thereof as irrecoverable, the ITO has no option but to accept the claim of the assessee. In this connection, he has submitted that there are 10 parties/accounts in respect of which a sum of Rs. 26,97,891 has been determined as bad debts in A. Y. 1978-79. I may add that the assessee has also determined a sum of Rs. 27,70,780 in respect of 201 loan accounts in A. Y. 1980-81 and Rs. 16,97,211 in respect of 612 loan accounts in A. Y. 1981-82. In my opinion, the contention of the assessee in this regard is not correct. What is required to be established is that these debts have become bad and the assessee cannot raise the plea that the jurisdiction of the ITO is excluded from going into the question whether these amounts have really become bad. What the ITO of the Act (sic). The reliance placed upon by the assessee's advocate also on the decision of Gujarat High Court in the Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166 is equally misplaced inasmuch as the same is without any reference to the facts and circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reserved of the bank while reflecting the same in the balance sheet as per the appropriate schedule prescribed in the scheme in the relevant Act. (d) Such evaluation of the debt undergoes critical examination by the Reserve Bank, Internal Auditors, Statutory Auditors, Inspection Department as also the State Bank of India-the holding company of the assessee. (e) In the income-tax proceedings the assessee always furnishes every year to the Income-tax officer a party wise list of irrecoverable debts in respect of which the deduction is claimed at the instance of the Income-tax Officer and in accordance with the past practice further details factual as well as historical are also supplied in respect of those accounts in which substantial amounts are written off. The details supplied included the amounts outstanding, the nature of the debt, marketability and the value of the securities available, amount receivable from credit guarantee organization of the Reserve Bank of India and other relevant material factors leading to the write off. (f) The write off is usually authorised by the Committee of the Directors who meet from time to time regarding sanctioning of the limits in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by calling for requisite data / particulars from the branches by their respective controlling offices. In spite of close monitoring and follow-up of advances, inevitably some of the advances tend to become bad for various reasons beyond the control of the bank. When the conduct of the borrowal accounts is not satisfactory or the repayment of the dues is not as per the schedule prescribed by the bank, more vigorous steps / checks are undertaken. 5.2 When all steps for recovery and nursing become futile and/or when there is no recovery/movement in the accounts for a long period of time and the extreme step of filing suit against the borrowing unit for recovery of dues becomes necessary, the outstanding in these accounts are transferred to Protested Bills Account, according to the internal procedure of the bank. The branches submit quarterly statement of the protested Bills Account for review at the Controller's level and a thorough and exhaustive annual review of the advances transferred to Protested Bills Account is done every year, at various management levels, to ascertain the position of good and recoverable portion of the advanced and simultaneously to quantify the bad and ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off' in the income-tax assessment of the bank. 5.5 In respect of the amounts involved in frauds and embezzlement of funds, the actual practice uniformly followed by the bank-in fact for that matter, by the State Bank of India and all its subsidiary banks like the State Bank of Saurashtra is to transfer the amounts to Protested Bills Account pending recovery proceedings, if any, wherever possible. These accounts are also reviewed and the loss on account of these frauds/embezzlement of funds is quantified and written off as bad debts and claimed accordingly. Details of such cases are given to the assessing authorities along with the details of bad debts and such practice is known to the Department and also accepted by it. 5.6 The quantification of bad and doubtful debts and provision thereof is a necessary process and in the process of drawing up of the Profit and Loss Account and balance sheet of the bank as per the provisions of the Banking Regulation Act, 1949 (Section 29 and Third Schedule of the Act), the provision for bad and doubtful debts has to be to the satisfaction of the statutory auditors of the bank is essential. In the audited accounts, presented in the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aggregate average of the advances made at least by the rural branches of the bank is made allowable as ad hoc deduction without there being proof regarding the bad debt and that again is over and above the amount actually proved to have been bad. This amendment is made with effect from 1-4-1980. Of course, we do not find claim on the basis of this sub-clause in any of the years concerned, probably because there did not exist any rural advance. Even if any of the debts is assumed to be premature for the purpose of allowance, yet we do not find any adjustment or rectification in the assessment of the concerned year where the deduction actually lie because it is now incumbent on the part of the Income-tax Officer to make such allowance on certain conditions and under certain circumstances by resorting to the provisions of sub-sec. (6) of sec. 155 as provided in sec. 36(2)(iv) of the Act. It appears, therefore, that in the present Act of 1961 the practical significance of allowance in particular year only in respect of bad debt has lost importance where the rates of tax are uniform. On going through the assessment order, we finding that there is also a disallowance of Rs. 7,50,000 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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