Vildirect: IncomeTax-caselaws-1989-VIL-85-ITAT-DEL

1989-VIL-85-ITAT-DEL

Equivalent Citation: ITD 030, 245, TTJ 034, 359,

Income Tax Appellate Tribunal DELHI

Date: 23.05.1989

PUNJAB NATIONAL BANK.

INSPECTING ASSISTANT COMMISSIONER.

BENCH

Member(s) : CH. G. KRISHNAMURTHY., G. K. ISRANI.

JUDGMENT

Per Ch. G. Krishnamurthy, President -- The assessee is a Nationalised Bank and in this appeal it objects to the disallowance of certain bad debts and to the refusal of allowance u/s. 35B in respect of expenses incurred at the branch of the Bank in London.

2. We shall first take up the issue concerning the disallowance of the claim made u/s 35B. The assessee Bank has a branch inLondonand on the maintenance of that branch, it incurred an expenditure of Rs. 64,16,686 and claimed that on the whole of that expenditure it was entitled to weighted deduction under the provisions of section 35B of the Income-tax Act. On the refusal of the Inspecting Asstt. Commissioner to allow the assessee's claim, the matter came up before the Commissioner(A), who also upheld the disallowance. The Commissioner(A) observed that under clause (iv) of section 35B(1)(b) weighted deduction was permissible only on "maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities" and this clause permitted the expenditure only where the assessee Bank maintained an office outside India and exports certain goods or services or facilities and that the assessee Bank could not be said to be exporting any services or facilities outside India and that a mere setting up of a branch in London though it helped exporters or importers, did not amount to export of any services or facilities outside India.

3. The learned counsel for the assessee Shri M.L. Khanna, now points out that the view taken by the authorities below was totally unsustainable. It was pointed out to us by filing a copy of the note submitted to the Commissioner(A) at the time of the hearing of the appeal, that the branch in London performs various services among which the following were important :--

(a) The Foreign branch of the bank in helped Indian exporters in identifying prospective buyers inU.K.and elsewhere.

(b) The Bank offers favourable terms to prospective foreign buyers for financing of imports fromIndia.

(d) In the event of disputes between the Indian exporters and foreign importers, the Bank acts as a mediator for the settlement of disputes and also undertakes to arrange alternative buyers of the goods exported fromIndia. The Bank also arranges storage facilities for goods exported fromIndiato avoid their deterioration and pilferage etc. and also to enable them to get customers.

(e) The Bank arranges buyer credit wherever possible for financing exports fromIndia.

(f) The Bank supplies information to Indian Exporters in connection with availability of European and other foreign currency for setting up joint ventures abroad by the Indian entrepreneurs to facilitate export of machinery of Indian manufacturers and supply of technical know-how, which enable India to earn foreign exchange.

(g) The Bank also offers guidance and help in promoting tourism among foreigners by supplying the information particularly in the matter of foreign exchange and other local rules and regulations, which helps earning foreign exchange so essential for our country.

(h) The Bank also arranges for various types of guarantee that may be required to be given to buyers of Indian goods. By relying upon these types of services performed by the Bank, it was submitted that the assessee Bank by opening a branch in London was performing services outside India and it was only to cover such services that section 35B was enacted and it is incorrect to state that the Bank was not exporting any services or facilities in the sense of export of goods. It was submitted that this was not a correct approach to be adopted to this problem and the correct approach to see it is whether any services were rendered outsideIndia, which helped the development of foreign markets vis-a-vis the exports. When the rendering of services had the effect of developing export markets, then subject to the satisfaction of other conditions laid down in section 35B, the assessee would be entitled to the claim. He also placed reliance upon a decision given by the Bombay Bench 'A' of the Tribunal in the case of ITO v. Bank of India [1984] 8 ITD 698 involving a similar point. He also drew our attention to two other decisions of the Income-tax Appellate Tribunal in the cases of ITO v. Lata Mangeshkar [1982] 2 ITD 618 (Bom.) and Ferro Alloys Corpn. Ltd. v. ITO [1983] 6 ITD 521 (Delhi).

