TaxTMI 
TaxTMI 
2008 (4) TMI 359
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....350. The AO observed that the amounts were written off as bad debt during the pendency of suits under s. 138 of the Negotiable Instruments Act. The assessee maintained that the claim was admissible because : (i) it was not necessary for the assessee to take legal action against the defaulters or wait for the outcome of the suit for the allowability of the claim of bad debts; (ii) the claim of bad debt was admissible on the basis of the decision of the management that the debt has become bad; (iii) the assessee had not been able to recover any amount from the parties till the date of assessment despite the lapse of three years from the end of closure of the accounts of the relevant accounting period, which itself proved that the accounts written off were irrecoverable; (iv) criminal proceedings were instituted against the parties under s. 138 of the Negotiable Instruments Act as distinguished from civil proceedings for the recovery of debts but the parties have failed to pay the amount; and (v) the foregoing circumstances clearly proved that the debts had become bad and the claim was rightly made. 4. The AO also required the assessee t....
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....ive the copy of suit filed against the party; (iv) it was not possible to verify the claim that the cheques issued by the party for payment of instalments of hire purchase were not honoured; (v) However the claim of bad debts to the extent of Rs. 5,09,682, taken into account for the asst. yrs. 1998-99 and 1999-2000 was considered eligible for deduction; (d) (i) The assessee (Haryana Steel) also did not furnish the copy of suit filed against Haryana Steel & Alloys Ltd., Sonepat, in support of its claim that 11 cheques of the party towards the bills discounting were dishonoured in the previous year relevant to asst. yr. 1999-2000; (ii) Specific details and confirmation that the cheques were dishonoured, were also not filed; (iii) The assessee had not accounted for the bill discounting charges in the relevant year, and (iv) claim for allowability of bad debts written off in respect of this party was not admissible; (e) (i) Similarly, the assessee did not submit the copies of suit filed against Rama Paper Mills Ltd., Kiratpur, U.P. in support of its claim that the cheques for lease charges for asst. yrs. 1998-99 and 1999-20....
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.... 10. We have carefully considered the issue. It is seen from the order of the learned CIT(A) that the assessee failed to produce the relevant evidence in support of its claim that the cheques issued by the parties were dishonoured; (ii) despite proper opportunity given by the lower authorities the assessee did not even file the copies of the relevant suits filed in the Court so as to enable the lower authorities to verify the relevant facts; (iii) the assessee could not establish that the amount written off had been taken into account for determining the income of any previous year as per the statutory requirement of the provisions of s. 36(2) of the Act; (iv) the learned CIT(A) has given clear finding of facts in his impugned order and taken note of the fact that there were considerable recoveries in the subsequent years; and (v) the amount of Rs. 85,69,350 claimed as bad debt written off comprised of the principal amount and the interest. It is, however, seen from paras 27-29 and 42-100 of the paper book placed on record that the assessee had filed before the lower authorities (i) copies of decree against SMS Construction; (ii) complaint fi....
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.... discussed in para 2.2 of his impugned order which are summarized below : (i) the act of the AO in making the addition of Rs. 58,689 under s. 41(1) of the Act shown as liability on account of "stale cheques" was arbitrary and against the principles of law; (ii) the liability could not be considered as income as per IT Act; (iii) the cheques were appearing as liability of the assessee; (iv) there was no cessation of liability within the scope and meaning of s. 41(1) of the Act; (v) the Explanation to s. 41(1) is also not attracted because the assessee had not written off the corresponding credits in its books of account; (vi) even if the liability was barred by the law of limitation, it would not be considered that the liability ceased to exist either because the amount had not been shown as liability in the books of account or because the assessee had unilaterally written it off; (vii) despite the insertion of Expln. 1 of s. 41(1) w.e.f. 1st April, 1997 by the Finance (No. 2) Act, 1996, the judicial view still holds good so far as it has been held that even if the assessee had voluntarily written off the liability, the ....
