THE COMMISSIONER OF INCOME TAX vs. O.E.N. INDIA LTD.

The questions of law framed in the appeal are re-framed as under: (i) Whether under Section 36(1)(vii) of the Act the Tribunal could have reversed the dis-allowance made of bad debts especially when the assessee had not taken any steps to recover the said debts and had merely stated it to be bad debts which were again receivable from a subsidiary company? (ii) Whether the Tribunal was correct in having deleted the dis-allowance of Rs.17,37,048/- under Section 37 of the Act?

The assessee; with respect to the transaction with the subsidiary company, by name “O/E/N Micro Systems Ltd.”, had claimed a deduction of Rs.57,95,975/-. Out of this, an amount of Rs.40,58,927/- related to transactions with the subsidiary company on a principal to principal basis for supply of materials and the balance Rs.17,37,048/- were stated to be amounts advanced by the - 3 - assessee for job works entrusted to the subsidiary company. The Assessing Officer [for brevity “AO”] found that there was no business expediency in declaring the debt to be bad debt. It is also found that the assessee had merely attempted financial support by writing off the bad debts, which cannot be permitted. It was also found that the assessee having continuous relationship with the subsidiary company; there cannot be any bad debt between themselves.

The denial of the claim under Section 37 with respect to Rs.17,37,048/- was on the ground that the assessee was not carrying on money lending business and there was no ground for any advance. The first appellate authority affirmed both the dis-allowances. However, the Tribunal reversed such disallowance.

The learned Senior Counsel for Government of India (Taxes) would argue that on established accounting principles, the assessee had a duty to take proceedings for recovery and only then could there be a declaration of bad debts. The assessee had, without any steps being taken, declared it to be bad debts, which cannot be countenanced; nor can the tax liability be absolved from on such a mere contention taken. The advance given by the assessee also - 4 - cannot be allowed as a claim under Section 37. 6. The learned Counsel for the assessee, however, would contend that there was ample evidence before all the authorities showing that the subsidiary company was in financial doldrums and the debt was mainly due to the assessee having issued a corporate guarantee against the loan availed by the subsidiary company from KSIDC. On recovery proceedings taken, the assessee was forced to pay up the amounts and it was in such circumstance that the assessee had declared the amounts due form the subsidiary company to be bad debts. There was absolutely no possibility of recovery of the said amounts from the subsidiary company which was in absolute financial stringency. The advances were not towards any financial assistance; but, however, to specific job works agreed upon by the subsidiary company to be executed for the assessee-Company.

We see that the Tribunal had considered the issue of the allowance under Section 36(1)(vii) especially with reference to the amendments made by Finance Act with effect from 01.04.1989. As the words existing prior to 01.04.1989, there as an obligation on the assessee to establish the bad debt claimed for the previous year, - 5 - whereas by the amendment any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year is eligible for deduction. Hence, the legislature has cautiously left it to the prudence of the assessee to determine whether the debt is bad or not. Further, we see that the Tribunal has looked at the financial figures as available in the previous year of the assessee-company as also the subsidiary company. The subsidiary company was in absolute financial stringency and there was no possibility of any recovery from that company. We do not see any question of law arising from the aforesaid issue, since the Tribunal had looked into the facts and found that the claim of bad debts cannot be said to be one which is made merely for absolving the tax liability. The financial figures on the subject year of the assessee-company and the subsidiary company commend such declaration of bad debts.

We also do not agree with the AO's finding that the advance amounts was in pursuance of a financial transaction. The assessee had made the advance to the subsidiary company for execution of job works, which is permissible under Section 37. We, in the light of the above findings, refuse to interfere with the orders of the Tribunal and reject the appeal of the Revenue, answering the questions framed against the revenue and in favour of the assessee; leaving the parties to suffer their respective costs. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE - 7 -