4. The learned Departmental Representative relied very heavily upon the orders of the authorities below.

5. But in our opinion the assessee is entitled to the claim and it is wrong to disallow it on the ground that the assessee was not exporting any services. Section 35B was enacted with a view to give impetus to the development of foreign markets, which will in the ultimate analysis facilitate more exports and bring in much needed foreign exchange. Section 35B only states that where an assessee being a domestic company or a person, he shall be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year. Such expenditure was referred to in section 35B(1)(b) and it states that the expenditure referred to is that incurred wholly and exclusively on (deleting the clauses with which we are not concerned) :

"(iv) maintenance outsideIndiaof a branch, office or agency for the promotion of the sale outsideIndiaof such goods, services or facilities ;"

Sub-clause (iv) only prescribes that there should be a branch outsideIndiaor an office or agency and that branch, office or agency must be for the promotion of the sale outsideIndiaof such goods, or for the promotion of services or for the promotion of the facilities. The words "for the promotion of" applies to the goods, services or facilities. It must therefore be read as for the promotion of services as well as for the promotion of sale of goods or facilities. So read it would clearly mean that the maintenance outsideIndiaof a branch must be for the promotion of services or facilities. It does not refer to any export of services as was emphasised by the Inspecting Asstt. Commissioner and the Commissioner(A) alike. Sub-clause (iv) as extracted above, when it does not prescribe export of services, the question of reading into that clause the export of services would not only be improper but would not be giving due weight and respect to the Legislative intent. All that has to be seen therefore is whether a branch has been maintained outsideIndiaand whether that branch has promoted the services that the branch offers. The ultimate consequence of the promotion of services was the inherent development of export markets. The development of export markets would depend as much upon the sale of goods outsideIndiaas also on the promotion of services or facilities. The promotion of services must be intended to and or related to promote the export markets. They may result in the development of export market or they may fall in their ultimate analysis but what is needed for the purpose of eligibility for weighted deduction under section 35B is the maintenance of a branch outsideIndiawith the object of promotion of services. The banking services that the bank could offer have all been enlisted above and it was not disputed that these services were not rendered by the branch inLondonor they were in any sense unrelated to the promotion of export markets. Therefore to deny the assessee Bank the benefit of the provisions of section 35B on the ground that the Bank was not exporting services was not justified and proper. This is also the view expressed by the Bombay Bench of the Tribunal in the case of Bank of India. This is also the view expressed by another Bench of the Tribunal atBombayin the case of Lata Mangeshkar and also by Delhi Bench 'C' in the case of Ferro Alloys Corpn. Ltd.

6. For the above reasons and for the reasons expressed by these Benches of the Tribunal in the above cases, with which we respectfully agree, we hold that the assessee Bank is entitled to the claim under section 35B but since no authority had examined the claim, we direct that the Commissioner(A) should verify the claim of the expenses and then allow the weighted deduction under section 35B in respect of those expenses, which are relatable to the maintenance of the London branch.

7. The first ground, which relates to the disallowance of bad debts consisted of 10 items, is as under :

"2. That the learned Commissioner (Appeals) was not justified in not allowing the claim of the Bank in respect of write off of the following debts :

Rs.

(i) M/s A.K. Woollen Mills and Mini Enterprises. 12,44,000.00

(ii)PunjabElectrical & General Industries. 60,264.00

(iii) Ganga Prashad Bachu Lal 16,61,271.00

(iv) Bharat Overseas Pvt. Ltd. 2,75,000.00

(v) Sethai Mills Ltd. 7,71,414.00

(vi) Bharat Dyes & Chemical Ind. 1,65,771.00

(vii) Rayman Engineering Works 4,50,000.00

(viii) Model Mills Ltd. 33,18,097.15

(ix) V. Krishnamurthy Chettiar 47,137.00

(x) V. S. Sambha Swami, Oil Merchant 3,301.00

It is prayed that the above claim of the debts written off be directed to be allowed."

