9911796707
TMI Blog1987 (10) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration the company filed its return on 29-6-1976 declaring a loss of Rs. 2,45,860. As per its accounts it claimed bad debts as under : Debit Credit Rs. Rs. Opening Balance B/F - 24,500 Short-term Investment 3,40,380 To M.B. Dalal A/c 37,010 Bad debts written off 3,52,890 -------- -------- 3,77,390 3,77,390 -------- -------- 4. At the hearing before the Income-tax Officer the company claimed that as the opening balance of Rs. 24,500 had already been taxed in earlier years and written off as above, deduction on account of bad debts be allowed of the entire amount of Rs. 3,77,390 as against Rs. 3,52,890 written off in the books. 5. On examining the accounts of the company the ITO noted the following position of accounts as shown by it in the past years : -------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two amounts were required to be written off and were written off during the accounting period under consideration as per Resolution passed on 22-12-1975. In this behalf reliance was placed on the observation of the Tribunal in its order dated 14-7-1978 in the assessee's appeals [ITA Nos. 2175 2176 (Ahd.) /77-78] which were to the effect that it was not disputed that even in earlier years the company had made short-term deposits and that those were accepted as business deposits and were also taxed as income of the company. The ITO remarked that the findings recorded by the Tribunal were sub judice in as much as Reference Applications in that behalf were pending and on examining the claim advanced on its own merits he held that absolutely no details regarding short-term investments were available with the company. He further held that though the company had claimed in the form of bad debts a loss of Rs. 3,11,545 being the amount irrecoverable from Gujarat Investment Trust Ltd. and the loss of Rs. 37,010 as irrecoverable bad debts from M/s Mansukhlal bhaidas Dalal but in neither of the two cases the company was able to prove either (i) advancement of the moneys to them or either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out as to what exactly its investments were with a view to recover them, the CIT (A) observed that the company itself had not been able to find out what amount had been invested on behalf of the company by its old Manager. The CIT (A) held that the company was not even able to give the particulars of the debt in question and, therefore, in that situation the assessee could not be allowed any deduction u/s 36(2) of the Act. The CIT (A) even doubted that the investments could be personal investments not of a business nature. 7. To the alternate claim of allowing the amount in question as business loss u/s 37, as advanced in the concluding portion of the letter dated 22-11-1983, referred to above, the CIT (A) held that in the absence of definite information about the debt it was not possible to come to the conclusion that the loss was a business loss and that it was revenue loss. In this behalf the CIT (A) specifically observed that : "The resolution passed by the company indicated that the members have accepted the loss as a capital loss. They have realized that they are unable to reconcile their own books and unable to find out the name of the party if any from whom the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey for bad money and that it was left with no alternative but to write off the amount in question as bad debt and that was done in the relevant accounting year in its books. Mr. Shah submitted that M/s Gujarat investment Trust Co. upon which the Auditors had sought to fix the liability or a part of the liability, had already gone into liquidation and thus the sum in question had in fact become quite irrecoverable and has rightly been written off as such. Mr. Shah further pointed out that while disposing of the company's appeals for the assessment years 1973-74 and 1974-75 and the R. A. arising therefrom the Tribunal had itself held that the amount in question had almost become bad debt and in such state of affairs the department should not be allowed to overlook and by-pass the findings of the Tribunal. In the alternative Mr. Shah submitted that even if the amount in question could not be allowed as bad debts it fully qualified to be allowed as business loss u/s 28 of the Act. In support of his arguments Mr. Shah relied upon CIT v. Equatorial (P.) Ltd. [1974] 37 Tax. 82 and Sarangpur Cotton Mgf. Co. Ltd. v. CIT [1983] 143 ITR 166 (Guj.). 10. As against the above contentions advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant upon the observations of the Tribunal in its orders dated 14-7-1978 and 6-2-1979, referred to above, for the purpose of either advancement of the amount in question by the.company in the ordinary course of its business or treating it as a business loss, Mr. Banthia submitted that irrespective of the fact that the doctrines of estoppel and res judicata were not applicable to the proceedings under the Act, when the orders of the Tribunal are read in their right perspective it would be crystal clear that in the assessment years 1973-74 and 1974-75, in respect of which the said orders were rendered, what had fallen for the consideration of the Tribunal was the question of allowability of certain amount claimed by the appellant as interest payments on its borrowings. The question before the Tribunal, therefore, was whether the borrowings were taken for business purposes and not whether the borrowings were taken for business purposes and not whether the borrowings were spent for or invested in business activity, though the consideration of later question might also be relevant to know the investments of the borrowings by the appellant. Since at the time of rendering its decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an by a banker or money-lender, the debt to be a debt proper has to be one which, if good and recovered would swell the taxable profits. It should not be simply in the nature of repayment of moneys advanced by the assessee to the other person. 