TMI Blog2003 (7) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 36(1)(vii) - - - - - Dated:- 28-7-2003 - Judge(s) : DIPAK MISRA., A. K. SHRIVASTAVA. JUDGMENT The judgment of the court was delivered by DIPAK MISRA J.- In this appeal preferred under section 260A of the Income-tax Act, 1961, the Revenue has called in question the penetrability and defensibility of the order dated November 2, 1999, passed by the Income-tax Appellate Tribunal (in short "the Tribunal"), in I.T.A. No. 234/Jab of 1997 and I.T.A. No. 200/Jab of 1997. The facts which are essential to be stated for the disposal of the present appeal are that the assessee filed its return of income for the assessment year 1994-95 declaring a net loss of Rs. 2,59,936. The audit copies of final accounts were filed along with the return. The case was selected for scrutiny and a notice under section 143(2) of the Act was issued to the assessee. The notice was issued as it was observed by the Assessing Officer that the assessee-company, who is engaged in the business of financing industrial enterprises, had not done any significant activity so as to get it reflected in the audit report except the fact that it had transferred the shares of Perfect Refractories Limited held as inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax the Assessing Officer came to hold that there had been transfer of shares at a lower rate at the face value for which a separate proceeding under the Gift-tax Act has been initiated. While dealing with the written off loan of Rs. 3 lakhs advanced to Moradabad Syntex Limited, the Assessing Officer recorded a finding that the loan was advanced in the year 1987 at the rate of 15 per cent. interest per annum and the explanation preferred was that the aforesaid company had lost all its capital, and the said company was approaching the BIFR in an effort to revive the unit and in that context the competent authority of the company had written to the assessee-company that it would inform about further developments. In this background, the Assessing Officer came to hold that the loanee-company has not yet been declared as a sick industrial unit; that there was no liquidation proceeding against the said company; and that the audit report of Moradabad Syntex Ltd., had written back unpaid interest of the loan amount. Being of this view the Assessing Officer added Rs. 91,748 as sale transaction of shares to Smt. Padma Maheshwari, Rs. 3 lakhs towards disallowance of written off bad debts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view it deleted the addition and allowed the appeal. It is relevant to state here that as the assessee succeeded on these counts before the Tribunal it did not find any merit in the appeal of the Department and accordingly dismissed the same. This court at the time of admission of the appeal had framed the following substantial questions of law: "(a) Whether the Tribunal was justified in deleting the addition of Rs. 91,748 made by the Assessing Officer invoking the provisions of section 94(2) of the Income-tax Act, 1961? (b) Whether the Tribunal was justified in holding that the assessee was entitled to the benefit of the provisions of section 94(3)(b) of the Income-tax Act, 1961, in respect of the dividends on the shares transferred to one of its directors? (c) Whether the Tribunal was justified in holding that the debit of Rs. 3 lakhs was allowable as deduction under section 36(1)(vii) of the Income-tax Act, 1961 from the income of the assessment year 1994-95?" In support of this appeal it is submitted by Mr. Rohit Arya, learned senior counsel for the Revenue, that the Tribunal has grossly erred in holding that the debit of Rs. 3lakhs was allowable under section 36(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of shares Mr. Nema has proposed that the words used in the section are of immense signification and in the case at hand there was no system endeavoured to avoid the tax. It is contended by him that in the absence of regular transaction and in the absence of satisfying the ingredients as provided under the relevant provision, the transaction cannot come within the mischief to be categorised as transaction meant to avoid the tax. In this regard learned counsel has commended us to the decisions rendered in the cases of Gurdial Singh Uppal v. CIT [1972] 85 ITR 238 (P H) and CIT v. Sakarlal Balabhai [1968] 69 ITR 186 (Guj). In addition to the aforesaid contention it is also put forth by him that there has been no avoidance of tax as the director has paid the tax on the dividend when the company had shown loss. It is also urged by Mr. Nema that the Revenue has been benefited by such transaction and, therefore, the question of avoidance of tax does not arise. First we shall take up the issue with regard to the concept of bad debt. In this context section 36(1)(vii) is relevant. The said provision is reproduced