We shall discuss each bad debt separately and give our decision thereon.

8. In respect of the first debt of Rs. 12,44,000 from M/s A.K. Woollen Mills and Mini Enterprises, this amount was disallowed by the Inspecting Asstt. Commissioner on the ground that the same was premature. During the appeal proceedings before the Commissioner(A), it was pointed out that the assessee has filed civil suits for the recovery of the amount and the decrees were obtained for Rs. 14.06 lakhs on3-11-1980and for Rs. 4.79 lakhs on10-9-1980. The Commissioner(A) felt that as the matter was pending in the Court and decree was also obtained in the following accounting period, the question of claiming the same as bad debt did not arise. It is now submitted by pointing out to the letter filed before the Income-tax Officer stating the facts in respect of each debt, that the bank conducted an enquiry and found that the total realisable assets of these two concerns would not exceed Rs. 5.5 lakhs and therefore the amounts were marked as protested advances. It appears even the stocks, which were originally valued at Rs. 5.26 lakhs were estimated to fetch only Rs. 1.8 lakhs. By the time the decree was obtained, the value of those assets further deteriorated to only Rs. 1 lakh and as there was no possibility of recovering the money, the assessee wrote off the debts as unrealisable. It was pointed out that though decree was obtained, nothing was realised till today. It is our considered opinion that in the case of a Nationalised Bank, it is not unreasonable to presume that it would take all possible steps before writing off an amount as bad debt and if the assessee bank after examining all the possibilities of recovery through its internal sources, comes to the conclusion that the debt would be a bad debt having become irrecoverable, it is not possible to disagree with that view unless there is material to show that such a conclusion reached by the Bank was a result of collusion. In the case of a nationalised bank unlike in the case of a private bank, it is not possible to conclude that the attempt of the bank would be to gain an unfair advantage in claiming bad debts to reduce its tax liability. We cannot assume collusion unless there is positive evidence leading to that conclusion. On the facts of this case, it is also not possible to say that the bank had not taken all necessary steps to realise the money. Even after obtaining the decree in 1980, when the Bank was unable to recover any money even till today, it could not be said that the debt had not become doubtful of recovery or its write off was premature. We are therefore of the opinion that this debt should not have been disallowed.

9. In respect of the second debt due from Punjab Electrical & General Industries of Rs. 60,264, though it was disallowed on the ground that the write off was premature, on the detailed note given by the Bank to the authorities below, we find that the write off could not be said to be premature at all. The facts are that a suit was filed and a decree obtained on17-9-1976for Rs. 93,227, since the decree granted was not in conformity with the requirements of the bank, as the future interest from the date of suit till the date of payment was not allowed, a further appeal was filed in the High Court on23-5-1977. The High Court transferred the case back to the District Court, Rohtak. The appeal is still pending. In the meantime the decree obtained in 1976 could not be executed as there were no properties left with the debtor. It is also found that a sum of Rs. 23,508 was written off in the year 1967 as irrecoverable debt from this party, when the amount due from this party was Rs. 76,450. At that time the security to the bank was stocks valued at Rs. 19,353 and a mortgage of the property worth Rs. 30,000. On verification it was found that there was a shortage in stocks and there was a mistake in the mention of the number of the property in the mortgaged deed. It was then realised that nothing could be recovered from this party and again a sum of Rs. 36,757 was written off in the year 1970. It is thus seen in the light of the past write off and the absence of any assets to execute decree, that the conclusion of the bank that nothing was realisable from this party for lack of assets, could not be said to be a wrong conclusion based on no material. It could not therefore be said that the debt was written off prematurely. It is now pointed out that though a decree was obtained from the District Court, it could not be executed so far. As and when any amount was recovered from this party, the same would always be brought to tax under section 41 of the Income-tax Act. On these facts we find that it is not correct to say that the debt was prematurely written off.

