TaxTMI 
TaxTMI 
2006 (5) TMI 117
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....61 (Act) can be allowed if the assessee writes off the debt as irrecoverable in his books of account. According to this decision, it is not necessary for the assessee to demonstrate that the debt has become bad and it is left to the prudence and judgment of the businessman to consider it as bad and irrecoverable debt and writing off the same in the books of account. On the other hand, the Mumbai Bench of the Tribunal in the case of Netwest Finance Ltd. [IT Appeal No. 1975 (Mum.) of 1998] vide order dated 18-12-2003 has held that even after the amendment, the assessee has to establish that the debt had become bad for claiming deduction under section 36(1)(vii). This difference of opinion has led to the constitution of this Bench. At this stage, it may also be mentioned that question referred to the Special Bench is purely a legal one and, therefore, it is not necessary for us to narrate the facts of the case before us. Therefore, we would now narrate the respective contentions raised by both the parties. 3. Mr. Daniel, the Learned Special Counsel for the Revenue, has contended before us that no deduction under section 36(1)(vii) can be allowed unless twin conditions are satisfied n....
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....overing it from the debtor: as held in Deoniti Prasad v. Commissioner of Income-tax AIR 1953 Pat. 360. The Law Lexicon Ed. Justice Y.V. Chandrachud: 6. Bad Debt: Debt which cannot reasonably be collected. A debt about which there is no reasonable expectation of recovery; A debt believed to be unrecoverable." 7. In continuation of his above submissions, it was pleaded by him that it is for the assessee to demonstrate that the debt has become bad and irrecoverable since the onus is on the assessee to prove that the conditions for claiming deductions are satisfied. Reliance was placed on the decision of Hon'ble Calcutta High Court in the case of CIT v. Dunlop India Ltd. [1994] 209 ITR 987, and the decision of Hon'ble Rajasthan High Court in the case of CIT v. Hanuman Tubewell [1995] 211 ITR 1047. Further, the Assessing Officer is also not precluded from making enquiry as to whether the debt has become bad since Assessing Officer has to ensure that conditions for claiming deductions are fully satisfied. Proceeding further, it was submitted that if the contention of assessee is accepted then it would lead to absurd results and encourage the dishonest assessees inasmuch us such....
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....iting off the concerned debt as irrecoverable, the law remains the same even after 1-4-1989. He then referred to Hon'ble Madhya Pradesh High Court judgment in the case of CIT v. Nand Manahor Agencies [2003] 259 ITR 723, for the proposition that a debt has to become irrecoverable. Then he referred to Hon'ble Calcutta High Court judgment in the case of Rallis India Ltd. v. CIT [2002] 246 ITR 170, wherein it was held that claim for deduction on account of bad debt was pre-nature since the assessee had not filed suit for recovery of the amount. In this connection, he also referred to Hon'ble Kerala High Court decision in the case of Travancore Tea Estate Co. Ltd. v. CIT [1992] 197 ITR 528 at Page-536, which has been affirmed by the Hon'ble Supreme Court in Travancore Tea Estates Co. Ltd. v. CIT [1998] 233 ITR 203 and Hon'ble Madras High Court decision in the case of Bhawarlal C. Bafna v. Asstt. CIT [2002] 257 ITR 687. He relied on the decision of Delhi Bench of the Tribunal in the case of Dy. CIT v. India Thermit Corpn. Ltd. [1996] 56 ITD 307, wherein, it has been held that even after the amendment the disallowance under section 36(1)(vii) could be given only when a....
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....that assessee would not be able to claim deduction in any subsequent year when, according to Revenue, the debt has become bad as conditions of writing off in that year would not be possible. In this connection, he relied on the decision of the Apex Court in the case of Addl CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1. 11. Proceeding further, it was submitted by him that words "bad debt" have been used to broadly indicate the nature of allowance. Even if any meaning is to be given to such word, then a debt should be presumed to be bad when it is written off in the books of assessee, as held by the Hon'ble Bombay High Court in the case of Lords Dairy Farm [1955] 27 ITR 700 at Page-708. Therefore, it is for the Department to prove to the contrary by leading some evidence. Alternatively, it was agreed by him that assessee is not required to prove beyond doubt that debt has become bad. It is only the honest and bona fide judgment of an assessee which should be considered in determining the question whether a debt is bad or not. Reliance was placed on the various judgments namely-Jethabhai Hirji & Jethabhai Ramdas [1979] 120 ITR 792 (Bom.), CIT v. Johilla Coalfiel....