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.... mentioned on the purchase invoice. (c) The CIT(A) erred in confirming the disallowance of depreciation on three other leased cars when the beneficial ownership of the appellant was established." 16. This ground of appeal was not pressed by the learned counsel and is dismissed accordingly. 17. The fourth ground of appeal is as under : "On the facts and circumstances of the case the CIT(A) has erred in upholding AO's act of disallowing sum of Rs. 13,34,586 on account of diminution in the value of re-possessed stock even when the same was in accordance with the method of accounting adopted by the appellant." 18. As per relevant facts on record, the assessee had declared value of stock of "hire re-possessed" at Rs. 19,00,000 as on 31st March, 2001 as against Rs. 32,34,586 as on 31st March, 2000. It claimed the amount of Rs. 13,34,585 as diminution in value of stock under the head "Operating, administrative and other expenses". As per questionnaire dt. 20th Dec., 2002, the assessee company was required by the AO to file the details of the same. The reply of the assessee submitted before the AO as per its letter dt. 19th Feb., 2004 has been reproduced in p....
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....n the value of these equipments due to passage of time and technological obsolescence the management decided to take the real value of assets so as to depict true and fair picture of its assets and liabilities in its books of accounts; (v) the relevant hire purchase agreement could have, in any case, ended in the financial year 1999-2000, reducing the value of equipment to 'nil'; (vi) as against prescribed depreciation @ 25 per cent as per IT Rules the management took the reduced value at Rs. 19 lakhs by taking approximately depreciation @ 15 per cent; (vii) the diminution in the value of stock on hire was in accordance with the method of accounting as described in para 1(1)(iii) of Sch. 14 and could not be considered excessive. 19. The learned CIT(A) duly considered the aforestated submissions as per discussion in para 2.2 of his impugned order but rejected the claim of the assessee for the reasons that : (i) the revaluation of stock by using the depreciation (approximate) @ 15 per cent was neither reliable nor prescribed; and (ii) the assessee neither filed the valuation report nor any other evidence in support of its claim.....
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....ble AM and in my opinion the matter does not require to be referred back to the AO as the issue for which the matter is being restored back to the AO does not require further verification of facts particularly in view of remand report of the AO dt. 15th March, 2005, a copy of which is placed at pp. 18 to 20 of the paper book. Therefore, I proceed to express my opinion on this issue. So far as it relates to other issues I am in agreement with the Hon'ble AM. My findings with regard to issue of bad debts are as follows. 2. The assessee company had claimed bad debts of Rs. 85,69,350 in place of P&L a/c. The assessee was asked to explain regarding its claim of bad debts. In response the assessee submitted details of bad debts vide letter dt. 19th Feb., 2004 and vide order sheet entry dt. 9th Feb., 2004 the assessee was required to file reasons as to why bad debts were written off during pendency of suits under s. 138. Reply was submitted vide letter dt. 27th Feb., 2004. It was explained that bad debt is allowable on the basis of decision of management that the same has become bad. Reference was made to the decision of Bombay High Court in the case of Jethabhai Hirji & Jethabhai ....
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....es issued by the party bounced and party defaulted in payment of hire purchase instalments suit under s. 138 of Negotiable Instruments Act was filed in the Court of Addl. Sessions Judge, Patiala House, New Delhi. Assessee did not file copy of suit for verification. (2) Haryana Steel & Alloys Ltd., Sonepat : Bills raised on this party were discounted in the year 1999-2000. The details of the bills discounted and discount charges accounted as income were also furnished by the party and the said party had issued cheques towards the bill discounting amounts which bounced in asst. yr. 1999-2000 and legal suits were stated to be filed under s. 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, Patiala House, New Delhi. Assessee did not file copy of suit for verification. (3) Rama Paper Mills Ltd., Kiratpur, UP : The party was leased effluent treatment plant for lease amount of Rs. 32,40,625 in asst. yr. 1997-98. The income arising out of such lease transaction was shown in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suit was filed under s. 138 of the Negotiable Instruments Act. Assessee....