10. In relation to the third debt due from Ganga Prashad Bachu Lal of Rs. 16,61,271, this debt also was disallowed on the ground that it was prematurely written off but we are of the opinion that this conclusion is not correct. From the facts furnished to the Commissioner(A) and to the Inspecting Asstt. Commissioner, we find that a sum of Rs. 22.40 lakhs was outstanding against the above borrower, advanced against pledge of kapas, cotton seeds, ground nuts and also warehouse receipts. On an inspection of the stocks pledged, it was found that there was huge shortage and a detailed inspection showed a deficit of Rs. 13,18,000. The bank tried to obtain a second mortgage on the Oil Mills and Refinery of the borrower, which was under first mortgage to M.P. Financial Corporation but the Corporation did not agree to the second mortgage. It was after disposing of the stocks, it was found that a sum of Rs. 22.40 lakhs was outstanding against this party. A sum of Rs. 7.17 lakhs was written off in the previous years leaving a balance of Rs. 13,12,588 in the account on 4-12-1969 a sum of Rs. 3.68 lakhs was recovered from M.P. Warehousing Corporation and together with some other small recoveries, the balance outstanding was Rs. 8,44,083. In 1970 the position was again reviewed and evaluated and it was found that the value of the properties owned by the party was Rs. 5,59,000. Out of these properties, to the extent of Rs. 1,92,000 was mortgaged to the State Bank ofIndoreand another property worth Rs. 3 lacs was mortgaged to M.P. Financial Corporation. As against these assets, the liabilities of this party was found to be Rs. 49.97 lakhs. Therefore the sum of Rs. 8.44 lakhs was written off leaving a balance of Re. 1 in the account to keep the claim alive. This write off was made in the year 1970. However, a money suit was filed for the recovery Rs. 22.45 lakhs in the court of District Judge, Rohtak along with a suit for specific performance of contract of mortgage of the party's property in favour of the bank. The Branch Manager reported that, government dues amounting to Rs. 32 lakhs were pending and by putting some properties perhaps to sale, the Sales-tax Department could realise Rs. 6.05 lakhs. These facts clearly show that there was no asset left with the borrower against which the bank could proceed for the recovery of this sum even though a decree was passed. Passing of a decree cannot therefore be concluded that the debt is good or recoverable. The decree is only an authority to proceed against the assets of the debtor. But if the debtor does not have any assets, the decree would be of no use. That is what has happened in this case. No proper attention was paid to these facts by the learned Commissioner(A), when he observed that the write off of this sum was premature. He was influenced mostly by the filing of the suit in the court. But as we have observed the filing of the suit in the court does not mean that the debt was good because for the recovery, one has to look to the assets in possession of the debtor and their value and whether that would satisfy the amount due to the assessee. We therefore think that this debt also should have been allowed as a bad debt and the conclusion reached by the bank on the basis of its experience, past history of this debt and the position of the assets and enquiries, should not have been doubted.

11. The next debt relates to Bharat Overseas Pvt. Ltd. of Rs. 2.75 lakhs. The facts relating to this debt as conveyed to the Commissioner(A) are as under :--

