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TMI Blog2008 (4) TMI 359X X X X Extracts X X X X X X X X Extracts X X X X ..... f as bad debt during the pendency of suits under s. 138 of the Negotiable Instruments Act. The assessee maintained that the claim was admissible because : (i) it was not necessary for the assessee to take legal action against the defaulters or wait for the outcome of the suit for the allowability of the claim of bad debts; (ii) the claim of bad debt was admissible on the basis of the decision of the management that the debt has become bad; (iii) the assessee had not been able to recover any amount from the parties till the date of assessment despite the lapse of three years from the end of closure of the accounts of the relevant accounting period, which itself proved that the accounts written off were irrecoverable; (iv) criminal proceedings were instituted against the parties under s. 138 of the Negotiable Instruments Act as distinguished from civil proceedings for the recovery of debts but the parties have failed to pay the amount; and (v) the foregoing circumstances clearly proved that the debts had become bad and the claim was rightly made. 4. The AO also required the assessee to justify the claim of bad debts of Rs. 1,54,610 from Rama Paper Mills on account of lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot honoured; (v) However the claim of bad debts to the extent of Rs. 5,09,682, taken into account for the asst. yrs. 1998-99 and 1999-2000 was considered eligible for deduction; (d) (i) The assessee (Haryana Steel) also did not furnish the copy of suit filed against Haryana Steel & Alloys Ltd., Sonepat, in support of its claim that 11 cheques of the party towards the bills discounting were dishonoured in the previous year relevant to asst. yr. 1999-2000; (ii) Specific details and confirmation that the cheques were dishonoured, were also not filed; (iii) The assessee had not accounted for the bill discounting charges in the relevant year, and (iv) claim for allowability of bad debts written off in respect of this party was not admissible; (e) (i) Similarly, the assessee did not submit the copies of suit filed against Rama Paper Mills Ltd., Kiratpur, U.P. in support of its claim that the cheques for lease charges for asst. yrs. 1998-99 and 1999-2000 for effluent treatment plant given on lease during the period relevant to asst. yr. 1999-2000 were dishonoured; (ii) Specific confirmation from the bank that cheques were dishonoured was also not filed; and (iii) The write ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not even file the copies of the relevant suits filed in the Court so as to enable the lower authorities to verify the relevant facts; (iii) the assessee could not establish that the amount written off had been taken into account for determining the income of any previous year as per the statutory requirement of the provisions of s. 36(2) of the Act; (iv) the learned CIT(A) has given clear finding of facts in his impugned order and taken note of the fact that there were considerable recoveries in the subsequent years; and (v) the amount of Rs. 85,69,350 claimed as bad debt written off comprised of the principal amount and the interest. It is, however, seen from paras 27-29 and 42-100 of the paper book placed on record that the assessee had filed before the lower authorities (i) copies of decree against SMS Construction; (ii) complaint filed against Haryana Steel & Alloys Ltd.; (iii) details of assets leased and (iv) lease rent received in asst. yrs. 1998-99 and 1999-2000. We are, therefore, of the considered opinion that the issue has not been examined properly by the lower authorities as is clear from their orders that these documents filed with paper book have not been dul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no cessation of liability within the scope and meaning of s. 41(1) of the Act; (v) the Explanation to s. 41(1) is also not attracted because the assessee had not written off the corresponding credits in its books of account; (vi) even if the liability was barred by the law of limitation, it would not be considered that the liability ceased to exist either because the amount had not been shown as liability in the books of account or because the assessee had unilaterally written it off; (vii) despite the insertion of Expln. 1 of s. 41(1) w.e.f. 1st April, 1997 by the Finance (No. 2) Act, 1996, the judicial view still holds good so far as it has been held that even if the assessee had voluntarily written off the liability, the liability would not cease to exist because the unilateral write off did not involve the consent of the creditors; (viii) the amount was written off in the subsequent year in the relevant books of account and offered for tax. 14. We have carefully considered the issue in view of the material placed on record and rival submissions. It is observed that : (i) in view of admission of the assessee that the liability in question was written off in subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossessed stock even when the same was in accordance with the method of accounting adopted by the appellant." 