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2008 (4) TMI 359 - AT - Income TaxInterpretation of Statutes - Disallowance on Bad Debt u/s 36 - written off as bad debt during the pendency of suits u/s 138 of the Negotiable Instruments Act - Difference of opinion for the assessment year 2001-02 between ld AM and ld JM - Substantial question of law - Whether the addition with regard to bad debts should be deleted or the issue is required to be restored to the file of Assessing Officer for further verification of facts - business of leasing and hire purchase of equipment, financing, bill discounting, loan placement etc - CIT(A) allowed the claim of bad debt and rejected the rest of the claim for the reason that the assessee could not file evidence in support of its claim that the charges given by the parties were not honoured and it was noticed by him that there was considerable recovery of bad debts. HELD THAT:- ld AM has remanded the matter to the AO, whereas the ld JM, in his proposed order, has directed that disallowance of bad debt be deleted. Third Member Order - The interpretation of section 36(1)(vii) of the Act was considered by this court in CIT v. Morgan Securities and Credits (P.) Ltd.[2006 (12) TMI 106 - DELHI HIGH COURT]. In that case, this court referred to the circular as well as another decision of the Gujarat High Court being Deputy CIT v. Patidar Ginning and Pressing Co.[1999 (10) TMI 727 - GUJARAT HIGH COURT] and came to the conclusion that no substantial question of law arises for consideration. It has also been brought to our notice by learned counsel for the respondent that if an assessee writes off a debt as a bad debt without giving any reason, he will not get any benefit from this. This is for the reason that by virtue of section 41(4) of the Act, where a deduction has been allowed in respect of a bad debt which is irrecoverable and if the amount or a part thereof is subsequently recovered, then that amount shall be deemed to be profits and gains of business or profession of that relevant previous year. Learned counsel for the revenue submits that the 1989 amendment incorporates only the year of allowability but it does not dispense with the requirement of the assessee to prove that the debt has become a bad debt. We cannot agree with this interpretation as it would take the situation to what was prevailing pre-1-4-1989. Taking all these factors into consideration, we are of the opinion that no substantial question of law arises for our consideration. The appeal is dismissed. In my considered opinion, principle laid down by their Lordship have been correctly appreciated by the learned Judicial Member in the proposed order. The net effect of change made in the statutory provision with effect from 1-4-1989 is that it was necessary for the assessee to establish that debt had become bad in the previous year before amendment, whereas now for debts to be classified as 'bad', the assessee has only to write it off as 'irrecoverable' in its accounts. If subsequently any part of written off debt is recovered, the same would be charged to tax by virtue of section 41(4) of the Income-tax Act. In holding that deduction of bad debts were rightly claimed, the Judicial Member held that conditions of section 36(1)(vii) and of section 36(2) were fully satisfied in this case. There is no dispute as far as writing off of bad debt is concerned. The learned Judicial Member further noted and underlined relevant portion of the remand report dated 15-3-2005 of the Assessing Officer wherein he had clearly stated that income in respect of each debt involved was duly shown by the assessee in the assessment year under consideration or in earlier years. Therefore, the conditions of section 36(2) were also satisfied. I have also noted the relevant portion of the remand report in earlier part of this decision to show that statement made by learned Judicial Member is factually correct. In fact even CIT (Appeals) in the impugned order has specifically admitted that income in respect of debt from SMS Constructions, Udaipur was shown and allowed relief. The other debts are not allowed on the ground that income was not shown in terms of section 36(2) or the debts were not established to be 'bad'. The finding of the CIT (Appeals) was factually incorrect as in the remand report the Assessing Officer has clearly accepted that income from all transactions was duly shown in the year under account or in earlier years. The assessee was also carrying business of financing. Thus conditions of section 36(2) were fully satisfied. Please see CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. [1985 (7) TMI 2 - SUPREME COURT]. I have also carefully considered the reasons given by the learned Accountant Member in his proposed order for remanding the case back to the Assessing Officer. In the first four paras he records the findings of the ld. CIT (Appeals) that assessee failed to produce the relevant evidence in support of its claim that cheques by the parties were dishonoured and secondly despite proper opportunity given by the lower authorities, the assessee did not file copies of the relevant suits filed in Court to enable lower authorities to verify the relevant facts. I have already noted above that the assessee, before the learned CIT (Appeals), had claimed that proper opportunity was not given to it by the Assessing Officer. As regards the non-filing of copies of action taken by the assessee against debtors, even the learned Accountant Member has noted that copies of proceeding taken against the debtors were duly filed before the lower authorities. Therefore, the statement made in the order of the CIT (Appeals) is not correct. Reason No. (iii) in Accountant Member's order that the assessee could not establish that written off debts had not been taken into account for determining the income of previous year, as required by section 36(2) is also factually and legally incorrect. This point has been discussed in detail in this order, how income of the debts written 9ff was taken into account in the previous year or in earlier assessment years and that conditions of section 36(2) are fully satisfied in this case. Reason (iv) in the proposed order of learned Accountant Member is not based on any material on record. It has been the case of the assessee that not a single penny has been recovered out of the debts claimed as bad debts. The learned CIT (Appeals) or the learned Accountant Member has not shown any material to establish alleged considerable recoveries in the subsequent years. At any rate, if recoveries have been made of debts written off as bad, then the same is to be taxed under section 41 (4) of the Income-tax Act as laid down by their Lordship of Delhi High Court in the decisions quoted. Bad debts could not be disallowed on this ground. Reason No. (v) has already been referred to above. It is, therefore, clear that all relevant material to decide the matter with reference to section 36(1)(vii) read with section 36(2) was available on record and it was not necessary for the Bench to remand the case to the file of the Assessing Officer. The learned Judicial Member has referred to the relevant material and I have also discussed how conditions of the statutory provisions were fully satisfied. It was contended by learned Departmental Representative that assessee even after the amendment has to establish that debt in question was bona fidely written off. Even assuming that above is the requirement of section 36(1)(vii), in my opinion, above requirement in this case was fully satisfied. The assessee had written off debts in the year under consideration. The assessee also filed evidence in the shape of copies of action taken against the debts in proceedings before learned CIT (Appeals). The claim of the assessee that to this day, not a single penny has been recovered, has not been refuted on record. There is no material to show that writing off of bad debt was not bona fide action. The facts involved in the case in hand are quite different from the facts involved in the case of South India Surgical Co. Ltd. where the debtor was a Government agency and had shown its willingness to pay the debt. In spite of above fact, the debt was written off in post date and claimed as "bad". The facts involved here are quite distinguishable and there is nothing on record to show that debtors were ready to pay or had in fact paid any amounts to the assessee or the judgment of writing off of debt suffers from any mala fide. There is nothing on record to contradict the claim of the assessee that not a penny had been recovered by the assessee from the debtors till this day. Having noted the facts of the case, I hold that there was no justification for remanding the case back to the file of the Assessing Officer. The learned Judicial Member was right in disposing of the matter on merit and I agree with his proposed order. The matter should now be placed before the regular Bench for disposal in accordance with law.
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