"Cash credit limit of Rs. 40 lacs which was enhanced to Rs. 50 lacs in 1969, alongwith other limits were sanctioned against hypothecation of stocks. The bank has secured collateral security as equitable mortgage of block assets of Plywood factory taken over by State Govt. The depreciation value of the assets was Rs. 4.32 lacs. The company entered into an agreement to transfer its plywood factory to M/s Alok Udyog Vanaspati & Plywood (P.) Ltd. The account of the company was irregular. On examination it was found that the inventory of stock which was valued by the company at Rs. 62.82 lacs turned out to be Rs. 50.91 lacs. The company had suffered heavy losses which stood accumulated to Rs. 39.59 lacs. Taking into consideration the balance outstanding and value of stock with the bank, it was ascertained that a sum of Rs. 2.75 lacs, in any case, would remain irrecoverable, as such said amount was written off from the profits for the year 1973. Stock valued at Rs. 52.86 lacs hypothecated with the Bank as per stock reports of 1973 were lying at Budge Calcutta unit of Albic Plywood which was a unit of Bharat Overseas (P.) Ltd. and was transferred to Alok Udyog Vanaspati & Plywood Ltd. since taken over by the Government. The total assets of Alok Udyog Vanaspati & Plywood Ltd. were valued at Rs. 15.03 lacs in March 1979 by authorised controller West Bengal Forest Development Corporation. The quality of finished plywood had completely deteriorated and it could only be used as firewood. In February 1981 preliminary decree was passed in bank's favour for Rs. 81,39,551.18 directing the defendants to pay the decretal amount within a period of 3 months. As the defendants failed to pay the decretal amount, application for passing the final decree has been filed. Till now nothing has been recovered and as the value of hypothecated goods is NIL and value of collateral security has also substantially depreciated, the chances of recovery are very remote."

These facts clearly disclose a position that the assessee has taken all steps necessary to recover its money from the borrower and it was only after ensuring that the money could not be recovered from the debtor that the amount was written off as bad debt and on the facts it was not possible to say that the write off was premature. The conclusion reached by the bank that the amount could not be recovered from the debtor should have been accepted. It must be noted that the assessee bank has nothing to gain, it being a nationalised bank, by making wrong claims of bad debts.

12. The next debt relates to Sethai Mills Ltd. of Rs. 7,71,414. This debt also was disallowed on the ground that the debt was premature. The facts relating to this debt are as under :

"The above company was enjoying term loan facility at its branchFirstLineBeach,Madrasand CC limit atMount Road,Madras. The company was in a financial difficulties on account of losses and its financial position was further deteriorated due to reduction of the market value of goods and shortage in the goods etc. After evaluating the position of the company, a sum of Rs. 7,72,413.58 was written off being the amount irrecoverable in the above account. The decrees were obtained by the bank against the debtor--one for an amount of Rs. 3,84,589.01 on11-2-1972which was a simple money decree against which there is no security available and other for a sum of Rs. 11,73,171.94 on8-7-1978. Execution proceedings in respect of second decree for the realisation amount by sale of mortgage properties had filed. But bank could not recover any amount so far. It is reported that the sale proceeds are not likely to cover even the amount payable to other creditors who hold prior charge, that the chances of recovery of even the amount which is considered good are not very bright, leave aside the amount which has already been written off as bad and unrecoverable."

On these facts, we are of the opinion that it is not possible to say that the write of this sum was premature and that there were any hopes left for the recovery of this sum. We have already expressed our opinion that the mere pendency of a suit or even an execution of a decree does not necessarily and conclusively mean that there were chances of recovery, if it is otherwise proved that the debtor had no assets to proceed against to recover this sum or the realisable value of the assets with the debtor, were less than the decretal amount. It is to be remembered that the existence of assets in the hands of the debtor over which the creditor could proceed against for the recovery of the sum is more important rather than taking the steps to recover the sum by resorting to legal proceedings. Resort to legal proceedings is an indication that steps were being taken to recover the sum and the write off of the sum as a bad debt was not ex gratia or was dictated by considerations other than business exigencies. The facts mentioned above show to any reasonable mind that the debtor had no assets and that the bank had explored all possibilities to recover this sum and it was only on its satisfaction that there were no assets left to proceed against, that the amount was written off as a bad debt and a conclusion reached by a nationalised bank, which has no axes to grind from the tax angle, should be accepted as the conclusion reached on a correct and proper appraisal of all the relevant factors.

