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Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
ORDER PER C.M.Garg, J.M.
This appeal has been filed by the assessee against the order of the CIT(A) – Central Gurgaon dated 26.09.2013 passed in appeal no. 41/16/IT/CIT(A) – I/ LDH /2009-10 for AY 2007-08.
The assessee has raised as many as four grounds in this appeal but except ground no. 1, other grounds are argumentative and supportive to the main ground which reads as follows : “1. The ld. CIT(A), (Central) Gurgaon has erred in law and on facts in sustaining the disallowance of debts amounting to Rs. 2985742/- written off as bad debts in the previous year as irrecoverable without disputing that the condition laid down under clause (vii) of sub section (1) of 2 Mukand Lal section 36 read with section 36(2) has not been compiled with by the appellant. Order, passed by the CIT(A) (Central), Gurgaon therefore, deserves to be annulled and may kindly be annulled.”
We have heard arguments of both the sides and carefully perused the relevant material placed on record before us, inter alia, impugned assessment order and order of the CIT(A). The ld. Counsel of the assessee submitted that the date of search was 21.08.2007 and before search on the said date, the assessee filed his return of income for AY 2007-08 on 31.07.2007 hence, this allegation of the authorities below is baseless that the assessee first time declared bed debts to avoid tax liability on surrendered amount. The ld. Counsel of the assessee also drawn our attention towards para 4.4 of the assessment order and submitted that as per ratio of the decision of Hon’ble Supreme Court in the case of CIT vs. TRF ltd. reported as 323 ITR 397 (SC).
Replying to the above the ld. Departmental Representative (DR) supported the action of the AO as well as impugned order and contended that there was a huge surrender by the assessee during search operation conducted on 21.08.2007 and undisputedly and admittedly the assessee for the very first time since inception of his business has claimed to write off bed debts and advances with an intention of nullity the tax liability arose due to surrender. The ld. DR also drawn our attention towards paras 4.5 to 7 of the assessment order and contended that as per decision of Hon’ble Kolkata High Court in the case of Coats India Ltd. vs. CIT 232 ITR 322 (page no. 329) the reasonable presumption would be willful 3 Mukand Lal writing off debts in the very year when the assessee has surrendered undisclosed income to just avoid the tax liability.
The ld. AR placing rejoinder to the above submissions vehemently contended that this presumption is not available for the Revenue in the present case as the return was filed on 31.07.2007 and search, wherein surrender was made in the search operation, was conducted subsequently on 21.08.2007. Hence, there was not mala fide intention of the assessee in writing off bed debts just to avoid tax liability arose therefrom.
On careful consideration of above rival submissions firstly we observe that the authorities below proceeded to make disallowance and addition only on the sole premise that by way of writing off bed debts the assessee wants to avoid tax payment which arose due to huge surrenders but we reject this basis as the assessee filed his return of income for AY 2007-08 on 31.07.2007 writing off bed debts in question and the search operation was held subsequently on 21.08.2007. Hence, we respectfully hold that the benefit of the ratio of the decision of Hon’ble Calcutta High Court in the case of CIT vs. Coats India Pvt. Ltd. (Supra) is not avoidable for the Revenue.
We further observe that the AO allowed bed debts of Rs. 99,39,905/- but disputed the amount of bed debts pertains to FY 2005-06 & 2006-07 relevant to AY 2006-07 & 2007-08respectively and after allowing claim of bed debts of Rs. 19,90,000/- with regard to Sh. Bhagwat Dayal & Sh. Rava Kumar, who had came into the accounts of the assessee on in FY 2006-07, disallowed the claim of 4 Mukand Lal Rs. 29,85,742/- without any basis solely on the previous of wrong presumptive based only on surmises and conjectures.
From the impugned order of the CIT(A) it is observed that the assessee filed written submissions supporting alleged claim of bed debts and explaining his stand which have been reproduced by the CIT(A) in paras 4.1 & 4.1.1 but the first appellate authority has not called comments or remand report thereto and the same have been dismissed merely agreeing with the action of the AO without any proper adjudication in the light of land made decision of Hon’ble Apex Court in thecase of TRF Ltd. vs. CIT (Supra). The relevant operative part of this decision of Hon’ble Supreme Court reads and follows.
“Heard learned counsel on both sides.
In these appeals, we are concerned with Assessment Year 1990-1991 and Assessment Year 1993-1994. Prior to 1st April, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word "established", which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 [`Act', for short].
For the sake of clarity, we re-produce hereinbelow provisions of Section 36(1)(vii) of the Act, both prior to 1st April, 1989 and post-1st April, 1989:
"Pre-1st April, 1989: Other deductions. 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (i) to (vi) xxxx xxxx xxxx
(vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year. Post-1st April, 1989: Other deductions. 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (i) to (vi) xxxx xxxx xxxx (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."
This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off.
In view of above we are of the considered opinion that the disputed claim of the assessee in regard to bed debts written off for FY 2005-06 & 2006-07 which was written of during AY 2007-08 requires proper verification, examination and adjudication of the level of the AO and thus, we restore this issue to the file of the AO for afresh adjudication after allowing due opportunity of hearing to the assessee and without being prejudiced from the earlier assessment and impugned first appellate order.
Accordingly, sole ground / issue of the assessee is deemed to be allowed for statistical purposes in the manner as indicated above.
In the result, appeal of the assessee is allowed for statistical purposes. Order Pronounced in the Court on 19/02/2011.