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....uld be supplied to the language used and resort to any rule of interpretation to unfold the intention is permissible only where the language is ambiguous. Plethora of decisions of the Apex Court are there to support this proposition, The Hon'ble Supreme Court, in the case of Smt. Tarulata Shyam, approved the observations in the case of Cape Brandy Syndicate v. Inland Revenue Commission (1921) 1 KB 64 by observing as under: "To us, there appears no justification to depart from the normal rule of construction according to which the intention of the Legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt, J. in Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 KB 64 (KB) at Page 71, that: "... in the taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a Tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." 15. Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may ap....
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.... intention of the Legislature by resorting to aids to interpretation where the language of a provision is clear and unambiguous. Consequently, the meaning of each word used by the Legislature is to be given its plain and natural meaning and no word should be ignored while interpreting a provision of a statute. 20. Now, let us consider the language employed by the Legislature. Relevant provisions of section 36(1)(vii) as effective from 1-4-1989 read as under: "36(1)(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year." 21. A bare look at the above provisions shows that there is no ambiguity in the language used by the Legislature. Clear and unambiguous words are used in the above provisions. Therefore, in our view, no words used by the Legislature can be considered as superfluous. Each word has to be given its due meaning. The word "debt" is qualified by the word "bad". Therefore, it is not any or every debt which can be written off for claiming deduction. It A must be a bad debt. The word "bad" used by the Legislature cannot be ignored. Therefore....
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.... High Court in the case of R. Jethabhai Hirji and Jethabhai Ramdas, has held that the onus to prove a bad debt is on the assessee. If the onus is upon the assessee to prove the factum of loss/bad debt, then question of raising a presumption that debt written off was bad does not arise. Let us also explain through an example - for instance, an assessee-dealer in stationery goods sells such goods to Reserve Bank of India for Rs. 20 lakhs and writes off the same, without any reasons, at the end of year. On these facts, can it be presumed that debt was bad. The answer is completely "No" as by no stretch of imagination, it can be said that sum due from Reserve Bank of India is bad. As already stated such contention of assessee, if accepted, would frustrate the object of the Act and encourage dishonest tax payers to evade the tax. Hence, such contention is rejected. Consequently, it has to be held that assessee must demonstrate, prima facie, that debt had become bad before it was written off. 25. At this stage, it may also be mentioned that Finance Act, 2001, has inserted the following Explanation after the proviso to section 36(1)(vii): "Explanation.-For the purposes of this clause, ....
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....ad become bad in earlier years. This legal position created hardship to the honest taxpayers. In order to avoid this hardship that section 36(1)(vii) was amended with effect from 1-4-1989. Now, after the amendment, the assessee is not required to prove that debt has become bad in the year of write off. If the debt had become bad in earlier years but could not be claimed as deduction, the same can be allowed in other year in which such bad debt is written off. So after the amendment, the assessee is relived of proving the factum of debt becoming bad in the year of write off. But this does not mean that assessee is relieved of proving that debt has become bad. The year in which debt has become bad is no more relevant after the amendment. Therefore, Hyden's Mischief Rule is applicable to the later part of the provisions of section 36(1)(vii) and not to the first part. The assessee is still required to prove that a debt in respect of which the claim is made has become bad whether in the year of write off or in any of the earlier years. 29. The contention of assessee's counsel that if revenue's contention is accepted would create great hardship to assessee as it would not b....
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.... even by reference to the subsequent conduct of the assessee from which it is possible to infer definitely that the assessee still considered the debt or at least a part thereof as recoverable or regarded the debtor as financially solvent. The fact that the assessee had not taken steps by way of legal proceedings against the debtor would not automatically justify the finding that he was not entitled to write off the amount of bad debt. Nor would the fact that an assessee, subsequent to the write-off a debt, continued legal proceedings against the debtor necessarily land to the conclusion that the write-off was improper or lacked bona fides. These would be factors to be taken into account in order to arrive at a proper determination of the question. Mere notices served for winding up a debtor company or lunching criminal prosecution or including other authorities to launch criminal prosecution against the debtor-company or its directors cannot be regarded as equivalent to taking steps for recovery of the amount." 31. Similar views has also been expressed by the Hon'ble Gujarat High Court and the case of Kamla Cotton Co. v. CIT [1997] 226 ITR 605, Hon'ble Madras High Court o....