13. Then we go to the next debt due from Bharat Dyes & Chemical Industries of Rs. 1,65,771. This debt was disallowed on the ground that this was prematurely written off. But we are unable to agree with this conclusion because the facts show a different picture. A cash credit limit of Rs. 3 lacs against pledge of dyes intermediates, finished dyes and caustic soda was sanctioned in favour of the above borrower. The pledged goods when checked in 1965 was found to be over-valued. It was also found on physical verification that the value of goods in 34 drums was found to be water. The book value of the remaining goods was ascertained at Rs. 3.68 lacs as against the bank dues of Rs. 4.83 lacs but the market value of those goods was found to be only Rs. 2 lacs. There was thus an uncovered balance in 1970, which was Rs. 1,65,772 arrived at as under :

Rs.

Amount outstanding 4,83,317

Less : Suspended interest 1,17,545

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3,65,772

Value of pledged goods 2,00,000

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Amount written off 1,65,772

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A suit for the recovery of dues amounting to Rs. 3.33 lacs was filed on27-1-1968and a decree also was obtained on16-6-1971. A sum of Rs. 1,41,212 was realised by the sale of pledged goods on different dates between24-11-1973to31-8-1974. It was in these circumstances that the sum of Rs. 1,65,772 was written off. It is also to be noticed that even after the write off of this amount, there was still a balance of Rs. 3,20,762, which was not covered by any security and the recovery of this sum was found to be zero. In these circumstances, it is very wrong to say that the write off of the sum of Rs. 1,65,772 was premature. As we have already observed it must be left to the discretion of the bank as to when an amount should be written off as bad debt and unless there were circumstances to show that the write off was for considerations other than banking considerations, no attempt should be made normally to question the decision of the nationalised bank and disallow the amount. Here we find that all steps necessary were taken by the bank before writing off the amount as bad debt and it was only after ensuring that there were no assets left with the debtor, that the amount was written off. It must also be realised that the decisions taken by the bank in this connection are always open to a check by the statutory auditors and to scrutiny closer and deeper than the audit by statutory auditor by the audit by the Reserve Bank of India and when all those external and internal auditors had approved the decision of the bank, it could not be still said that the write off was premature, inasmuch as the Income-tax Act does not impose a further condition other than the conditions that should prevail with the management to write off the sum as a bad debt. All that the Income-tax Act requires is that the deduction for bad debt should not be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year and the money must represent moneys lent in the ordinary course of the business of banking and the amount in question has been written off as irrecoverable in the accounts of the assessee for that previous year. So once it is established by the decision taken by a nationalised bank that the debt had become irrecoverable, whose decisions were subject to severe and intensive scrutiny by independent outside agencies like Reserve Bank of India, its decision must be accepted as justified and reasonable and when the amount was written off as bad debt, normally no further question should arise. If a reference is made to sections 36(1)(vii) and 36(1)(viia) of the Income-tax Act, though section 36(1)(viia) was inserted with effect from 1-4-1980, it is seen that even a provision made for bad and doubtful debt subject to a certain limit, is being allowed as a deduction, which meant the recognition on the part of the Legislature that write off of bad debts or even of doubtful debts is a common feature and a normal incidence of business in the case of banks and even a provision was thought of for being allowed as a deduction. Thus when a provision towards bad and doubtful debts subject to a certain limit was being permitted to be deducted as a business expense in computing the income of a bank, we fail to see how a concept of premature write off can be brought in to disallow the debts even when all the steps necessary were taken by the bank and all efforts to trace the assets were made, but in vain thus there appears to be a ring of inconsistency in calling this as premature. A further analysis of section 36(2)(ii) shows that a deduction for a debt could be made in one year pending ultimate recovery in some other year because this sub-clause (ii) provided :

"(ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made."