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.... claim is not allowable for the reason that the claim of the assessee that cheques have bounced is not supported by any bank memorandum. Therefore, write off of bad debt cannot be allowed. Assessee is aggrieved hence in appeal. 7. It was vehemently pleaded by the learned Authorised Representative that the assessee had fulfilled all the conditions required to be fulfilled for claiming deduction of bad debt. He contended that the disallowance has been upheld by the CIT(A) only for the reason that the assessee did not submit evidence in respect of bounced cheques. He contended that after 1st April, 1989 the only condition for allowability of bad debt is that it should be written off. To support such contention he relied on the following decisions : (1) CIT vs. Morgan Securities & Credits (P) Ltd. (2007) 210 CTR (Del) 336 : (2007) 292 ITR 339 (Del); (2) CIT vs. Autometers Ltd. (2007) 210 CTR (Del) 339 : (2007) 292 ITR 345 (Del). 8. On the other hand, the learned Departmental Representative relying on the orders of AO and CIT(A) pleaded that disallowance has rightly been sustained by CIT(A). 9. I have carefully considered the rival submissions in the light of ....
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.... in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made; (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year), but the AO had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) and the AO is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding th....
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....igation would be eliminated by permitting the debt to be treated as bad or irrecoverable no sooner it was written off in the books of the assessee's concern. Their Lordships have relied on the decision of Hon'ble Gujarat High Court in the case of CIT vs. Girish Bhagwat Prasad (1999) 152 CTR (Guj) 199 : (2002) 256 ITR 772 (Guj) wherein it has been held that w.e.f. 1st April, 1989 'all that the assessee had to show was that the bad debt was written off as irrecoverable'. Thus in my opinion, upholding of the disallowance by CIT(A) is contrary to the aforementioned decision of Hon'ble jurisdictional High Court in the case of CIT vs. Morgan Securities & Credits (P) Ltd. (supra). Respectfully following the aforementioned decision of the Hon'ble Delhi High Court, addition sustained by CIT(A) is required to be deleted. There is no justification in restoring this issue to the file of AO in view of the remand report of AO which is already on record and referred to by learned Authorised Representative. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 04-02-2008 The following question arising for consideration of the Third Member on a difference of opinion for the....
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....Act were instituted against the debtors but nothing was recovered from the debtors till date. The assessee also filed separately explanation for write off of bad debt in respect of M/s Rama Paper Mills. 2.1 The AO disallowed the claim, with the following observations : "No books of account have been produced for verification of accounts of these persons. No details have been filed as to since when these amounts are outstanding or as to whether such amounts were offered for taxation in any preceding years. As the assessee has failed to furnish any evidence in support of its claim, its claim is not allowed and accordingly the sum of Rs. 85,69,350 is being disallowed. Penalty proceeding under s. 271(1)(c) of the IT Act, 1961 is being initiated separately for filing inaccurate particulars of income." 2.2 After making addition of bad debt in question, total income of assessee was computed at Rs. 32,49,490 which was adjusted against the brought forward loss. Interest income of Rs. 5,88,862 which the assessee had claimed as business income was taken as income from "other sources". However, on appeal, CIT(A) directed that said income be taken as "business income". The order ....
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....e stated to be filed under s. 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, Patiala House, New Delhi. The assessee has not furnished copy of the suit filed, for verification.' The Punjab National Bank memorandum submitted by the appellant does not contain any specific details to confirm that cheques bounced. Besides no bill discounting charges have been booked this year. Thus the claim for write off cannot be allowed. Rama Paper Mills Ltd., Kiratpur, U.P. : 'The party was leased effluent treatment plant for lease amount of Rs. 32,40,625 in asst. yr. 1997-98. The income arising out of this lease transaction as booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed under s. 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, Patiala House, New Delhi. The assessee has not furnished copy of the suit filed, for verification.' No specific confirmation that cheques bounced has been submitted by the appellant i.e. bank memorandum. Thus no write off claim can be allowed. Deepak Industries Ltd. ....
