TMI Blog2007 (9) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... ted two parties was very bad and there was no hope of recovery despite legal suit pending against them. We are, therefore, of the opinion that even if the assessee could have provided for the penal interest, the same was liable to be written off as irrecoverable. In our considered opinion, since the principal itself was not likely to be recovered the question of providing for penal interest did not arise and, therefore, the lower authorities were not correct in making addition on account of penal interest on accrual basis. The decision of the learned CIT(A) on this issue cannot, therefore, be sustained. The addition is deleted. This ground of appeal is allowed. Disallowance out of the total Court fees - pursuing civil proceedings for the recovery of bad debts - HELD THAT:- In our considered opinion, the expenditure has been incurred for filing the suit for recovery of debts before the amount was written off by the assessee, but the expenditure is not, admissible as business expenditure because the debts have been written off and the decisions of the lower authorities on this issue deserve to be sustained. This ground of appeal of the assessee is rejected. Expenditure at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors demanding payments but in vain. Finally, a criminal complaint under s. 138 r/w s. 141 of the Negotiable Instruments Act was filed in the Court of Addl. Chief Metropolitan Magistrate, 37th Court, Esplanade, Mumbai and is still pending trial. 4.3 Thus, the assessee was further required to explain vide questionnaire dt. 10th Feb., 2003 as to why the debts amounting to Rs. 25,70,000 should be considered bad and written off when the suit for recovery of the debt is still pending in the Court. In response to the query the assessee stated that the suit for recovery of amount of dishonored cheques of Rs. 26,20,000 was filed in 1996 and notice for hearing on 2nd June, 1997 was served by the Addl. Chief Metropolitan Magistrate. There is no outcome of the suit till date whereas such cases are expected to be finalized in 2-3 years. The financial position of the defaulter is miserable and amount cannot be realized even if the assessee firm wins the Court case. Thus, the assessee had written off the amount outstanding as on 31st March, 2000 at Rs. 25,70,000." 3. The AO disallowed the claim of the assessee for the reason that the assessee had not exhausted all options to recover the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /w s. 141 of the Negotiable Instruments Act r/w. s. 420 of the IPC was filed in the Court of Addl. Chief Metropolitan Magistrate, 37th Court, Esplanade, Mumbai. The proceedings in the matter have been stayed by the Hon'ble High Court of Mumbai under Writ Petn. No. 2237 of 1991 on 21st Feb., 2000. The matter is still pending trial." 5. The AO rejected the claim of the assessee in this case also for the reason that since the Court proceedings were pending, it was premature to write-off the debts and the assessee had not exhausted all options for the recovery of the debts in question. He also observed that as per the provisions of s. 36, three conditions were required to be satisfied for allowing the claim of bad debt namely (i) the debt should have been incurred in the normal course of business, (ii) it should have become bad during the relevant accounting period and (iii) it should be written off in the books of accounts of the assessee. The AO perused the agreement of the assessee with the concerned parties and held that (1) the assessee did not furnish copy of schedule of security and assets pledged against the amount of loan, {2) in absence of copy of schedule it was not possib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad taken all steps to recover the debts and the amount was written oil only when there was no possibility of any recovery, (6) no recovery has been made till date and the claim of the assessee was liable to be allowed. 8. The submissions taken before the lower authorities were also reiterated. It was contended that (1) the total amount of advance to SFL was Rs. 26,20,000 and after reducing Rs. 1,13,685 on account of interest at the rate of 18 per cent for the period of 90 days, the amount of bad debt of Rs. 25,06,315 was arrived at, (2) the cheque of SFL for Rs. 26,20,000 was not honoured by the bankers and, therefore, legal notice was issued to SFL and its directors, (3) finally the suit was filed in Mumbai Court which was pending but it could not be said that the action of the assessee in writing off the debts was premature because there was no hope of recovery, (4) in view of the financial position of the defaulter, no recovery was possible and the claim was wrongly rejected by the lower authorities, (5) similarly, in the case of M/s ATSIL a short term loan of Rs. 1 crore at the rate of 15 per cent per annum for 180 days was given on 24th May, 1995, (6) The another short term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. ITO [1982] 14 TTJ (Bom) 57; (2) Shoban Lal Jain v. Asstt. CIT [2003] 79 TTJ (Del) 446; (3) Swastik Asbestos Products Ltd. v. Dy. CIT [2004] 89 TTJ (Pune) 393; (4) CIT v. Girish Bhagwat Prasad [1999] 152 CTR (Guj) 199 : [2002] 256 ITR 772 (Guj). 12. The learned Departmental Representative relied on the order of the lower authorities and reiterated that the claim of the assessee was premature and deserves to be rejected. 13. We have carefully considered the issue. In our considered opinion the debts in question have already been written off in the previous year relevant to the assessment year under consideration and in view of the amendment to s. 36(2) of the Act, the AO was not justified in rejecting the claim of the assessee merely on the ground that it was premature to write-off the debts in question. The decision of the learned CIT(A) on this issue cannot therefore, be sustained. This ground of appeal is allowed. 14. The next ground of appeal is against making an addition of Rs. 3,41,400 as interest accrued on loan advanced to M/s Solar Pharma Chem. The AO observed that the assessee as per the agreement was entitled to 2 per cent additional interest per month on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing civil proceedings for the recovery of bad debts despite the fact that the same had been incurred wholly and exclusively for the purpose of the business of the assessee. The learned counsel claimed that the lower authorities did not appreciate the fact that the expenditure was incurred during the course of business and was admissible expenditure under the Act. The learned CIT(A) observed that the AO had correctly disallowed Rs. 1,50,000 out of the total claim of Rs. 3 lacs for legal proceedings against SFL and ASTIL for the reason that the assessee had already written off the claim from its books of account and the expenditure claimed against amount written off was not admissible as business expenditure. The learned CIT(A) also observed that the facts of the claim of the expenditure were not clear and it was not possible to allow the same. 18. The learned Departmental Representative supported the decision of the lower authorities The learned counsel reiterated that the expenditure was incurred for pursuing the suits of recovery and only because the assessee had written off the amounts as bad debt, the expenditure did not cease to be an expenditure for the purpose of business. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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