This provision postulates that the deduction of a debt of a sum equal to or less than the final recovery is contemplated to be allowed in an year in which the write off was made and the deficiency between the write off made and the ultimate recovery can be allowed in an year, in which the ultimate recovery was made. That means an assessee can claim as a deduction not necessarily the whole of the debt but only that part of it, which he estimates to be irrecoverable in a particular year. When its expectation to recover a part of the debt be lie and eventually the amount ultimately recovered by him was proved to be less than the difference between the debt or part written off, that deficiency is to be allowed in the year of ultimate recovery. This also shows how liberal the Legislature has been in the matter of allowing bad debts and there is no rigidity attached to the claim for the allowance of bad debts except that the debt must relate to the business, the amount must be shown to be irrecoverable and the amount was actually written off in the accounts. It is the irrecoverability part that the Income-tax Officer can ensure himself by asking for details as to whether the debt had really become irrecoverable or not. There his assessment must be from the standpoint of the assessee and not from the standpoint of the Revenue. These general remarks we are making apply to all the bad debts we are discussing in this case and not necessarily to that particular bad debt while discussing which these observations are made.

14. The next bad debt is in relation to Rayman Engineering Works of Rs. 4,50,000. This amount also was not allowed as premature again. Here we find that the debtor was sanctioned a cash credit of Rs. 30 lacs against security of iron and steel goods. The debtor was engaged in the manufacture of wagons for railways. For want of adequate orders from the railways and for continued labour trouble, the financial position of the debtor deteriorate to such an extent that even the railways were compelled to lodge criminal proceedings and even filed a civil suit against the debtor for the recovery of a sum of Rs. 20.33 lacs. The assessee bank also filed a suit against the debtor and also against the guarantor in the Calcutta High Court, sometime in July, 1969. The value of the goods pledged with the bank was Rs. 12.02 lacs against a total dues of Rs. 22.31 lacs. After excluding the value of the goods over which the railways had a lien, the deficit came to Rs. 12.40 lacs. It was in these circumstances and estimating the value of the goods pledged to the railways over which it has a lien, a sum of Rs. 4.5 lacs was arrived at as bad debt of irrecoverable nature and was written off. It cannot be said that the estimate made by the bank in these circumstances was bad or without any basis or vague or abrupt or arbitrary. As we have explained above, it is permissible for the bank u/s 36(2)(ii) of the Income-tax Act to estimate the irrecoverable part of a debt and write it off, which the bank has done in this case. Unless this was shown to be without any basis or excessive or short, as the case may be, it is not open to the authorities to disallow the bad debt on the ground that the write off was premature. What the Income-tax authorities should divert their attention to is to find out whether the estimate made by the bank on the facts and in the circumstances of the case, was proper and justified. This aspect was not examined by the authorities below at all and on the contrary they appeared to have accepted the bank's estimate. There is therefore no justification to say that the write off of this sum was premature. It is to be further seen that this debtor was directed to be wound up by an order of the Court on an application made by a creditor. The Official Liquidator entered upon its office, prepared a list of the assets and filed in the Court. It is no doubt a fact that the sale of the stocks and other assets had not taken place. Actually a sum of Rs. 18.01 lacs was due from this debtor, out of which having kept in view the circumstances of the over-riding title of the railways over certain stocks and the winding up proceedings and filing of inventory of assets in the court, only a sum of Rs. 4.5 lacs was written off as irrecoverable keeping the balance of about Rs. 13.5 lacs in the account. It was stated that even to recover this amount, the debtor has no assets at all. Even if the bank was able to recover even a small amount in the disposal of the debtor's assets, the uncovered amount would still be far in excess of the amount written off as bad debt. There is therefore no justification to hold that this write off was premature.

15. Then we go the biggest debt of Rs. 33,18,097.15 due from Model Mills Ltd. and written off as bad debt, which was also disallowed on the same ground of premature write off. This amount of Rs. 33.41 lacs was written off in the year ending31-3-1975but the claim had been disallowed by the Income-tax Officer. Following were the details of the amounts written off :

Rs.

