Vildirect: IncomeTax-caselaws-1995-VIL-200-ITAT-DEL

1995-VIL-200-ITAT-DEL

Equivalent Citation: ITD 056, 307,

Income Tax Appellate Tribunal DELHI

Date: 29.09.1995

DEPUTY COMMISSIONER OF INCOME-TAX.

INDIA THERMIT CORPN. LIMITED.

BENCH

Member(s) : G. D. AGARWAL., RAM SWARUP.

JUDGMENT

Per G.D. Agrawal, Accountant Member.---- This appeal by the revenue is against the order of the Commissioner of Income-tax (Appeals),Bhopal.

2. The only ground raised in this appeal reads as under :

"On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting a sum of Rs. 2,58,537 being disallowance of bad debt."

3. The facts of the case are that the assessee-company derives income from contract work with Indian Railways during the year under consideration the assessee wrote off a sum of Rs. 2,58,537 due from various Divisions of the Indian Railways, which related to various years. The Assessing Officer held that the assessee has not done any effort to realise the said amount from the above Department. Since there was ray of hope left to recover the bad debt, he did not allow the deduction for the sum of Rs. 2,58,537 claimed by the assessee.

4. On appeal, the CIT (Appeals) considering the amendment in section 36(1)(vii) allowed the deduction with the following observation :---

" What was necessary was that the amount should have been written off and it was not relevant whether the debt has been established as a bad debt. The contention of the appellant is found to be correct. It appears that the Assessing Officer was lost sight of the amendment made which were applicable for the first time during the assessment year under consideration. There was no doubt that the amount was due from various divisions of the Indian Railways and related to various years. The amount taken into consideration while working out the income of the appellant in the relevant years. The amount had been written off in the books of account during the previous year. The amount of Rs. 2,58,537 was, in the circumstances, allowable as a bad debt. The disallowance is deleted."

5. At the time of hearing before us the learned Sr. Departmental Representative submitted that even after the amendment the assessee has to satisfy that the amount written off was irrecoverable. By the amendment in section 36(1)(vii) no blanket permission is given to the assessee to write off any amount. She, submitted that the amount due from Government cannot be said to be bad debt. She also submitted that from the details of the bad debt furnished by the assessee it would be evident that some of the amounts due were of the year under consideration and some were only a year or two years old. Thus, she submitted that the Assessing Officer was justified in disallowing the claim of bad debt.

6.The Learned Counsel for the assessee has submitted that in view of the amendment in section 36(1)(vii) the assessee is entitled to the claim of bad debt which the CIT (Appeals) has rightly allowed. In support of his contention he has relied upon the Circular No. 551, dated23rd January, 1990of the Central Board of Direct Taxes. He further submitted that while considering the allowability of bad debt it has to be judged from the businessman's point of view whether the debt was irrecoverable or not. He also submitted that no suit was filed by the assessee for recovery of the debt because the assessee cannot afford to quarrel with the Indian Railways. He has further submitted that when in the subsequent year the assessee was able to recover the part of the debt, it has been offered to tax and whenever any amount will be further recovered the same will be offered to tax in the year of receipt.

7. We have carefully considered the arguments of both the sides and have gone through the material placed before us. Before we deliberate upon the issue, it would be relevant to reproduce section 36(1)(vii) as it existed prior to1-4-1989and as amended after1-4-1989.

The provision prior to amendment was as below :---

" 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."

This has been substituted with effect from1-4-1989with the following sub-clause :---

"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."

Now, the claim of the assessee is that as per the provision applicable with effect from1-4-1989, when the assessee writes off any debt as bad debt, he is entitled to the deduction and this submission is accepted by the CIT (Appeals). The claim of the Learned Departmental Representative is that even as per the amended provision, the assessee has to prove that the debt has become bad.

8. After reading the provisions before and after the amendment carefully, we find that as per law prior to amendment the assessee has to establish that any debt has become bad in the previous year itself. In the amended provision the assessee is entitled to claim deduction, if any, bad debt is written off as irrecoverable in the accounts of the assessee. Thus, the writing off has to be of the bad debt and not of any debt which is not bad.

9. The assessee has heavily relied upon the Explanatory Notes on the provisions of Direct Tax Laws (Amendment) Act, 1987. In the Circular No. 551 dated 23rd January, 1990 the Central Board of Direct Taxes has explained the provisions of Direct Tax Laws (Amendment) Act, 1987. The relevant amendment is explained in para 6.6 of the Circular which is also reported in 183 ITR (Statutes) page 37. The relevant portion of the Circular reads as under :---

" 6.6 Amendments lo section 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts.--- The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987, has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee."

The above explanation does not support the assessee's contention. As per the above explanation, the above amendment is in order to eliminate the dispute in the matter of determining the year in which a bad debt can be allowed. Before this amendment the assessee was to prove that the debt has become bad in the relevant previous year. Requirement of proving that the debt has become bad in a particular year led to the enormous litigation and, therefore, this amendment is brought so as to eliminate the controversy with regard to the year in which the debt has become bad. If the debt has become bad it will be allowed in the year in which it is written off by the assessee. However, it nowhere says that any debt can be written off and claimed as bad debt. Had this been the intention of the Legislature, in the amended provision, they would have mentioned "any debt or part thereof which is written off as irrecoverable". But the Legislature has mentioned "any bad debt or part thereof, which is written off as irrecoverable." (Emphasis supplied). We cannot ignore the inclusion of word "bad" prior to "debt". Therefore, in our considered opinion the debt written off has to be bad debt. It is the prior condition for allowability of the deduction under section 36(1)(vii) even after the amended provision. Once the debt is established to be bad, deduction will have to be allowed in the year in which the assessee writes off the same. The Assessing Officer cannot question the year in which debt becomes bad.

10. Now the question remains, whether the amount written off by the assessee was bad debt or not. The CIT (Appeals) has not considered this aspect. He had allowed the appeal on the basis that after the amendment it was not relevant whether the debt has been established as a bad debt. Since we have already held that even after the amendment in section 36(1)(vii) it is only the "bad debt"which can be written off, we set aside the order of the CIT (Appeals) and restore the matter back to his file, with the direction that he shall examine whether the debt written off by the assessee was "bad debt" or not. He shall decide the issue keeping in view our observation in this order and after giving opportunity of being heard to both the parties as per law.

11. In the result, the Revenue's appeal is deemed to be allowed for statistical purposes.

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