M/S BRIJNATH KHANDELWAL & CO,KOLKATA vs. D.C.I.T CIR - 34,KOLKATA., KOLKATA

The assessee in the present case is a partnership firm, which is engaged in the business of investment in shares and securities. The return of income for year under consideration was filed by it on 30.10.2006 declaring a loss of Rs.20,79,640/-. In the Profit & Loss Account filed along with the said return, a sum of Rs.32,68,760/- was debited by the assessee on account of bad debts written off. During the course of assessment proceedings, the assessee could not establish on evidence that the said amount of bad debts was included in its income for ./2013 Assessment year: 2006-2007 Page 2 of 6 the earlier years. The Assessing Officer, therefore, disallowed the claim of the assessee for deduction on account of bad debts in the assessment completed under section 143(3) vide order dated 24.11.2008. The said disallowance made by the Assessing Officer was confirmed by the ld. CIT(Appeals) dismissing the appeal of the assessee. Thereafter a notice was issued by the Assessing Officer requiring the assessee to show-cause as to why penalty under section 271(1)(c) should not be imposed in respect of the addition made to its total income on account of disallowance of bad debts written off. The explanation offered by the assessee in this regard was not found satisfactory by the Assessing Officer and rejecting the same, he imposed the penalty of Rs.11,00,234/- under section 271(1)(c) being 100% of the tax sought to be evaded by the Assessing Officer in respect of the addition made to its total income on account of disallowance of bad debts.

The penalty imposed by the Assessing Officer under section 271(1)(c) was challenged by the assessee in an appeal filed before the ld. CIT(Appeals). During the course of appellate proceedings before the ld. CIT(Appeals), the following submissions were made by the assessee:- (a) The appellant during the course of hearing before the Learned Assessing Officer had duly filed the details of name and address of parties alongwith the list of Sundry Debtors since March 2002 to March 2006 and copies of their accounts.

Aggrieved by the order of the ld. CIT(Appeals), the assesese has preferred this appeal before the Tribunal.

The ld. Counsel for the assessee, at the outset, took us through the various submissions filed by the assessee before the Assessing Officer to point out that the relevant bad debts written off by the assessee actually pertained to two broker firms, which had merged into the assessee firm. He submitted that all these debts were consistently shown by the said two firms as well as by the assessee-firm as sundry debts, which by itself is sufficient to show that they represented trade debtors of the assessee. He submitted that the assessee could not establish that the amount of the said debs, either partly or fully, was included in the income of the earlier years due to substantial time gap, but a request, therefore, was made by the assessee to the Assessing officer to inspect the relevant assessment ./2013 Assessment year: 2006-2007 Page 4 of 6 record to find out and furnish such details. He contended that this conduct of the assessee clearly shows his bonafide and in the absence of anything brought on record by the Assessing Officer to show that the claim of the assessee for bad debts written off was wrong penalty under section 271(1)(c) cannot be justifiably imposed. He also submitted that both the erstwhile firms merged with the assessee-firm were engaged in broker’s business and part of income on account of the relevant debts in the form of brokerage must have been offered by them as income in the earlier years. He contended that the claim of the assessee for deduction on account of bad debts written off thus was a bonafide claim and just because the same has been disallowed in the quantum proceedings for want of relevant evidence to establish that the amount of such debts was offered as income in the earlier years and the said disallowance is accepted by the assessee, penalty cannot be imposed under section 271(1)(c).

The Ld. D.R., on the other hand, strongly relied on the orders of the authorities below in support of the revenue’s case that the present case is a fit case to impose penalty under section 271(1)(c). He contended that one of the conditions to claim deduction on account of bad debts was not satisfied by the assessee and the fact that the disallowance made on this issue is accepted by the assesee clearly shows that its claim on account of bad debts written off was a wrong claim attracting the penal provisions of section 271(1)(c).

We have heard the rival submissions and also perused the relevant material available on record. It is observed that the relevant debts written off by the assessee during the year under consideration pertained to the erstwhile two share broker firms that had merged into the assesee- firm. As demonstrated by the ld. Counsel for the assessee before the authorities below as well as before us, the said debts were shown by the two erstwhile firms as their sundry debtors and keeping in view the nature of the business of the said two firms as well as the treatment given ./2013 Assessment year: 2006-2007 Page 5 of 6 to the relevant debts in their books of account, it can reasonably be inferred that the said debts represented trade debtors of the concerned two firms. Even after merger, the assessee-firm continued to show the said debts as sundry debtors in its books of account and after having written off the same as irrecoverable from its books of account for the year under consideration, deduction under section 36(1)(vii) was claimed by the assessee. Having regard to all these facts and circumstances of the case, we are of the view that the claim made by the assessee for deduction on account of bad debts was a bonafide one based on a possible view of the matter and although the same has been disallowed in the quantum proceedings and the disallowance so made has been accepted by the assessee, there is nothing brought on record to show that the claim made by the assessee was a wrong one. On the other hand, the failure of the assessee to establish that the amount of relevant debts was not included, either partly or fully, in its income was due to a substantial time lag as explained by the assessee and the conduct of the assessee to furnish all the relevant details and to seek inspection of assessment records to find out and furnish the relevant details to support and substantial its claim for bad debts written off clearly show its bonafide. As such considering all the facts and circumstances of the case, we are of the view that the assessee cannot be said to be guilty of concealing the particulars of its income or furnishing inaccurate particulars of such income warranting imposition of penalty under section 271(1)(c). In that view of the matter, we cancel the penalty imposed by the Assessing Officer and confirmed by the ld. CIT(Appeals) and allow this appeal of the assessee.