18. As per relevant facts on record, the assessee had declared value of stock of "hire re-possessed" at Rs. 19,00,000 as on 31st March, 2001 as against Rs. 32,34,586 as on 31st March, 2000. It claimed the amount of Rs. 13,34,585 as diminution in value of stock under the head "Operating, administrative and other expenses". As per questionnaire dt. 20th Dec., 2002, the assessee company was required by the AO to file the details of the same. The reply of the assessee submitted before the AO as per its letter dt. 19th Feb., 2004 has been reproduced in para VI at pp. 3-4 of the assessment order. In short the assessee contended that : (i) the diminished value of re-possessed stock was on account of 'tippers' given on hire to M/s SMS Constructions; (ii) due to financial crisis the party had stopped paying the hire purchase instalments; (iii) despite best of efforts, no payment was forthcoming from them; (iv) left with no alternative, the assessee company took the possession of the tippers given on hire purchase and wrote off the amount due from the party on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock on hire was in accordance with the method of accounting as described in para 1(1)(iii) of Sch. 14 and could not be considered excessive. 19. The learned CIT(A) duly considered the aforestated submissions as per discussion in para 2.2 of his impugned order but rejected the claim of the assessee for the reasons that : (i) the revaluation of stock by using the depreciation (approximate) @ 15 per cent was neither reliable nor prescribed; and (ii) the assessee neither filed the valuation report nor any other evidence in support of its claim. 20. The learned counsel reiterated the submissions taken before the lower authorities. 21. The learned Departmental Representative relied on the orders of the lower authorities. 22. We have carefully considered the issue in view of the material placed on record and orders of the lower authorities. It is observed that the lower authorities have not examined the claim of the assessee that the tippers were taken in its stock on repossession at a cost of Rs. 32,32,586 in July, 1998 and that the value of the machinery in question had diminished due to the passage of time and technological obsolence and, therefore, the stock of machinery in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of bad debts. In response the assessee submitted details of bad debts vide letter dt. 19th Feb., 2004 and vide order sheet entry dt. 9th Feb., 2004 the assessee was required to file reasons as to why bad debts were written off during pendency of suits under s. 138. Reply was submitted vide letter dt. 27th Feb., 2004. It was explained that bad debt is allowable on the basis of decision of management that the same has become bad. Reference was made to the decision of Bombay High Court in the case of Jethabhai Hirji & Jethabhai Ramdas vs. CIT 1978 CTR (Bom) 415 : (1979) 120 ITR 792 (Bom). It was submitted that till date assessee has not received any amount from these parties and this itself is a testimony of the fact that the amounts are unrecoverable. It was explained that the suit filed under s. 138 under Negotiable Instruments Act was for criminal liability which has nothing to do with recovering of the amount and for recovering of the amount civil proceedings have been instituted separately. 3. Further vide order sheet entry dt. 19th Feb., 2004 the assessee was required to explain that the amount of Rs. 1,54,610 not claimed from Rama Paper Mills against lease rental/sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents Act before the Court of Addl. Sessions Judge, Patiala House, New Delhi. Assessee did not file copy of suit for verification. (3) Rama Paper Mills Ltd., Kiratpur, UP : The party was leased effluent treatment plant for lease amount of Rs. 32,40,625 in asst. yr. 1997-98. The income arising out of such lease transaction was shown in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suit was filed under s. 138 of the Negotiable Instruments Act. Assessee did not file copy of suit for verification. (4) Deepak Industries Ltd., Calcutta : The party was leased CNC turning centre amounting to Rs. 47,70,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed under s. 138 of Negotiable Instruments Act. Assessee did not file copy of suit for verification. (5) Rapid Construction, New Delhi : The said party was leased Becon batching plant and DG set amounting to Rs. 26,84,910 in asst. yr. 1999-2000. The income arising out of this lease transaction was booked in asst. yr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following decisions : (1) CIT vs. Morgan Securities & Credits (P) Ltd. (2007) 210 CTR (Del) 336 : (2007) 292 ITR 339 (Del); (2) CIT vs. Autometers Ltd. (2007) 210 CTR (Del) 339 : (2007) 292 ITR 345 (Del). 