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....assessee. The operative portion of learned AM's order is as under : "10. We have carefully considered the issue. It is seen from the order of the learned CIT(A) that the assessee failed to produce the relevant evidence in support of its claim that the cheques issued by the parties were dishonoured; (ii) despite proper opportunity given by the lower authorities the assessee did not even file the copies of the relevant suits filed in the Court so as to enable the lower authorities to verify the relevant facts; (iii) the assessee could not establish that the amount written off had been taken into account for determining the income of any previous year as per the statutory requirement of the provisions of s. 36(2) of the Act; (iv) the learned CIT(A) has given clear finding of facts in his impugned order and taken note of the fact that there were considerable recoveries in the subsequent years; and (v) the amount of Rs. 85,69,350 claimed as bad debt written off comprised of the principal amount and the interest. It is, however, seen from paras 27-29 and 42-100 of the paper book placed on record that the assessee had filed before the lower....
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....ent treatment plant for lease amount of Rs. 32,40,625 in asst. yr. 1997-98. The income arising out of such lease transaction was shown in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suit was filed under s. 138 of the Negotiable Instruments Act. Assessee did not file copy of suit for verification. (4) Deepak Industries Ltd., Calcutta : The party was leased CNC turning centre amounting to Rs. 47,70,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed under s. 138 of Negotiable Instruments Act. Assessee did not file copy of suit for verification. (5) Rapid Construction, New Delhi : The said party was leased Becon batching plant and DG set amounting to Rs. 26,84,910 in asst. yr. 1999-2000. The income arising out of this lease transaction was booked in asst. yrs. 1999-2000 and 2000-01. The cheques which were issued by the party bounced and accordingly arbitration proceedings were stated to be initiated before Addl. Sessions Judge, New Delhi fo....
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.... the books of account, is to be allowed as a deduction after amendment of the relevant provision w.e.f. 1st April, 1989. In his opinion, the assessee after amendment in the law need not prove that such bad debt had infact become bad only during the relevant previous year under consideration. The aforesaid proposition, according to the learned JM was fully supported by decision of Hon'ble Delhi High Court in the case of CIT vs. Morgan Securities & Credits (P) Ltd. (2007) 210 CTR (Del) 336 : (2007) 292 ITR 339 (Del) as well as by Circular No. 551 dt. 23rd Jan., 1990 [(1990) 82 CTR (St) 325] of CBDT. The learned JM thereafter, following the decision of Delhi High Court and Circular of CBDT directed that the addition made be deleted. 6. In the light of above conflicting views, the matter has been placed before me under s. 255(4) of the IT Act. 6.1 I have heard both the parties. The learned counsel for the assessee pointed out that AO had not provided sufficient opportunity to the assessee and, therefore, copies of proceedings taken against the debtors as well as books of account were produced in the appellate proceedings. The learned CIT(A) asked for a remand report from the ....
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....roposed order of the learned AM. 8. In rebuttal the learned counsel for the assessee Shri Anil Jain agued that all evidence was furnished to the AO who after examining them had given remand report to the CIT(A). No finding by AO or by CIT(A) or even in the proposed orders has been recorded that bad debt claim was not bona fide or that transactions involved were bogus. Shri Jain further submitted that the company was amalgamated and ceased to exist on 4th July, 2003. It had huge carry forward losses and, therefore, even if addition is made, it would not lead to any tax gain to the Revenue. Shri Jain further argued that this Tribunal was bound by the decision of Hon'ble Delhi High Court and not by decision of Hon'ble Madras High Court. At any rate even if two reasonable views of the matter were possible, the Bench should take a view favourable to the assessee. 9. I have given careful thought to the rival submissions of the parties. As noted earlier, the learned AM has remanded the matter to the AO whereas the learned JM, in his proposed order, has directed that disallowance of bad debt be deleted. Therefore, the first question to be examined relates to the principles, w....
