COMMISSIONER OF INCOME TAX vs. M/S SEPTU INDIA PVT. LTD.

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH I.T.A. No. 607 of 2007 DATE OF DECISION: FEBRUARY 06, 2008 Commissioner of Income Tax, Faridabad .....APPELLANT Versus M/s. Septu India (P) Ltd., Begumpur, Khatola, Gurgaon ....RESPONDENT CORAM: HON'BLE MR.JUSTICE SATISH KUMAR MITTAL HON'BLE MR.JUSTICE RAKESH KUMAR GARG --- Present: Mr.Yogesh Putney, Advocate, for the appellant. .. SATISH KUMAR MITTAL

, J. The instant appeal filed by the revenue is directed against the order dated 22.12.2006 passed by the Income Tax Appellate Tribunal, Delhi Bench “D” New Delhi (hereinafter referred to as `the ITAT') in ITA No.2133/DEL/03 in case of the respondent for the Assessment Year 1997- 98. In the present case, the Assessing Officer disallowed Rs.20,41,541/- on account of bad debts written-off as the assessee did not furnish even the names of the parties whose debts became bad and also failed to produce any documentary evidence that these debts became really bad. On appeal filed by the assessee, the Commissioner of Income

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-2- Tax (Appeals) deleted the said addition by holding that after amendment to Section 36(1)(vii) of the Income Tax Act (hereinafter referred to as `the Act'), it was not obligatory on the part of the assessee to prove that the debts written-off were indeed bad debts. Feeling aggrieved against the said order, the revenue filed an appeal before the ITAT. The ITAT dismissed the said appeal and confirmed the order of Commissioner of Income Tax (Appeals) by following the judgment of Special Bench of ITAT, Mumbai in case of DCIT Versus Oman International Bank, (2006) 100 ITD 285 (Mum) (SB) while observing as under:- “We have heard the parties and perused the record of the case. There is no dispute about the actual writing off of the bad debts in the books of account of the assessee. The claim of the Revenue is that irrespective of the amendment in the provision of Section 36(1)(vii) of the Act, the assessee has to establish that the debt has become bad. However, this has not been established by the assessee. Therefore, CIT(A) was not justified to delete the same merely on the basis of entry of writing off in the books of account. A reliance has been placed on the decision of the Madras High Court in the case of South India Surgical Co. Ltd. vs. ACIT reported in (2006) 201 CTR (Mad) 289 wherein it has been held as under:- “Held : It is not sufficient for the assessee to say that he has become pessimistic about the prospect of recovery of debt in question. He must feel honestly convinced that the financial position of the debtor was so precarious and shaky that it would be impossible to collect any money from him. The question is really one of fact depending upon the various facts and diverse circumstances bearing on the debtor's pecuniary position, his commitments and obligations. The judgement of the assessee in regarding the debt as bad

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-3- debt must be a honest judgement and not a convenient judgement. The judgment of the assessee must be established to have been taken on relevant facts and circumstances, which should show that the debt is not realizable for some fault on the part of the debtor or some supervening impossibility on the part of the debtor to pay but not possible difficulties or hurdles the assessee may have to incur to compel the recalcitrant debtor to pay. The assessee for his convenience may decide that the debt is too small and it is not worthwhile to pursue the debtor but that judgment would not be a honest judgement, which would establish that the debt has become a bad debt. A time barred debt can be assumed to be bad, but is not necessarily bad because of expiry of limitation for recovery of the same – Devi Films Ltd. Vs. CIT (1963) 49 ITR 874 (Mad) and T.S.P.L.P. Chidambaram Chettiar Vs. CIT (1967) 64 ITR 181 (Mad) relied on.” 29. However, we find that the Gujarat High Court in the case of CIT Vs. Girish Bhagwan Prasad 256 ITR 772 has held that under the provisions of Section 36(1)(vii) of the Act, deduction had to be allowed in computing the income referred to in Section 28 of the Act of 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 subject the provisions of sub-section (2). Prior to amendments from April 1, 1989, the allowance under this clause was confined to the debts and loans which had become irrecoverable for the accounting year. Thus, under the provisions of Section 36 (1)(vii) as enforced from April 1, 1989 all that the assessee had to show was that the bad debt was written off as irrecoverable. Further the Special Bench of ITAT, Mumbai in the case of DCIT VS. Oman International Bank (2006) 100 ITD 285 (Mum) (SB) has held that as per the existing

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-4- provisions of Section 36(vii), after its amendment w.e.f. 1.4.89, it is not obligatory on the part of the assessee to prove that the debt written off by the assessee is indeed a bad debt for the purpose of allowance u/s 36(1)(ii) of the Act. It may be mentioned that there is no decision available of the jurisdictional High Court on this issue. Thus, there are two views available on this issue. Therefore, in view of the decision of the Hon'ble Supreme Court in the case of Vegetable Products reported in 88 ITR 192, the Hon'ble Supreme Court held that the view which is favourable to the assessee is required to be accepted. We, therefore, uphold the order passed by the CIT(A) in this regard.” Against the said order, the present appeal has been filed. Counsel for the appellant submitted that the decision taken by the assessee regarding the debt as bad debt must be an honest decision and the said decision must be established to have been taken on relevant facts and circumstances which should show that the debt is not realizable for some fault on the part of the debtor or some supervening impossibility on the part of the debtor to pay but not possible difficulties or hurdles the assessee may have to incur to compel the recalcitrant debtor to pay. After hearing the counsel for the appellant and going through the impugned order, we are of the opinion that in the facts and circumstances of the present case the debts with regard to certain persons had actually been written-off as bad debts in the books of accounts of the assessee. There is no material on the record that the decision taken by the assessee by writing-off the debt as bad debt is not an honest decision. Therefore, in our view, the ITAT while following the judgment of the Gujarat High Court in the case of CIT v. Girish Bhagwan Prasad, 256 ITR 772 and the Supreme Court in the case of Vegetable Products, 88 ITR

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-5- 192, has rightly held that the view which is favourable to the assessee is required to be accepted. Therefore, we are of the opinion that no substantial question of law is arising in this appeal. Dismissed. (SATISH KUMAR MITTAL) JUDGE

February 06, 2008 (RAKESH KUMAR GARG) vkg JUDGE