14. Now a bad debt, in order to qualify for its deductability u/s36(2) must fulfill, as laid down in the case of Sarangpur Cotton Mfg. Co. Ltd., the following requirements, viz. (i) it should be in respect of the business carried on by the assessee in the relevant accounting year; (ii) it should have been taken into account in computing the income of the assessee for the accounting year or for an earlier accounting year or should represent money lent in the ordinary course of his business of banking or money-lending; (iii) it or a part of it, which is claimed as deduction, should be established to have become bad in the accounting year; and (iv) it should be written off as irrecoverable in the accounts of the assessee for that accounting year in which the claim for deduction is made for the first time. If a bad debt fulfills the above conditions then certainly it would be deductible u/s36(2) of the Act. 15. There could be no den ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or's Report and Statement of Accounts for the year ended 30-9-1972 the Directors had informed the share-holders that since the Accountant and the Secretary of the company were unable to reconcile the Short-term Investment Account and a serious view had been taken of the matter by the Board of Directors, Mr. I. J. Desai of M/s. I. J. Desai Co., Chartered Accountants, Surat had been appointed by the Board to investigate and report on such investments of the company and that the said I. J. Desai had been working on that since 17-1-1973. In their Report dated 14-5-1973 the Auditors of the company had also, inter alia, reported that : (i) the amount shown under the head Short-term Investment Account at Rs. 4,88,349 was stated to be under investigation and no satisfactory explanation was received in that behalf; (ii) the amount received from M/s. Mansukhlal Bhaidas Co. at Rs. 1,47,969 was shown in Schedule 'C' forming part of the balance sheet under the head Short-term Investment Suspense Account which was not proper as there was a personal account of M/s. Mansukhlal Bhaidas Co. also; (iii) no income was credited to P L A/c in respect of the amount invested in Short-term In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------- ----------- 5,25,505.25 5,25,505.25 ----------- ----------- 20. Mr. Desai further observed that he was convinced that the debit of Short Investment Account was unnecessarily and wrongly inflected in place of debit to Gujarat Investment Trust Ltd. He clearly pointed out that apart from cash deficit for which 1/2 liability would have to be fixed, the additional amount of Rs. 3,17,670.30 which stood debited to Gujarat Investment Trust Ltd. should be recovered from them along with the interest thereupon, if any. Besides pointing out at a number of anomalies in the accounts (at pp. 28, 29), Mr. Desai clarified that though there had been a change in the personnel in 1971 in the case of secretary and in 1968-69 in the case of auditors, yet the secretary and the auditors of the assessee-company, Gujarat Investment Trust Ltd. and of Gujarat Dairy Co. Ltd. had been common and their registered offices had also been at the same place and that the cash box of at least two of them had also been common. Mr. Desai could gather that much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the report. Mr. Gandhi, however, pointed out that he had been told that reconciliation work was being done by the office of the company. This is what he reported : "I was given the report of Investigation made by M/s. I. J. Desai Co., Chartered Accountants but it is not possible therefrom to ascertain the liability of any particular officer or individual unless some one is able to explain the contents of the report. I am told that reconciliation work is being done by the office. If after this I am approached again I might be able to look into the matter and be of assistance to you." 23. Thereafter the company appears to have asked Kum. Hemlata M. Patel, Advocate, to advise it for possible action and the said Advocate advised on 3-9-1974 that it would be wasteful to start proceedings in Court as had been suggested to her by the company itself and, therefore, no action was advised to be taken in the matter. Her letter reads as under : "I have gone through all the papers connected with the recovery of the above amounts and your instructions to proceed for recovery through Court or any other measure. Having considered the details, the correspondence exchanged and other par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dental to its business then we find and hold, on the basis of Mr. Desai's report, that the advancement to Gujarat Investment Trust Ltd. or to the said two Brokers through the said company was not more than that in the nature of money handed over to the said persons for purchasing shares and which those persons had failed to return. In that case it would have been simply an outstanding, which if had been recovered would have not swelled the profits of the company. 27. Again assuming, without holding, that it was a 'debt' then we find that it had not become bad and irrecoverable in the accounting year under consideration. Irrespective of the fact whether Mr. Desai was or.was not given proper and sufficient assistance by the officers of the company in locating the exact position of the 'debt' we find that he had specifically suggested for recovery of a huge amount from M/s. Gujarat Investment Trust Ltd. but for no good reasons the company had taken no steps to recover that. Mr. Gandhi, Advocate had simply informed that he necessitated the services of some one to help him to understand the report of Mr. Desai to fix liability of some officer in the company and not the debtor of loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm Investments by the assessee-company in this case appear to have become bad debts." In our opinion the Tribunal had simply expressed a possibility of the 'debt' (which it was not) having resulted from some business activity of the company and its becoming 'bad' (which it did not as found by us above) and such observations do not operate as res judicata in the present proceedings. Again, even if the income from investments in question might have been wrongly offered and mistakenly accepted as business income in the past, the Revenue is not estoppel from seeking the decision of the Tribunal over the true character of the investments this year in which such questions have directly and necessarily arisen in the context of company's claim for its deductibility as a 'bad debt' or allowability as a 'business expenditure' or as a 'business loss'. For, each assessment is to be decided on its own merits and is independent of the assessment preceding or succeeding it. An observation on a fact which was not in issue in earlier year can hardly be pressed into service as precedent in subsequent year. Where facts of two assessment years materially differ and the questions having arisen for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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