YEOMAN MARINE SERVICES PVT LTD,LOWER PAREL MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 8(3)(1), CHURCHGATE MUMBAI

This appeal is filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as "the Ld. CIT(A)"] for the Assessment Year 2018-19 arising out of the assessment framed under section 143(3) of the Income-tax Act, 1961 ("the Act").

The assessee has raised the following grounds of appeal: -

During the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction of bad debts amounting to Rs.3,56,65,465/- under section 36(1)(vii) of the Act. The assessee was called upon to furnish party-wise details of the bad debts together with copies of invoices, ledger accounts, PAN and addresses of the respective debtors. According to the Assessing Officer, although certain details were furnished, complete ledger accounts of the parties were not produced and PAN of some of the parties was also not available. The Assessing Officer thereafter issued notices under section 133(6) to various debtors calling for copies of their accounts maintained in their books. Based on the replies received from certain parties, the Assessing Officer observed that some of the invoices relied upon by the assessee were either not reflected in the accounts of such parties or payments had been made without any deduction corresponding to the amounts claimed as bad debts. The Assessing Officer further observed that in respect of some current year's invoices, the assessee had claimed the amounts as bad debts without satisfactorily explaining how such debts had become irrecoverable within such a short span of time. He therefore concluded that the assessee had failed to establish the genuineness of the claim and disallowed the entire bad debt claim of Rs.3,56,65,465/- under section 36(1)(vii) of the Act.

Aggrieved by the assessment order, the assessee carried the matter in appeal before the Ld. CIT(A). During the appellate proceedings, detailed written submissions were filed explaining that the impugned debts represented business debts which had been duly written off in the books of account during the relevant previous year and that the corresponding income had already been offered to tax in the earlier years. It was further contended that after the amendment to section 36(1)(vii), the assessee was not required to establish that the debt had actually become irrecoverable. The assessee also objected to the reliance placed by the Assessing Officer on replies received under section 133(6), contending that copies of such replies were never supplied before making the addition. The Ld. CIT(A) called for a remand report from the Assessing Officer. However, after considering the remand report and the rejoinder filed by the assessee, the Ld. CIT(A) upheld the action of the Assessing Officer by holding that the assessee had failed to substantiate the claim of bad debts and accordingly dismissed the appeal.

During the course of hearing before us, the Ld. Authorised Representative reiterated the submissions advanced before the lower authorities. It was submitted that the authorities below have proceeded on an erroneous understanding of the legal position governing allowance of bad debts under section 36(1)(vii) of the Act. Drawing our attention to the decision of the Hon'ble Supreme Court in the case of TRF Ltd. vs. CIT [(2010) 323 ITR 397 (SC)], it was contended that after the amendment made with effect from 01.04.1989, it is no longer necessary for an assessee to establish that the debt has in fact become irrecoverable. It was submitted that once the debt is written off as irrecoverable in the books of account and the conditions prescribed under section 36(2) are fulfilled, deduction cannot be denied merely because the Assessing Officer entertains a different opinion regarding recoverability of the debt.

The Ld. AR further submitted that the Assessing Officer has travelled beyond the scope of enquiry permissible under section 36(1)(vii) by insisting upon proof regarding irrecoverability of each individual debt. It was submitted that the assessee had produced ledger accounts, invoices and other documentary evidences to demonstrate that the amounts represented trade debts arising during the ordinary course of business and had been duly written off in the books of account. According to the Ld. AR, instead of examining whether the statutory conditions prescribed under sections 36(1)(vii) and 36(2) were fulfilled, the Assessing Officer rejected the claim by merely drawing adverse inferences from certain replies received from third parties under section 133(6) of the Act.

Inviting our attention to the assessment records, the Ld. AR submitted that the entire addition is founded upon replies allegedly received from various customers pursuant to notices issued under section 133(6). However, copies of such replies were never furnished to the assessee during the assessment proceedings. Consequently, the assessee was deprived of an opportunity to reconcile the alleged discrepancies or to furnish explanations with supporting documentary evidence. It was vehemently argued that no adverse inference can be drawn on the basis of material collected behind the back of an assessee without first confronting the same. Such action, according to the Ld. AR, is in complete violation of the settled principles of natural justice.

The Ld. AR further submitted that even during the appellate proceedings, the Ld. CIT(A) called for a remand report from the Assessing Officer. However, the remand report itself demonstrates that proper verification was never carried out. It was pointed out that in respect of certain parties, partial replies had admittedly been received by the Assessing Officer, yet the remand report proceeds on the footing that no reply had been received at all. This factual inconsistency, according to the Ld. AR, clearly establishes that neither the assessment proceedings nor the remand proceedings were conducted after proper appreciation of the available records. It was therefore pleaded that the entire matter deserves to be restored to the file of the Assessing Officer after directing him to furnish all replies received under section 133(6) and thereafter decide the issue afresh in accordance with law.

