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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & MS. ASTHA CHANDRA
The appeal by the Revenue is directed against the order dated 28.09.2018 of the Ld. Commissioner of Income Tax (Appeals)-10, New Delhi (“CIT(A)”) pertaining to the assessment year 2014-15.
The assessee is an individual. He did commodity trading during the previous year relevant to assessment year 2014-15. During the course of assessment proceedings, Ld. Assessing Officer (“AO”) perused the profit and loss account and observed that the assessee has written off bad debts to the tune of Rs. 1,50,00,000/-. The Ld. AO required the assessee to explain/ justify his claim. He also issued notice under section 133(6) of the Income Tax Act, 1961 (“Act”) to the Principal Officer of National Spot Exchange Limited (“NSEL”) seeking the information regarding the contention of the assessee that the sum of Rs. 1,50,00,000/- has become irrecoverable. The Ld. AO showed the reply of NSEL to the assessee and again sought justification for his claim of bad debts to which the assessee replied stating as under:-
Outstanding Debt which was not recoverable as on 31.03.2014 was amounting to Rs. 5,23,29,230/-. This amount was included as income during the financial year 2013-14. The profit and loss account submitted with your honour was showing the amount of sales during the year including this amount of Rs. 5,23,29,230/- which has become irrecoverable. The outstanding Bad-debt was thus taken as income during the referred Assessment year 2014-15. The total amount of Bad-debt is Rs. 5,23,29,230/- included in the income of the assesee via the profit and loss account and out of this amount Rs. 1,50,00,000/- has been written off during the Assessment Year 2014-15. The Bad debts written off by the assessee during the referred year is allowable under section 36(1)(vii) and section 36(2) of the Income Tax Act, 1961. In this regard we submit herewith the CBDT Circular no: 12/2016 dated 30 May, 2016. This circular clarifies that Bad-debts written off by the assessee is allowable.
The explanation/ justification offered by the assessee was not acceptable to the Ld. AO who for the reasons stated by him came to the conclusion that the assessee has pre-maturely written off sum of Rs. 1,50,00,000/- without satisfying the conditions laid down under section 36(2) of the Act. He, therefore, disallowed the claim of bad debt and added Rs. 1,50,00,000/- to the income of the assessee.
The assessee appealed before the Ld. CIT(A). With the help of documents contained in the Paper Book filed before the Ld. CIT(A), the assessee demonstrated that the impugned bad debt has been written off as per the requirement of section 36(1)(vii) and the amount written off has been included in the total income of the subject year, the write off fulfils the requirement of section 36(1)(vii) read with section 36(2). Reliance was placed on the decisions of Hon’ble Delhi High Court in CIT vs. Morgan Securities and Credits (P.) Ltd. (2007) 292 ITR 339 (Del) and CIT vs. Autometers Ltd. (2007) 292 ITR 345 (Del) and CBDT Circular No. 12/2016 dated 30th May, 2016.
4.1 The assessee also assailed the observations of the Ld. AO. On page 4 of the assessment order, the Ld. AO stated that the fact of having written off the impugned bad debt is not mentioned in Form 3CD report filed by the assessee on 12.12.2016. The assessee submitted that there is no requirement of any disclosure in Form 3CD about the amount of bad debts written off during the year.
4.2 The Ld. AO mentioned that the assessee is still doing business with the concerned debtor i.e. NSEL. According to the assessee this conclusion is not based on facts and has no legal legs to stand because NSEL has been barred from engaging in any transaction w.e.f. July 2013 by SEBI as fraud has been detected against it.
4.3 The Ld. AO also mentioned that the assessee has written off only part of the income received from NSEL i.e. Rs. 1,50,00,000/- as against the receivable of Rs. 5,23,29,230/-. The assessee submitted that there is no law to write off the whole amount in one go.
