1988 (11) TMI 136 - AT - Income Tax

Tribunal allows appeal, directs reassessment of bad debts under Income-tax Act Section 155(6). Interest charges to be adjusted accordingly.

The appeal was partly allowed by the Tribunal. The disallowance of bad debts totaling Rs. 1,10,875 was reconsidered, with directions given to the CIT(A) ... Accounting Year, Bad Debt, Business Loss, Debt Due Issues Involved:1. Disallowance of bad debts totaling Rs. 1,10,875.2. Charge of interest of Rs. 3,731 under Section 139 and Rs. 21,853 under Section 217 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of Bad Debts (Rs. 1,10,875):The primary issue in the appeal is the disallowance of bad debts amounting to Rs. 1,10,875. The breakdown of the disallowed bad debts is as follows:- Grown Chemists, Bombay: Rs. 27,548- Sri G.R.K. Shastry: Rs. 34,620- Various private parties: Rs. 33,557- Various Government Organisations: Rs. 15,150The assessee, a private limited company manufacturing pharmaceutical medicines, returned a loss of Rs. 44,090 for the assessment year 1980-81. The ITO proposed an addition of over Rs. 1,00,000, resulting in a draft assessment order assessing the company at a total income of Rs. 1,68,500. The ITO disallowed the bad debts on the grounds that there was no evidence in the final accounts to support the write-off, and the provision for bad debts did not appear in the balance sheet. The assessee argued that the bad debts were written off by debiting the provision for bad debts, which was an accepted accounting method.The CIT(A) confirmed the disallowance, stating that the debts were time-barred and that the company did not take necessary steps for recovery. Specifically, for the debt due from Crown Chemists, it was noted that the amount was misappropriated by an employee and became time-barred. Similarly, the debt due from Sri G.R.K. Shastry was also disallowed on the grounds of being time-barred and misappropriated.For the amounts due from various private parties and government organizations, the CIT(A) upheld the disallowance due to the lack of specific details and proof that the debts were outstanding for more than six months.The Tribunal found that the CIT(A)'s finding that the debt due from Sri G.R.K. Shastry became time-barred was incorrect. It also noted that the embezzled amounts should be considered as business loss and not bad debts. The Tribunal referred to the Supreme Court decision in Associated Banking Corpn. of India Ltd. v. CIT, which stated that embezzled amounts do not necessarily result in immediate loss and that a reasonable chance of obtaining restitution must be considered.The Tribunal remanded the matter to the CIT(A) with directions to examine whether the liabilities were admitted or disputed. If disputed, they should not be considered income. If admitted but written off, the CIT(A) should determine if the debts became bad within four years prior to the accounting year under consideration and direct the ITO to reopen those assessments and allow bad debts in the appropriate years under Section 155(6) of the Income-tax Act.2. Charge of Interest (Rs. 3,731 under Section 139 and Rs. 21,853 under Section 217):The second issue involved the charge of interest under Sections 139 and 217 of the Income-tax Act. The Tribunal noted that the interest charges are consequential and must be reduced proportionately while giving effect to the Tribunal's order. Hence, this issue was allowed for statistical purposes.Conclusion:The appeal was partly allowed. The Tribunal directed the CIT(A) to re-examine the claims of bad debts and consider the provisions of Section 155(6) for reopening assessments if necessary. The interest charges under Sections 139 and 217 were to be adjusted proportionately based on the Tribunal's findings.