Per contra, the Ld. Departmental Representative relied upon the orders of the authorities below. It was submitted that despite several opportunities afforded during the course of assessment proceedings, the assessee failed to furnish complete ledger accounts, confirmations and other documentary evidence necessary to substantiate its claim. It was further submitted that the Assessing Officer had noticed several discrepancies between the invoices relied upon by the assessee and the copies of accounts furnished by various parties in response to notices issued under section 133(6). According to the Ld. DR, the assessee had also claimed certain current year's invoices as bad debts without satisfactorily explaining as to how such debts had become irrecoverable within such a short period. The Ld. DR accordingly supported the orders of the lower authorities and submitted that no interference was called for.

We have heard the rival submissions and perused the material available on record. We have carefully gone through the assessment order, the impugned order of the Ld. CIT(A) and the various documents placed before us. The controversy before us lies in a narrow compass, namely, whether the authorities below were justified in disallowing the claim of bad debts amounting to Rs.3,56,65,465/-.

From the assessment order, it is evident that the principal reason which weighed with the Assessing Officer for making the impugned addition was the alleged discrepancy noticed in the replies received from certain debtors pursuant to notices issued under section 133(6). The Assessing Officer has observed that some of the invoices claimed by the assessee were not reflected in the books of the respective parties and that certain parties had reduced the bill amounts on account of delayed execution of work or other commercial adjustments. Based upon these replies, the Assessing Officer concluded that the assessee had failed to establish that the debts had become irrecoverable and consequently disallowed the entire claim.

At this stage, it would be relevant to note that the assessee has specifically pleaded before us that none of the replies received under section 133(6), which formed the very basis of the addition, were ever furnished to it before completion of the assessment. The Revenue has also not been able to controvert this factual assertion by placing any material on record to show that copies of such replies were supplied to the assessee before adverse conclusions were drawn. In our considered opinion, once the Assessing Officer proposes to rely upon material collected from third parties for making an addition, such material must necessarily be confronted to the assessee. The requirement is not merely procedural but goes to the root of the principles of natural justice. An assessee cannot be condemned on the basis of evidence collected behind its back without being afforded an effective opportunity to explain or rebut the same.

We further notice that while rejecting the claim, the Assessing Officer has repeatedly observed that the assessee failed to establish that the debts had become irrecoverable. In our opinion, the aforesaid approach requires reconsideration in the light of the law laid down by the Hon'ble Supreme Court in the case of TRF Ltd. vs. CIT [(2010) 323 ITR 397 (SC)]. The Hon'ble Apex Court, while interpreting section 36(1)(vii) after its amendment with effect from 01.04.1989, has held that it is no longer necessary for the assessee to establish that the debt has in fact become irrecoverable. It is sufficient if the bad debt is written off as irrecoverable in the books of account of the assessee. The Hon'ble Supreme Court, however, clarified that the Assessing Officer is entitled to examine whether the debt has actually been written off in the books and whether the requirements of section 36(2) stand fulfilled. Thus, the enquiry of the Assessing Officer has to be confined within the statutory parameters prescribed by the Act.

In the present case, the assessment order reveals that considerable emphasis has been laid upon the opinion of the Assessing Officer that certain debts could not have become irrecoverable within the same financial year and that some of the debtors had not accepted the assessee's claim in their replies furnished under section 133(6). Such an approach, in our view, loses sight of the legal position explained by the Hon'ble Supreme Court. Whether the debt has commercially become irrecoverable is primarily a business decision of the assessee. Once the statutory conditions are fulfilled, the deduction cannot be denied merely because the Assessing Officer entertains a different perception regarding the recoverability of the debt. At the same time, where the Assessing Officer proposes to dispute the factual correctness of the write-off on the basis of third-party information, such material must necessarily be confronted to the assessee and an effective opportunity should be granted to explain the discrepancies.

In the facts of the present case, we find that the assessment order itself shows that the Assessing Officer has relied substantially upon the replies received from various parties under section 133(6). However, there is nothing on record to establish that complete copies of such replies together with the accompanying documents were ever supplied to the assessee before drawing adverse inference. Similarly, the remand report also appears to contain factual inconsistencies regarding the receipt of replies from certain parties. In these circumstances, we are of the considered opinion that the matter deserves to be restored to the file of the Assessing Officer for fresh adjudication after curing the aforesaid procedural infirmities.

In the result, Ground Nos. 1, 2, 4 and 5 of the appeal are allowed for statistical purposes.