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.... the debt is not sufficient for claiming deduction under section 36(1)(vii) of the Act effective from 1-4-1989. In addition, the assessee is also under obligation to show, at least prima facie, that the debt has become bad. Whether a debt has become bad or not would depend on the facts of each case. The observations of the Hon'ble Bombay High Court in the case of Jethabhai Hirji & Jethabhai Ramdas, would be a guiding factor for determining such question of fact. 34-35. The matter will now go to the regular Bench for decision on merits. Per G.E. Veerabhadrappa (Vice President) & Dr. O.K. Narayanan (Accountant Member. 36. We have had the privilege of going through the order proposed by our esteemed brother, Shri K.C. Singhal, the learned Judicial Member. We have also had discussions and deliberations on the issue before us. In spite of our best efforts, we are unable to convince the learned Judicial Member on our reasoning and are also unable to be convinced by his reasoning and conclusion thereon. We, therefore, record our dissent in the following manner. 37. We agree with the discussions in the proposed order as regards the question before us, the arguments that are advance....
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.... "(xi) when the assessee's account in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer (now Assessing Officer) by estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee: 41. Provided that if the amount ultimately recovered on any such debt or loan is greater than the difference between the whole debt or loan and the amount so allowed, the excess shall be deemed to be a profit of the year in which it is recovered, and if less, the deficiency shall be deemed to be a business expense of that year ...." 42. Under the 1922 Act though a debt was a bad debt, the Assessing Officer could refuse to grant allowance therefore, on the ground that the debt in question had become bad in an earlier year. In such an event the assessee found himself unable to ask for relief ....
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.... off as irrecoverable in the accounts of the assessee for the previous year. The amended clause with effect from 1-4-1989 now reads as under: "(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year...." 45. A comparison of these provisions show that in pre-amended provision the assessee was required to establish that the debt in question has become bad in the previous year. In the post amended period it is sufficient if the bad debt or part thereof is written off as irrecoverable in the accounts of the assessee. What is the effect of substitution made by the Direct Tax Laws (Amendment) Act, 1987 in the matter of deductibility of a bad debt is the core issue. In our view the law has done away of the onerous obligation on the part of the assessee to establish that the debt has become bad in the previous year. Now the requirement is only the write off of such debt as irrecoverable in the accounts of the assessee. 46. The Central Board of Direct Taxes in its Circular No. 551 dated 23-1-1990 has explained the object and the ambit of the amendment in the....
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....year in which a bad debt can be allowed and also to rationalise the provisions. Even after the amendment, if the assessee is again called upon to establish that the debt has become bad, the true spirit of the amendment will not be fulfilled. The intent and purpose of the amendment is to avoid litigations and do away with all sorts of disputes regarding the allowability of bad debts as a deduction in computing the income of an assessee. The dispute regarding the year in which the debt has to be allowed as a deduction has been resolved by the clear statement of the amended law that the deduction shall be allowed in the year in which the debt has been written off as irrecoverable. It is very important to note that the earlier expression "any debt, or part thereof, which is established to have become a bad debt in the previous year" has been conspicuously omitted by the amendment and substituted by the expression "written off as irrecoverable". The words of the law are clear and the intent and purpose of the amendment are manifest. The earlier rule of establishing that the debt has become bad is omitted from the provisions of law. Therefore, there is no occasion or provocation to consi....
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....rrecoverable. Therefore, it has become necessary for the Legislature to qualify the debt which would be entitled for deduction in computing the taxable income. It is for that purpose of identifying or qualifying the debt that the adjective "bad" has been prefixed to the word "debt" in section 36(1)( vii). The presence of the expression "bad" does not lay down any rule of evidence or onus of proof. The expression "bad debt" always goes along with the second limb of the provision that is "writing off as irrecoverable". Therefore, the presence of the expression "bad" has to be read in the normal sense without attributing any unintended implication and, therefore, it is to be held that the expression "bad debt" does not mean that the assessee should establish that the debt has become bad. On the other hand, it only qualifies that debt which is entitled to be deducted if written off as irrecoverable. 50. The act of writing off a debt as irrecoverable in the accounts of the assessee is deemed to be discharging the onus of the assessee in holding a debt as bad. When the statute has provided the mode of discharging the onus of proof by writing off the debt as bad debt, it is not incumbent....