8. On the other hand, the learned Departmental Representative relying on the orders of AO and CIT(A) pleaded that disallowance has rightly been sustained by CIT(A). 9. I have carefully considered the rival submissions in the light of material placed before us. From the assessment order it is clear that the assessee company is engaged in the business of leasing, hire purchase of equipments and financing i.e. bill discounting ICDS and loan placement etc. Thus the main business of the assessee company is leasing, hire purchase of equipments and financing in the shape of bill discounting, earning interest on inter-corporate deposits and loan placements. Bad debts which have been written off relates to such activities of the business of the assessee. At the assessment stage there may be some doubt that whether or not the assessee had accounted for income relating to these transactions in the year under consideration or in earlier years. However, the said doubt was cleared by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) and the AO is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off the provisions of sub-s. (6) of s. 155 shall apply; (v) where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause." 10. According to s. 36(2)(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of only debt or part thereof is written off or of an earlier previous year, or represent money lent in the ordinary course of business of bankin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on sustained by CIT(A) is required to be deleted. There is no justification in restoring this issue to the file of AO in view of the remand report of AO which is already on record and referred to by learned Authorised Representative. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 04-02-2008 The following question arising for consideration of the Third Member on a difference of opinion for the asst. yr. 2001-02 is being referred to the Hon'ble President for the opinion of the Third Member : "Whether on the facts and in the circumstances of the case, the addition with regard to bad debts should be deleted or the issue is required to be restored to the file of AO for further verification of facts ?" Vimal gandhi, president (As third member) : 08-04-2008 The following question has been referred to me on account of difference between the learned Members of Tribunal, "I" Bench, Delhi under s. 255(4) of the IT Act : "Whether on the facts and in the circumstances of the case, the addition with regard to bad debts should be deleted or the issue is required to be restored to the file of AO for further verification of facts ?" 2. The facts of the case are that the assessee was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing addition of bad debt in question, total income of assessee was computed at Rs. 32,49,490 which was adjusted against the brought forward loss. Interest income of Rs. 5,88,862 which the assessee had claimed as business income was taken as income from "other sources". However, on appeal, CIT(A) directed that said income be taken as "business income". The order of CIT(A) has been confirmed by the Tribunal in ITA No. 3471/Del/2005 vide order dt. 8th Feb., 2008. Besides this, in the assessment order the ITO has allowed, to carry forward loss from earlier year at Rs. 1,21,51,794. Therefore, even if these bad debts are disallowed and added, it will have no tax effect. 3. The assessee impugned above disallowance of bad debt in appeal before the learned CIT(A) and reiterated its submissions that only condition required for claiming bad debt was that it should be written off. The assessee filed evidence of proceedings taken against different debtors to establish that proper action was taken against the debtors. The learned CIT(A) sought and obtained a report from the AO, which was furnished on 15th March, 2005. A copy of said report is available at pp. 18 to 20 of the paper book. