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Income Tax Appellate Tribunal, BENCH “C”, KOLKATA
Before: Shri Mahavir Singh, JM & Shri M.Balaganesh, AM]
ORDER
Per Shri M.Balaganesh, AM
This appeal of the revenue arises out of the order of the Learned CITA in Appeal No. 136/CIT(A)-I/Wd-1(2)/05-06 dated 19.05.2006 passed against the order of assessment for the Asst Year 2003-04 framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
Shri.Sanjay Mukherjee, JCIT, the Learned CIT DR argued on behalf of the revenue and Shri. P.K.Himmatsinghka, Advocate, the Learned AR argued on behalf of the assessee.
The only issue to be decided in this issue is as to whether the Learned CITA is justified in granting deduction towards bad debts claimed by the assessee in the sum of Rs. 11,08,326/-.
The brief facts of this issue is that the assessee is engaged in the business of hire purchase financing as a non-banking finance company. The income of the assessee mainly consisted of hire purchase management fees and interest on advances / loans provided for hire purchase. During the course of its business, the assessee had advanced monies under hire purchase scheme to Poddar & Associates ; Chandra
2 M/s. Progressive Stock Management Co.Pvt.Ltd., A.Yr.2003-04 Sekhar Upadhyay and Shri.Swapan Kanti Dey, among others, who defaulted in payment of instalments. The assessee after taking all reasonable steps for recovery of the dues treated the recoverability of the dues from the aforesaid parties as doubtful to the tune of Rs. 11,08,326/- comprising of Poddar & Associates (Rs. 9,69,175/-) ; Shri.Swapan Kanti Dey (Rs. 1,02,776/-) and Shri. Chandra Sekhar Upadhyay (Rs. 36,375/-) and accordingly proceeded to write off the same in its books of accounts in accordance with prudential norms prescribed by Reserve Bank of India (RBI) by crediting to the concerned parties account. But in the profit and loss account, the assessee had erroneously mentioned the same as provision as per RBI norms instead of actual write off of dues. Accordingly, the Learned AO held that provision as per RBI norms is not permissible as deduction in terms of section 36(1)(vii) read with section 36(2) of the Act and moreover, the principal amount of the instalment was never offered as income by the assessee and accordingly the same even if written off is not eligible for deduction as per section 36(1)(vii) read with section 36(2) of the Act. On first appeal, the disallowance was deleted by the Learned CITA by stating that as the assessee is engaged in the business of granting loans, the condition that the debt written off should have been taken into account in computing its income, which the Learned AO has emphasized , is not applicable in this case. The Learned CITA also observed that after the amendment in section 36(1)(vii) of the Act with effect from 1.4.1989, it is only necessary that the debt should be written off as irrecoverable in the accounts of the assessee and it is not necessary to establish that the debt has become bad in the previous year. Aggrieved, the revenue is in appeal before us on the following grounds:- “
1. Whether the Ld. CIT(A) is justified in allowing the principal amount of a term loan, given by the assessee as a NBFC, to be written off as bad debt when the said amount is in the nature of capital of the assessee.
2. Whether the Ld. CIT(A) is justified in allowing the principal amount of term debt to be written off, debited to P/L A/c., as well claimed as an allowable expense under section 36(1)(vii) read with section 36(2), when the said amount is never offered by the assessee for taxation as his income.”
The Learned DR argued that the assessee had advanced term loans which are fully secured and hence the action of the assessee to forego the securities at the time of 3 M/s. Progressive Stock Management Co.Pvt.Ltd., A.Yr.2003-04 recovery of the dues and the consequential write off of the debts and claiming the same as deduction u/s 36(1)(vii) of the Act could not be appreciated . Moreover, he further argued that the principal portion of the Hirepurchase dues is never offered to tax as income . He argued that the statute provides for deduction towards bad debts u/s 36(1)(vii) read with section 36(2) of the Act. Since no income is offered to tax for the principal portion, no deduction could be granted for the secured loans of the assessee. In response to this, the Learned AR argued that the entire instalments recoverable (instalments mean principal and interest) have been duly written off in the books as irrecoverable and credited to the concerned parties account. Moreover, the assessee is engaged in the business of money lending under hire purchase scheme and this is evident from the fact of showing the instalments receivable from various parties as a current asset (stock in trade). He further argued that the assessee had taken enough steps for recovery of the dues and all its efforts were in vain and for this purpose, he took us to the various pages of the paper book containing pages 1 - 45 comprising of audited annual accounts for the year ended 31st March 2003 ; copy of loan agreements entered into with three parties ; advocate legal notice issued u/s 138 of Negotiable Instruments Act for cheque bouncing case when the cheque issued by party for one time settlement figure of Rs. 5,74,000/- also got bounced and status of court case of one of the parties M/s Poddar & Associates . He further argued that the concerned party had fled away with the equipment given on hire purchase and he could not be traced even for execution of the court proceedings and the police had reported that the court summons could not be served as the summonee could not be found in the given address and thereafter the Magistrate had issued warrant of arrest against the accused person Mr.Pradip Agarwal Proprietor of M/s Poddar & Associates. In view of the above, he pleaded that the deduction u/s 36(1)(vii) towards bad debts may kindly be granted to the assessee.