The Ld. CIT(A) deleted the impugned addition of Rs. 1,50,00,000/- and recorded the followings findings in para 5.2 of his order:-
“5.2 The assessment order and the written submission of the appellant have duly been considered. Facts of the case, in brief, are that assessee was engaged in the business of commodity trading through the broker Integrated Commodity Trades Pvt. Ltd., which was the authorized broker of M/s National Spot Exchange Ltd (‘NSEL’). It is submitted that the appellant sold commodities amounting to Rs.30,44,32,556/- through NSEL and income from which was duly offered for tax after deduction of various expenses. Out of the above mentioned total sale effected through NSEL an amount of Rs.5,23,29,230/- was recoverable from NSEL at the end of the A.Y. 2014-15. It is the case of the appellant that the said amount of Rs.5,23,29,230/- has become irrecoverable in the year under consideration as NSEL was prohibited from doing any transactions w.e.f. July 2013 due to certain irregularities found in its conduct. It is also submitted that the said irregularity was well acknowledged in public domain, leading to jail terms of NSEL’s Managing Director and Chairman for their role in fraud. Therefore, assessee on becoming aware of the above developments, has written off an amount of Rs. 1,50,00,000/- out of the above said total amount of Rs.5,23,29,230/- as bad debts during the impugned assessment year. The AO disallowed the said claim on the ground that the appellant was not satisfying the conditions laid down u/s 36(2) of the Act. However, the AO has not mentioned the specific Clause of Section 36(2) of the Act, which the appellant was not fulfilling. It was observed that the appellant was still doing business with NSEL and the recovery process was being monitored by the Hon’ble High Court Committee appointed by Hon’ble Bombay High Court and therefore, the debts of the appellant have still not become bad and irrecoverable. In this connection, the AO has referred to the letter dated 24/11/2016 of NSEL in which it is mentioned that an amount of approximately Rs. 17.66 Crores were recovered in November, 2016 and it is also stated in the said letter that it is only a matter of time that the assets will be liquidated and disbursed to the concerned parties. In this regard, the appellant has submitted copy of ledger account of M/s Integrated Commodity Trades Pvt. Ltd in the books of the appellant for A.Y. 2014-15. During the course of appellate proceedings, the appellant was asked to furnish copy of ledger account of the appellant in the books of his broker Integrated Commodity Trades Pvt. Ltd. In response, a copy of the ledger account of the appellant in the books of M/s Integrated Commodity Trades Pvt. Ltd. has also been filed in which the outstanding balance as on 31/03/2014 is mentioned at Rs.5,23,29,230/-. Further, copy of confirmation dated 25/09/2018 from M/s Integrated Commodity Trades Pvt. Ltd. has also been submitted in which it is mentioned that the remaining balance of Rs.5,21,16,449/- is receivable by the appellant from NSEL. The appellant has also relied upon the decision of the Hon’ble Delhi High Court in the case of CIT vs. Morgan Securities and Credits (P) Ltd., (2006) 292 ITR 339 (Dei HC) and CIT vs. Autometers Ltd.,(2007) 292 ITR 345 (Del HC). The appellant has also relied upon the circular 12/2016 dated 30/05/2016 issued by CBDT in which it is observed that - “The Hon’ble Supreme Court in the case of TRF Ltd. in CA Nos. 5292 to 5294 of 2003 vide judgment dated 9.2.2010 has stated that the position of law is well settled. “After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1) (vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of accounts of assessee”. Considering the facts of the case and the judicial pronouncements and the Circular issued by the CBDT, I find that the bad debt of Rs.1,50,00,000/- written off by the appellant as irrecoverable in its account is admissible u/s 36(1 )(vii) read with section 36(2) of the Act. In view of the above, the addition of Rs.1,50,00,000/- is deleted. Accordingly, the above ground of appeal is allowed.”
6. The Revenue has come up in appeal before the Tribunal on the following grounds:-
“1. Whether in law & facts and circumstances of the case, Hon’ble CIT(A) was correct in deleting disallowance of Rs. 1,50,00,000/- claimed on account of bad debts u/s 36(1)(vii) of the Income Tax Act, 1961.
2. The Ld. CIT(A) erred in law & in facts by ignoring the fact that assesee had not fulfilled conditions laid out u/s 36(2)(i) of the Income tax Act 1961 to be able to claim deduction of bad debts u/s 36(1)(vii) of the Act.” 7. The Ld. Sr. DR, relying on the concluding para of the Ld. AO’s order argued that the assessee has prematurely written off sum of Rs. 1,50,00,000/- without satisfying the conditions laid down under section 36(2) of the Act. According to him, bad debts are not written off in the same year. The Ld. AR submitted that the AO’s order itself states that the impugned bad debt has been written off in the assessment year 2014-15. According to the Ld. AO it has been written off prematurely as there were chances of its recovery. The Ld. AR argued that it is no longer necessary that the bad debt should become irrecoverable. Once the assessee wrote off the bad debt in its books of account, it is lawful to claim the deduction on account of bad debt and the assessee produced evidence to prove that the impugned sum has been written off in his books of account. He relied on Hon’ble Delhi High Court’s decision in the case of CIT vs. Autometers Ltd. (supra) and judgment of the Hon’ble Supreme Court in the case of T.R.F. Ltd. vs. CIT (2010) 323 ITR 397 (SC) as also on CBDT’s Circular No. 12/2016 dated 30th May, 2016.
We have given careful thought to the rival submissions and perused the material on record. We are of the opinion that the Revenue will not succeed. The Ld. AO has been candid enough to observe that the assessee has written off bad debt to the tune of Rs. 1,50,00,000/-. His prime objection for denial of impugned deduction is that the said bad debt has been prematurely written off without satisfying the conditions laid down under section 36(2) of the Act.