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns Judge, Patiala House, New Delhi. The assessee has not furnished copy of the suit filed, for verification.' No specific confirmation that cheques bounced has been submitted by the appellant i.e. bank memorandum. Thus no write off claim can be allowed. Deepak Industries Ltd. Calcutta : 'The party was leased on turning centre amounting to Rs. 47,70,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed under s. 138 of Negotiable Instruments Act before the Court of Addl. Sessions Judge, New Delhi. However, copy of the suit filed is not furnished for verification.' Rapid Construction, New Delhi : 'The said party was leased Becon batching plant and DG set amounting to Rs. 26,84,910 in asst. yr. 1999-2000. The income arising out of this lease transaction was booked in asst. yrs. 1999-2000 and 2000-01. The cheques which were issued by the party bounced and accordingly arbitration proceedings were stated to be initiated before Addl. Sessions Judge, New Delhi for recovery of the principal and inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as bad debt written off comprised of the principal amount and the interest. It is, however, seen from paras 27-29 and 42-100 of the paper book placed on record that the assessee had filed before the lower authorities (i) copies of decree against SMS Construction; (ii) complaint filed against Haryana Steel & Alloys Ltd.; (iii) details of assets leased and (iv) lease rent received in asst. yrs. 1998-99 and 1999-2000. We are, therefore, of the considered opinion that the issue has not been examined properly by the lower authorities as is clear from their orders that these documents filed with paper book have not been duly considered. We, therefore, set aside this issue to the file of the AO with the direction that he should consider the evidence filed by the assessee and decide the issue afresh after giving proper opportunity to the assessee. This ground is treated as allowed for statistical purposes." 5. The learned JM did not agree with the above proposed order of learned AM. He noted the query made by the AO on 19th Feb., 2004 and reply given by the assessee in para 3 of his proposed order. He also noted that during the course of appellate proceeding, the learned CIT(A) had soug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000-01. The cheques which were issued by the party bounced and accordingly arbitration proceedings were stated to be initiated before Addl. Sessions Judge, New Delhi for recovery of the principal and interest. No further details have been furnished. (6) Atul Glass Ltd., New Delhi : The said party was leased a DG set amounting to Rs. 40,00,000 in asst. yr. 1997-98. The income arising out of this lease transaction was booked in asst. yrs. 1998-99 to 2000-01. The cheques which were issued by the party bounced and accordingly legal suits were stated to be filed under s. 138 of Negotiable Instruments Act. Assessee did not file copy of suit for verification." 5.1 The learned JM thereafter considered the reasons given by learned CIT(A) for upholding the disallowance, The learned JM observed that the assessee company in the relevant period was engaged in the business of leasing and hire purchase of equipment and financing i.e. the bill discounting ICDS and loan placement etc. He further noted that bad debts in question have been written off by the assessee relating to abovementioned business activities. He has observed that at the assessment stage, there might have been doubt whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs taken against the debtors as well as books of account were produced in the appellate proceedings. The learned CIT(A) asked for a remand report from the AO on the facts placed before him. In the remand report, the AO had clearly admitted that income from each of the debt claim was duly shown. The detail of such income has been incorporated in the proposed order of the JM. Copies of proceedings taken by the assessee were also filed before the learned CIT(A). This fact is also mentioned by learned AM in his proposed order, although not very relevant after the amendment of the statutory provision w.e.f. 1st April, 1989. The proposed order of learned AM in the view of the learned counsel for the assessee was contradictory and factually incorrect. The matter in issue stands fully covered by the decision of jurisdictional High Court in the case of Morgan Securities & Credits (P) Ltd. (supra) and by decision of CIT vs. Autometers Ltd. (2007) 210 CTR (Del) 339 : (2007) 292 ITR 345 (Del). The learned counsel further argued that the remand cannot be directed by the Tribunal merely for the sake of remand, particularly when material evidence for deciding the issue is available on record. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n his proposed order, has directed that disallowance of bad debt be deleted. Therefore, the first question to be examined relates to the principles, which are to be followed by the appellate authorities while exercising discretion to remand the matter. For above proposition, I would like to quote and rely upon the following decisions : (1) In the case of M.G. Shahani & Co. (Delhi) Ltd. vs. CCE 1994 (73) ELT 3 (SC) it is observed : "The complaint of the appellant before us, for which we find sufficient justification, is that the Tribunal should have itself gone through the evidence and rendered a finding because all the relevant materials were before the Tribunal. To our mind, it appears that