We have heard the rival submissions and perused the materials available on record including the paper book filed by the Learned AR. It is found that the assessee had taken enough steps for recovery in respect of one of the parties M/s Poddar & Associates even though it is not required for an assessee to establish that the debt had 4 M/s. Progressive Stock Management Co.Pvt.Ltd., A.Yr.2003-04 become bad after the amendment in section 36(1)(vii) of the act with effect from 1.4.1989. It is also found that the assessment year under appeal before us is Asst Year 2003-04 and whereas the court proceedings in respect of cheque bouncing case stated by the Learned AR as supra pertain to the period in 2005 & 2006. However, the assessee had already written off the debts due from M/s Poddar & Associates in Asst Year 2003-04 itself. In fact the subsequent conduct of the court proceedings strengthens the original stand taken by the assessee in Asst Year 2003-04 in deciding to write off the debt as irrecoverable in the books of accounts and claiming the same as deduction, even though the assessee need not establish a debt to have become bad after 1.4.1989. It is also observed that the assessee had duly written off the entire instalments receivable from the following three parties as irrecoverable in its books of accounts in Asst Year 2003-04 :-
Poddar & Associates , 7, Tarachand Dutta Street, R.N., 4h, 4th Floor, Kolkata – 700073 9,69,175 Chandra Sekhar Upadhyay, Laskar Halt, Madhyapara P.O. , Tiljala, Kolkata – 700039 36,375 Swapan Kanti Dey, Sreemanto Market, No.319, AT Road, Guwahati, Assam – 781001 1,02,776 11,08,326 Reliance in this regard is placed on the following decisions :- 326 ITR 315 (Mad) – CIT vs Y. Ramakrishna & Sons Ltd “Held, dismissing the appeal, that the transaction of the assessee of financing the subsidiary company was genuine and bona fide. The assessee paid further advances in its own interest with a view to recover the amount given earlier, to sustain a share and to avoid the guarantee being invoked. The mere fact of payment of money after the stoppage of interest from the subsidiary company by itself could not be a ground to hold that the transactions were not in the course of the business. There was no bar in law for financing the subsidiary company. The income received by the assessee from the subsidiary company by way of interest was subjected to tax and the advance made by the assessee to that company was also subjected to tax. At the time of writing off the debt, the subsidiary company had accumulated huge losses. The assessee also suffered a loss while selling the shares of the subsidiary company which resulted in the subsidiary company ceasing to be the subsidiary of the assessee. Therefore, in the circumstances the money advanced by the assessee had become irrecoverable and was given during the course of the business. What was not paid by the subsidiary company was only the interest and there was no principal amount due at the time of advancing the amount
5 M/s. Progressive Stock Management Co.Pvt.Ltd., A.Yr.2003-04 thereafter. The advances made by the assessee were also utilized by the subsidiary company for the purpose for which they were obtained which was to run the foundry. This would also indicate that the amount had been given out of commercial expediency as well. Both the Commissioner (Appeals) as well as the Tribunal had considered the materials on record and came to the conclusion that the transactions involved were true and genuine. They had also held that the advances had been made during the course of the business and they had become irrecoverable as bad debts and hence the assessee was entitled to the benefit under section 36(1)(vii). The question as to whether a debt had become bad or not was a pure question of fact and, therefore, it could not be construed as a question of law.”
323 ITR 397 (SC) TRF Ltd “BAD DEBT-LAW AFTER APRIL 1, 1989 – ASSESSEE ONLY TO ESTABLISH THAT DEBT WAS WRITTEN OFF – NOT NECESSARY TO ESTABLISH THAT DEBT IN FACT HAD BECOME IRRECOVERABLE – INCOME-TAX ACT, 1961, s.36(1)(vii). After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, 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. The Supreme Court accordingly remanded the matter to the Assessing Officer to examine, solely to the extent of write off, whether the debt or part thereof was written off in the accounts of the assessee.”