Overdrafts 13,52,950.15

Debentures 13,26,075.00

Interest accrued on the debentures included in the income for earlier years. 6,39,872.00

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Total 33,18,097.15

This mill had become a sick mill and it was taken over by the Government under the Sick Textile Mills Undertakings Act, 1974 as and from1-4-1974. Under the terms of the Act, all the assets of the said mill vests free from all encumbrances in the Central Govt. Only a compensation amount of Rs. 1,000 is payable to the company under the terms of the said Act. In the meantime two claims for Rs. 30,94,672 and Rs. 19,51,361 respectively were lodged with the Commissioner of Payments on27-4-1977. The Commissioner of Payments, Ministry of Commerce, Department of Textiles by letter No. 6/187/78-CP. VI. 17 (63) STM/81-C dated 11-6-1981 advised that compensation amount in respect of debtor Model Mills, was exhausted while meeting claims upto Category I and the claim of the bank falls under category IV of Second Schedule to the Sick Textile Undertakings (Nationalisation) Act, 1974 and according to that, in terms of section 22(2) of that Act, the claim of the bank was rejected. The matter was then referred to the Law Ministry of the Govt. of India and as per the opinion sought, it was considered purposeless to file a suit against the order of the Commissioner of Payments. It was under these circumstances that the sum of Rs. 33,18,097 was written off as bad debt. It is therefore un-understandable how it can be said on the facts of this case that the write off of this sum was premature. If at all only one argument is possible to say that the debt had become bad in 1975, when the mill was taken over by the Govt. under the Sick Textile Mills Undertakings Act and when a complaint was lodged on 27-4-1977 but that argument is not available because the Commissioner of Payments informed only on 11-6-1981 that its claim was exhausted and that there were no chances of recovery. Merely on the ground that the letter from the Commissioner of Payments was received on11-6-1981, which date happen to fall outside the accounting year, it cannot be said that the write off of this sum in this year was premature. The provisions of Sick Textile Mills Undertakings Act, 1974 were very clear, which left no doubt that except from the Commissioner of Payments, the assessee could not recover anything from the Government by reason of the take over. Assuming for the sake of argument that the assessee was not aware of as to what would happen to the recovery of this sum till the letter from the Commissioner of Payments dated 11-6-1981 reached the assessee and since that date fell in the next assessment year, it would not be a bad debt of this year, then under the provisions of section 36(2)(iv), the Inspecting Asstt. Commissioner should allow this amount in the next year as a bad debt. It is no doubt an uncontroversial fact that this sum had become bad beyond any hope of recovery. The question is to which year it relates. The assessee considered that this amount related to this year. The assessee conclusion was supported by the audit conducted by the Reserve Bank ofIndiaas well as the statutory auditors and the Board of Directors of the assessee bank. If their conclusion was held disputable by the Inspecting Asstt. Commissioner as not in conformity with the Income-tax Act, then under section 36(2)(iii) the debt should have been allowed in the next assessment year but the total disallowance is absolutely uncalled for and unjust. On the facts of this case we have no doubt in our minds that the Bank had correctly concluded that the debt became bad in this year and the debt was rightly written off in this year and it could not be said on the facts and circumstances of this case that the write off of this sum was premature.

16. The last two debts relating to V. Krishnamurthy Chettiar of Rs. 47,137 and V.S. Sambha Swami, Oil Merchant of Rs. 3,301 were of very small amounts and no serious attempt was made before us to the allowance of these sums but on the facts seen from the details submitted to the authorities below, we have no doubt in our mind that these debts had become bad and irrecoverable and to disallow them on the ground that they were prematurely written off is totally uncalled for. For the reason given by the assessee before the authorities below, which we are not reproducing here, we hold that these two debts also had become bad and their write off in the accounting year is not at all premature. For these reasons, we hold that the claim made by the assessee for the allowance of these debts should not have been disallowed.

17. In the result, the appeal is allowed.

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