2005 (3) TMI 700

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....vant point of time, could not get certain clearances for the appellant firm property and proceed with the development. Therefore, by mutual consent the (sic) agreement entered into between the appellant and M/s. Vinayaka Enterprises was cancelled the said M/s. Vinayaka Enterprises, agreed to pay a sum of Rs. 6 crores by way of damages/compensation to the appellant firm. This compensation/damages that was so arrived was offered as income of the appellant firm for the year ended 31-3-1999. Furthermore, it was agreed between the appellant firm and M/s. Vinayaka Enterprises that the amount payable after cancellation of the agreement would be paid within a stipulated time frame and M/s. Vinayaka Enterprises/P. Dayananda Pai had also given cheques for due and lawful discharge of the total sum, so payable. M/s. Vinayaka Enterprises could not honour the commitments for repayment of the amount advanced together with damages/compensation. However, for the year ended 31-3-2000, the interest accrued on the amount so receivable was also offered as income by the appellant firm and the same was subjected to tax. Thus, the total amount due to the appellant firm was Rs. 19,24,09,280 as at 31-3-2001....

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.... not pay inspite of the criminal proceedings under section 138 of the Act pay it. The decision of the appellant as on 31-3-2001 taking into consideration the circumstances of the debtor, the write off was a bona fide judgment and decision and that cannot be called into question by the subsequent recoveries or subsequent action on the part of the appellant in instituting the suit against M/s. Vinayaka Enterprises/P. Dayananda Pai. 3.3 Learned CIT(A) held that- (i)debt written off has to be necessarily a bad debt which is a pre-condition for allowability under section 36(1)(vii). (ii)He held that though several cheques issued by M/s. Vinayaka Enterprises were dishonoured, it is also fact that between 30-7-1998 and 31-8-1999 Rs. 3 crores were paid to the assessee. Rs. 1 crore was paid to M/s. Chandru Raheja at Bangalore on behalf of assessee. After the legal action by way of civil and criminal proceedings, M/s. Vinayaka Enterprises paid a sum of Rs. 7.15 crores between 31-10-2002 and 19-9-2003. Thus the debtor had not become totally insolvent as on 31-3-2001. (iii)The appellant had not initiated any proceedings before write off. After writing off, the assessee filed a suit....

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.... which M/s. Vinayaka Enterprises also agreed to pay compensation of Rs. 6 crores. This itself prove that the position of debtors was not good. Neither the principle nor the interest was paid for the year 1999-2000. The payment made to Chandru Raheja at Bombay is not on behalf of assessee. Several cheques issued by the debtor were dishonoured. This itself proves that the debtor is unable to pay the debts. This leads the assessee to believe that the debt had become bad which is required to be written off. Only after the criminal proceedings were initiated, the payments were received. Thus as on 31-3-2001 when the amount was written off, the fact remains that the debt was bad and the action of assessee is bona fide. 4.1 He further submitted that the amount was advanced in the course of business of property development. The amount was advanced to purchase a large piece of land. Since the amount was advanced in the course of its business of property development and since such sum has become bad, the same can be allowed as deduction as bad debt. Reliance was placed on the decision of Hon'ble Mysore (Karnataka) High Court in CIT v. Y.V. Sreenivasa Murthy [1967] 63 ITR 306 . He further ....

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....ty 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 Assessing Officer 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 clause (vii) of sub-section (1) and clause (i) of sub-section (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 assessee. Clauses (iii) and (iv) of sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightaway allo....

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....ally or without bona fide belief treat any debt as bad debt. If the assessee's action is bona fide and reasonable, the Assessing Officer cannot substitute his own subjective judgment rather he should accept the action of assessee as to the quality of debt as conduct of business is to be carried on by the assessee himself and which cannot be the prerogative of Assessing Officer. (ii)The year in which the amount is to be written off is to be decided by the assessee. 7.3 In the light of above, let us examine the conduct of assessee. From the facts it is seen that M/s. Vinayaka Enterprises firstly defaulted in honouring the first agreement. A fresh contract was entered into and the debtor also agreed to pay compensation. The compensation was to be paid in the year 1998. After 31-8-1999 nothing was paid till October, 2002. In between several cheques issued by the debtor bounced. There were more than 24 such instances of bouncing of cheques. During this period there was a general recession in property market. This can lead the assessee to believe that the debt has become bad. The position has to be looked into as on the date of write off, and not on the possibility of recovery at a....