Tribunal Rules in Favor of Assessee: Bad Debts Deemed Allowable Deduction

Commissioner Of Income-Tax Versus Howrah Flour Mills Ltd.

Commissioner Of Income-Tax Versus Howrah Flour Mills Ltd. - [1999] 236 ITR 156, 155 CTR 353 Issues Involved:
1. Interest of directors in the eleven concerns.
2. Classification of debts as trade debts.
3. Burden of proof on the Commissioner.
4. Nature of the debt.
5. Avoidance of Section 295 of the Companies Act, 1956.
6. Relationship of directors with debtors.
7. Writing off bad debts.
8. Genuineness of the debt write-off.
9. Basis of the Commissioner's allegations.
10. Erroneous assessment order.
11. Validity of the Commissioner's order u/s 263.
12. Allowability of bad debts u/s 36(1)(vii) read with Section 36(2) of the Income-tax Act, 1961.

Summary:

Issue 1: Interest of directors in the eleven concerns
The Tribunal found no evidence to support the Commissioner's conclusion that the directors of the assessee-company were interested in the eleven concerns whose debts were taken over by Eastern Tyre Sales Agency. The finding was based on evidence and was not perverse.

Issue 2: Classification of debts as trade debts
The Tribunal's finding that the assessee-company claimed these debts as trade debts from the assessment year 1967-68 to 1984-85 was based on evidence and was not perverse.

Issue 3: Burden of proof on the Commissioner
The Tribunal correctly held that the burden was on the Commissioner to establish that the debts were loans and advances. Since the Commissioner did not examine the records beyond 1967-78, the Tribunal accepted the assessee's claim that they were trade debts, which was not perverse.

Issue 4: Nature of the debt
The Tribunal's finding that the debt in question was a trade debt was based on relevant material and was not perverse.

Issue 5: Avoidance of Section 295 of the Companies Act, 1956
The Tribunal was justified in law in not holding that the debts were direct or indirect loans attracting Section 295 of the Companies Act, 1956, as this issue was not part of the revisional order u/s 263.

Issue 6: Relationship of directors with debtors
The Tribunal's finding that the relationship of the directors with the eleven debtors was not established was based on relevant evidence and was not perverse.

Issue 7: Writing off bad debts
The Tribunal's finding that the relationship of the directors with the eleven debtors did not affect the writing off of bad debts was based on legal principles and was not perverse.

Issue 8: Genuineness of the debt write-off
The question of the non-genuineness of the debt write-off does not arise as the Income-tax Officer had accepted the writing off as genuine.

Issue 9: Basis of the Commissioner's allegations
The Tribunal's finding that the other allegations of the Commissioner had no basis was not perverse and was based on the material of the Income-tax Officer's favorable first order.

Issue 10: Erroneous assessment order
The Tribunal was justified in law in holding that the assessment order was not erroneous.

Issue 11: Validity of the Commissioner's order u/s 263
The Tribunal was correct in holding that the Commissioner's order u/s 263 was not correctly initiated as there was no basis to treat the nature and character of the debt as having changed due to the change in the debtor's identity.

Issue 12: Allowability of bad debts u/s 36(1)(vii) read with Section 36(2)
The Tribunal was fully justified in holding that the bad debts of Rs. 46,25,804 were allowable as a deduction u/s 36(1)(vii) read with Section 36(2) of the Income-tax Act, 1961.

Conclusion:
The assessee succeeded in the reference, and the Tribunal's findings were upheld on all issues.