(2013) 36 taxmann.com 537 (Allahabad HC) CIT vs Smt.Sushila Mallick – “To treat a debt as a bad debt had to be a commercial or business decision of the assessee based on the relevant material in the possession of the assessee. Once the assessee records the debt as a bad debt in his books of account, that would prima facie establish that it was a bad debt unless the Assessing Officer for good reasons holds otherwise. The writing off in the accounts had to be bona fide. Once that be the case, the assessee was not called upon to discharge any further burden. After the 1989 amendment in section 36(1)(vii) it was neither obligatory nor was the burden on the assessee to prove that the debt written off by him was indeed a bad debt as long as it was bona fide and based on commercial wisdom or expediency. [Para 10] In the instant case, the assessee has written off bad debt when it was felt that the amount is not recoverable. The satisfaction of the assessee is sufficient for claiming write off the bad debt. Moreover, both the companies have disappeared from Lucknow without making any payment. [Para 13] In the light of the above discussion and by considering the totality of the facts and circumstances of the case, there was no reason to interfere with the impugned order passed by the Tribunal. [Para 14]”
Dy. CIT vs Oman International Bank Saog in (Mum) of 1997 dated 17.5.2006 for Asst Year 1994-95 passed by Mumbai Tribunal Special Bench.
6 M/s. Progressive Stock Management Co.Pvt.Ltd., A.Yr.2003-04 “Held the Direct Tax Laws (Amendment) Act, 1987 with effect from assessment year 1989-90 has liberalized the requirement of writing off of debts by an assessee by altogether doing away with the condition precedent of the satisfaction of the AO in writing off a bad debt, which used to lead to enormous litigations. The amendment provisions provide that a claim of bad debt will be allowed in the year in which such bad debt has been written off as irrecoverable in the accounts of the assessee for the previous year [para 30]. In pre-amended provision the assessee was required to establish that the debt in question has become bad in the previous year. In the post-amended period it is sufficient if the bad debt or part thereof is written off as irrecoverably in the accounts of the assessee. The law has done away with the onerous obligation on the part of the assessee to establish that the debt has become bad in the previous year. Now the requirement is only the write off of such debt as irrecoverable in the accounts of the assessee. [ Para 31]. As explained by the CBDT Circular, No.551, dt. 23-1-1990 the amendment has been brought to do away with all the complications involved in determining the issue of deductibility of bad debts under section 36(1)(vii). The amendment decided the year in which the deduction has to be allowed, as the year in which the assessee has written off the debt as bad debt in the books of account. The amendment has also done away with the requirement of establishing that the debt has become bad. This is clear from the circular of the Board where it is stated that the amendment has been brought to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions. Even after the amendment, if the assessee is again called upon to establish that the debt has become bad, the true spirit of the amendment is to avoid litigations and do away with all sorts of disputes regarding the allowability of bad debts as a deduction in computing the income of an assessee. The dispute regarding the year in which the debt has to be allowed as a deduction has been resolved by the clear statement of the amended law that the deduction shall be allowed in the year in which the debt has been written off as irrecoverable. It is very important to note that the earlier expression “any debt, or part thereof, which is established to have become a bad debt in the previous year “ has been conspicuously omitted by the amendment and substituted by the expression “written off as irrecoverable “. The words of the law are clear and the intent and purpose of the amendment are manifest. The earlier rule of establishing that the debt has become bad is omitted from the provisions of law. Therefore, there is no occasion or provocation to consider whether the assessee has again to establish that the debt has become dad. In fact, there is no provocation at all to go to that extent of discussion because the amendment has omitted the expression “debt which is established to have become a bad debt”. When the amendment has been brought o cure a defect and the amendment has omitted the expression which has made way for such defect there is no reason to ponder over the past and to decide the matter still under the law which stood prior to the amendment [ Para 33].”
We also hold that since the assessee is engaged in the business of money lending through hire purchase scheme, the principal portion obviously could not have been offered to tax as income and hence claim of deduction u/s 36(1)(vii) of the Act should not be denied to the assessee on that count.
7 M/s. Progressive Stock Management Co.Pvt.Ltd., A.Yr.2003-04 We also hold that the assessee’s primary business is only money lending through hire purchase scheme and hence the instalments receivable becomes the stock in trade of the assessee and all these monies were advanced during the course of business of the assessee. Hence any loss arising out of it could only be treated as business loss u/s 28 of the Act.
In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we are not inclined to interfere with the findings given by the Learned CITA in this regard. Accordingly, the grounds raised by the revenue are dismissed.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the court on 24.09.2015.