8.1 Let us glance through the relevant provisions of the Act. Section 36(1) of the Act allows certain deductions in computing the income under the head ‘Profits and Gains of Business or Profession’.
(vii) subject to the provisions of sub-section (2), the amount of any debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year.
Section 36(2), provides that in making any deduction for a bad debt or part thereof the following provisions shall apply – “(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.”
8.2 Before we proceed further, it may be noted that Direct Tax Laws (Amendment) Act, 1987, w.e.f. 01.04.1989 substituted ‘any debt or part thereof, which is established to have become bad debt in the previous year’ by the words ‘any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year’. This is a major development with a view to avoid controversy as to the year in which such bad debt is allowable. It is thus evident that the year of write off is now taken as the year in which the amount is allowable as a bad debt.
8.3 The amended law w.e.f. 01.04.1989 provides that for an amount to be treated as a bad debt and to be allowed as an expenditure in the year in which it was written off, the assessee has to prove the satisfaction of both section 36(1)(vi) and section 36(2)(i), namely that bad debt had been written off and that bad debt had been taken into account in computing income of the assessee in any one of years mentioned in clause (i) of sub-section (2) of section 36 of the Act.
8.4 It is also crystal clear that after 01.04.1989, it is not necessary for the assessee to establish that debt has become irrecoverable. It is enough if bad debt is written off as irrecoverable in the accounts of the assessee. The assessee need not prove that debts have become bad. All that the assessee has to do after the amendment w.e.f. 01.04.1989 is to establish that the debt has been written off. It is not necessary to establish that debt has become irrecoverable during the year. We may refer to the judgment of the Hon’ble Supreme Court in the case of T.R.F. Ltd. (supra) and quote the following observations of the CBDT in Circular No. 12/2016 dated 30th May 2016:
“The legislative intention behind the amendment was to eliminate litigation on the issue of the allowability of the bad debt by doing away with the requirement for the assesses to establish that the debt, has in fact, become irrecoverable. However, despite the amendment, disputes on the issue of allowability continue, mostly for the reason that the debt has not been established to be irrecoverable. The Hon'ble Supreme Court in the case of TRF Ltd. in CA Nos. 5292 to 5294 of 2003 vide judgment dated 9.2.2010 has stated that the position of law is well settled. "After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1) (vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of accounts of assessee." In view of the above, claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act.”
The Ld. AO has admitted that the assessee has written off bad debt to the tune of Rs. 1,50,00,000/-. He made this observation on perusal of profit and loss account of the assessee for the year. The assessee brought on record copy of ledger account of M/s. Integrated Commodity Trades Pvt. Ltd. (broker through which the assessee traded in NSEL) in his books. During the course of appellate proceedings the Ld. CIT(A) required the assessee to furnish copy of ledger account of the assessee in the books of his broker. The assessee complied. The Ld. CIT(A) noticed therefrom that the outstanding balance as on 31.03.2014 is Rs. 5,23,29,230/-. The assessee also submitted the copy of confirmation dated 25.09.2018 from the broker wherein it is mentioned that the remaining balance of Rs. 5,21,16,449/- is receivable by the assessee from NSEL. All this go to prove that the claim of the assessee is bonafide and that he has fulfilled the first pre condition of section 36(1)(vii).
As regards the second pre condition, namely that the bad debt should have been taken into account in computing the income of the assessee, the submission of the assessee is that the outstanding debt which was not recoverable as on 31.03.2014 amounted to Rs. 5,23,29,230/-. This amount was included as income during the previous year 2013-14. The amount of sales during the year reflected in the profit and loss account included the said amount of Rs. 5,23,29,230/- which has become irrecoverable. The outstanding bad debt was, thus taken as income of the assessment year 2014-15. To make it more explicit the assessee explained that the total amount of bad debt of Rs. 5,23,29,230/- was included in the income of the assessee via the profit and loss account and out of the said amount Rs. 1,50,00,000/- has been written off during the assessment year 2014-15. Thus, the assessee satisfies the condition laid down in 36(2)(i) as well.
The objection of the Ld. AO that the assessee has prematurely written off sum of Rs. 1,50,00,000/- cannot stand in the post amendment era in which a write off cannot be questioned and should be allowed in the year it is written off in the books of the assessee. This change in law has also been pointed out by the Hon’ble Delhi High Court in the case of CIT vs. Modi Telecommunication Ltd. [2010] 325 ITR 291 (Del). We, therefore, endorse the findings of the Ld. CIT(A) and reject the appeal of the Revenue.
In the result, the Revenue’s appeal is dismissed.