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....ew while deciding the issue in the case of Pradeshiya Industrial & Investment Corpn. of UP Ltd. The Tribunal stated therein that what is necessary is to write off the debts as irrecoverable in the books of account of the assessee. Again, the ITAT, Calcutta Bench "B" in the case of Jayanti Commerce Ltd. held that the only pre-condition for writing off a debt is that the assessee should bona fidely believe that the debts are not recoverable and no other evidence is called for. The ITAT, Bangalore Bench in the case of Wipro In formation Technology Ltd. held the same view that it is the objective satisfaction of the assessee what is to be considered in determining whether a debt written off as bad is in fact bad or not and assessee need not have to prove that the debt has become bad in the relevant previous year of write off. The Tribunal held therein that if the assessee is still required to prove that the debt is bad even though it is written off the same in the accounts, then the controversy whether the debt has become bad or not in the relevant previous year would still continue and the effect of then amendment would be nullified. This principle has been reiterated by the ITAT, Ban....
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....eriod. On appeal, the Commissioner of Income-tax (Appeals) deleted the disallowance on the ground that after the amendment to section 36(1)(vii), there was no need for the assessee to establish as to what steps had been taken for recovery and writing it off as irrecoverable debt was sufficient. On appeal filed by the revenue, the Accountant Member upheld the finding of the CIT(A) while the Judicial Member held that even after the amendment, it was necessary for the assessee to prove that the debt has become bad in the year in which it was written off. On a difference of opinion, the Third Member, who was Vice President as well as Judicial Member agreed with the view taken by the Accountant Member and held that there is no obligation lot the assessee to place demonstrative proof for establishing it as bad, if he has taken steps to write it off in the previous year, left to his prudence and it is sufficient compliance for claiming debt as bad debt under section 36(1)(vii). The Third Member has held as follows: "It is clear from the substitution itself before the amendment by the Finance Act, 1987 with effect from 1-4-1989 in section 36(1)(vii), the words used were "any debt, or par....
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.... High Court is to be followed, the majority decision handed out in the case of Anil H. Rastogi is a decision to be reckoned by the Special Bench in adjudicating this issue. 56. The Revenue has placed heavy reliance on the decision of the Bombay High Court in the case of General Insurance Corpn. of India (No.2). In fact the said decision of the Bombay High Court does not go to help the case of revenue. The court has made it clear at the outset itself that the question as to whether the debt has become irrecoverable has not been raised in the appeal before it. The only dispute raised before the court was whether assessee has complied with the statutory conditions for writing off the debts. So far as the requirement of writing off is concerned, the court observed that the language used in the Indian Income-tax Act, 1922 and Income-tax Act, 1961 is identical. The court observed that if the debit entries posted by the assessee indicated that bad debt has been written off as irrecoverable in the account of the assessee, then the statutory condition stands fully complied with. That if the assessee has posted entries in the profit & loss account and the corresponding entries are posted in....
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....ships have reiterated the proposition laid down by them which is reported at page 738 of the same judgment. It is recorded in that proposition that a decision of a High Court outside its territorial jurisdiction may at best have only persuasive effect. The decisions of the Gujarat High Court and Delhi High Court, which have been relied upon by us elsewhere in this order, have been considered in that spirit only, within the framework of the principle laid down by the Jurisdictional High Court in Thane Electricity Supply Ltd. The Third Member decision in the case of Anil H. Rastogi is as good as a Special Bench decision within the territorial jurisdiction of the Bombay High Court as there being no contrary view expressed by the Bombay High Court on the issue in question. It will be laying down a wrong precedent if the Third Member decision in the case of Anil H. Rastogi is slighted by any other Division Bench as not being bound. 58. In our view, the sanctity of the Third Member decision and the Special Bench decision is of the same nature as viewed by the Delhi High Court in the case of P.C. Puri. Even on this issue there is no binding precedent of the Jurisdictional High Court, it ....
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....will only annex an obligation which is not spelt out in the so-called clear provisions of the amendment brought out with effect from 1-4-1989. The accounts of the assessee are subject to audit which means that the board, general body of shareholders and the statutory auditors have confirmed that the decision to write off is bona fide charge on the profit and loss account. There is no qualification in the auditors report to say that the write off was not a business consideration, which only strengthened that what has been written off to the profit and loss account is a bad debt and can be duly established so with all the attended circumstances. Asking for any demonstrative evidence or proof will only seem to be doing violence to the provisions contained in the Act and wanting the assessee to do the same act, which were specifically omitted to be done by the Amending Act. 60. We may further examine the issue from another angle. If for any reason the revenue's contentions were to be accepted that the write off is not bona fide and the debt has not become bad in the previous year in which the debt is so written off, the assessee will only get denied its rightful deduction in the y....