the Tribunal has adopted an easy course in remanding the matter. The remand was superfluous when the parties have argued the matter at length. To characterize the order of the Collector as laconic is not correct since he has written a detailed order including reference to relevant case law. The Tribunal has adopted an easy course of remanding the matter to Collector, when it could have decided the same. The remand was superfluous when the parties have argued the matter at length and relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission by giving another innings' (i) Asstt. CIT vs. Anima Investment Ltd. (2000) 68 TTJ (Del)(TM) 1 : (2000) 73 ITD 125 (Del)(TM); (ii) Asstt. CIT vs. Arunudoi Apartments (P) Ltd. (2002) 123 Taxman 48 (Gau)(Mag); (iii) Smt Neena Syal vs. Asstt. CIT (2000) 69 TTJ (Chd) 516 : (1999) 70 ITD 62 (Chd). (7) The Courts have held that appeals are not to be decided for giving 'one more innings' to the lower authorities in the appellate jurisdiction. (i) Rajesh Babubhai Damania vs. ITO (2001) 169 CTR (Guj) 346 : (2001) 251 ITR 541 (Guj); (ii) CIT vs. Harikishan Jethalal Patel (1987) 65 CTR (Guj) 54 : (1987) 168 ITR 472 (Guj) "Remand not for the benefit of the party seeking it to fill up gaps." 10. It is clear from above that primary power, rather obligation of the Tribunal, is to dispose of the appeal on merits. The incidental power to remand, is only an exception and should be sparingly used when it is not possible to dispose of the appeal for want of relevant evidence, lack of finding or investigation warranted by the circumstances of the case. Remand in a casual manner and for the sake of remand only or as a short cut, is totally prohibited. It has to be borne i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s irrecoverable in the accounts of the assessee. 6.7 Clauses (iii) and (iv) of sub-s. (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the ITO was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightaway allowed in the year of write off. The Amending Act, 1987, has, therefore, amended these clauses to withdraw them after the asst. yr. 1988-89.' The conundrum which has arisen before us had also engaged the attention of the Gujarat High Court in CIT vs. Girish Bhagwat Prasad (1999) 152 CTR (Guj) 199 : (2002) 256 ITR 772 (Guj) with which we are in respectful agreement. Our learned brothers had pointedly observed that the genuineness of the claim predicated on s. 36(1)(vii) of the IT Act was not in doubt. Where the loan transaction is itself shrouded in uncertainty other provisions of the statute would immediately come into play. Our learned Brothers further observed that prior to the amendment from 1st April, 1989, the allowance under the said section was confined to debts and loans which had becom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gan Securities & Credits (P) Ltd. (2007) 210 CTR (Del) 336 : (2007) 292 ITR 339 (Del) in IT Appeal No. 1442 of 2006 decided on 7th Dec., 2006. In that case, this Court referred to the circular as well as another decision of the Gujarat High Court being Dy. CIT vs. Patidar Ginning & Pressing Co. (1999) 157 CTR (Guj) 177 and came to the conclusion that no substantial question of law arises for consideration. We are of the view that there is no error in the view taken by the Tribunal. 'The amendment made to s. 36(1)(vii) of the Act was a conscious decision taken to eliminate litigation with regard to establishing what is bad debt. 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 s. 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 subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully satisfied. Please see CIT vs. T. Veerabhadra Rao, K. Koteswara Rao & Co. (1985) 48 CTR (SC) 123 : (1985) 155 ITR 152 (SC). The other ground for disallowance of large portion of claim was the failure of the assessee to file copies of suit filed by him against debtors. This ground of CIT(A) is also wrong. A reference to proposed order of learned AM would show that copies of Court proceedings were filed before the learned CIT(A). The matter in issue is fully covered by decisions of jurisdictional High Court, which we are duty bound to follow. Having regard to material on record, there was no scope to remand the matter. 12. I have also carefully considered the reasons given by the learned AM in his proposed order for remanding the case back to the AO. In the first four paras he records the findings of the learned CIT(A) 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the statutory provisions were fully satisfied. 13. 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 s. 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(A). 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. vs. Asstt. CIT (supra) 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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