for proper appreciation: "36. (1)(vii) Subject to the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option to treat a debt as bad when he chooses to do so. This has to be ascertained having regard to the circumstances of the debtor and the difficulty or impossibility of recovery of the same. Therefore, the question whether the debt has become bad will have to be determined by the fact-finding authority. Of course, it has been held that a trading loss has a wider connotation than a bad debt. A bad debt which cannot be written off may be allowed as a trading loss, provided the loss is incurred wholly and exclusively for the purpose of the business of the assessee." The submission of Mr. Rohit Arya is that when there has been no liquidation and the period of limitation has not fossilised the claim as the loanee does not deny to pay it. Hence, it cannot be regarded as bad debt. In this regard, Mr. Nema has drawn our attention to paragraph 6.6 of the relevant circular issued by the Central Board of Direct Taxes. The said clause reads as under: "6.6 Amendments to sections 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Bank of Bihar Ltd. v. CIT [1962] 45 ITR 427, has observed that the question, whether a debt is bad, is one of fact and if there is some evidence to justify the conclusion of the Tribunal it is not open to the High Court in a reference under the Act to re-appreciate the evidence. The said observations of their Lordships fully apply to the facts of the present case." In the case of Travancore Tea Estates Co. Ltd. [1998] 233 ITR 203, the apex court held as under: "This case is about writing off of bad debts. It is well settled that whether a debt has become bad or the point of time when it became bad are pure questions of fact. There is no question of law involved in this appeal. We, therefore, decline to go into the controversy raised. The appeal is dismissed. There will be no order as to costs." If the present factual scenario is appreciated on the anvil of the aforesaid pronouncements of law and the circular issued by the Central Board of Direct Taxes it is deducible that in the present case the assessee had written off the bad debt as the loanee company though has not admitted it as bad, as it expressed its financial condition by indicating that it is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the ratio laid down in the case of Sakarlal Balabhai [1968] 69 ITR 186 (Guj) is fully applicable to the provisions enshrined under section 94(3)(b) of the 1961 Act. It is pertinent to state here that in the case of Sakarlal Balabhai [1968] 69 ITR 186, the Division Bench of the Gujarat High Court interpreting section 44F of the old Act and in that context Bhagwati C. J. (as his Lordship then was) referred to the concept of punitive nature of the section and eventually held as under: "Turning to the first condition, the main question which arises for consideration is as to what is the true meaning of the expression 'exceptional and not systematic'. 'Exceptional' is defined in the Shorter Oxford Dictionary as 'unusual, of the nature of or forming an exception' and 'systematic' is defined as 'involving or observing a system: acting according to system, regular, methodical: carried on as a regular reprehensible practice.' These words according to their plain natural meaning connote that the avoidance of tax must be by way of an exception to the regular practice of the assessee and must not be part of a regular practice followed by the assessee. The Revenue, however, pleaded th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, the more exceptional it is. Moreover, "exceptional" means, in my view, taken out of something; it cannot mean taken out of the ordinary rule; it must mean in this context taken out of the system, and that implies that there must be more than one instance in the system. It seems to me impossible to say fairly that a single avoidance of tax is systematic and not exceptiona1.' It is significant to note that though this decision deprived the Revenue of a large amount of tax which it would otherwise have obtained if section 33 of the English Finance Act, 1927, were held applicable, the Crown accepted the decision as correct and did not appeal from it. Since the time it was given in 1936 it has always been regarded as good law by authors of all standard text books. Wheatcroft says in his book on Income Tax Law: '...But it should be noted that this provision only applies when this method is used systematically; in this, as in some other are as the law, the dog is allowed but one bite.' It may also be noted that section 44F was introduced in our Act by an amendment made in 1939 after the decision in Bilsland's case [1936] 20 TC 446; [1936] 2 All ER 616 (KB). The Legislature when ..... X X X X Extracts X X X X X X X X Extracts X X X X
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