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.... second chance to the party to adduce that evidence. The policy of the law is that once that matter has been fairly tried between the parties, it should not, except in special circumstances, be reopened and retired. In a recent decision their Lordships of the Supreme Court laid down that power to order retrial after remand, where there had already been a trial on evidence before the Court of first instance, cannot be exercised merely because the appellate Court is of the view that the parties who could lead better evidence in the Court of first instance have failed to do so." (5) In the case of Ghasi Ram Dayanand vs. CST 92 STC 478 @ 480, 481 (All), it has been held that remand cannot be made for the purpose of de novo trial for permitting the parties to adduce fresh evidence to fill up lacuna or to decide a point when material is already on record. (6) Powers of the Tribunal in the matter of setting aside an assessment are large and wide, but these powers cannot be exercised to allow the AO an opportunity to patch up the week parts of his case and to fill up the omission by giving another innings' (i) Asstt. CIT vs. Anima Investment Ltd. (2000) 68 TT....
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.... debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular No. 551, dt. 23rd Jan., 1990 [(1990) 82 CTR (St) 325 ], the relevant portion of which reads as follows : '6.6 The old provisions of cl. (vii) of sub-s. (1) r/w sub-s. (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the AO in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987, has amended cl. (vii) of sub-s. (1) and cl. (i) of sub-s. (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the as....
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.....1 The aforesaid decision was again applied by their Lordships of Delhi High Court in the case of Autometers Ltd. (supra). After noting the change made in the statutory provision w.e.f. 1st April, 1989, their Lordships observed as under : "We find that there is a significant difference between the provision as it stood prior to 1st April, 1989 and the provision as it stands today. Prior to 1st April, 1989, it was necessary for the assessee to establish that the debt had become bad, whereas now for the debt to be classified as bad, the assessee has only to write it off as irrecoverable in its accounts. While making the amendment as above, the CBDT issued a circular bearing No. 551, dt. 23rd Jan., 1990 [(1990) 82 CTR (St) 325 ], wherein it is stated in paras 6.6 and 6.7 that the earlier provision generated a considerable amount of litigation on the issue whether the assessee had been able to establish that the debt had become bad. It was to overcome this that the amendment was made resulting in a bad debt 'now being straightaway allowed in the year of write off'. The interpretation of s. 36(1)(vii) of the Act was considered by this Court in CIT vs. ....
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....(vii) and of s. 36(2) were fully satisfied in this case. There is no dispute as far as writing off of bad debt is concerned. The learned JM further noted and underlined relevant portion of the remand report dt. 15th March, 2005 of the AO wherein he had clearly stated that income in respect of each debt involved was duly shown by the assessee in the assessment year under consideration or in earlier years. Therefore, the conditions of s. 36(2) were also satisfied. I have also noted the relevant portion of the remand report in earlier part of this decision to show that statement made by learned JM is factually correct. In fact even CIT(A) in the impugned order has specifically admitted that income in respect of debt from SMS Construction, Udaipur was shown and allowed relief of Rs. 5,00,682. The other debts are not allowed on the ground that income was not shown in terms of s. 36(2) or the debts were not established to be 'bad'. The finding of the CIT(A) was factually incorrect as in the remand report the AO has clearly accepted that income from all transactions was duly shown in the year under account or in earlier years. The assessee was also carrying business of financing. ....
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.... legally incorrect. This point has been discussed in detail in this order, how income of the debts written off was taken into account in the previous year or in earlier assessment years and that conditions of s. 36(2) are fully satisfied in this case. 12.3 Reason (iv) in the proposed order of learned AM is not based on any material on record. It has been the case of the assessee that not a single penny has been recovered out of the debts claimed as bad debts. The learned CIT(A) or the learned AM has not shown any material to establish alleged considerable recoveries in the subsequent years. At any rate, if recoveries have been made of debts written off as bad, then the same is to be taxed under s. 41(4) of the IT Act as laid down by their Lordships of Delhi High Court in the decisions quoted (supra). Bad debts could not be disallowed on this ground. 12.4 Reason No. (v) has already been referred to above. 12.5 It is, therefore, clear that all relevant material to decide the matter with reference to s. 36(1)(vii) r/w s. 36(2) was available on record and it was not necessary for the Bench to remand the case to the file of the AO. The learned JM has referred to the relevant ma....