TMI Blog2005 (3) TMI 700X X X X Extracts X X X X X X X X Extracts X X X X ..... hibition for initiation of legal proceedings subsequent to write off. The decision has to be arrived at on the common sense and as to what a prudent business man will arrive at. The civil proceedings were only to restrain the debtor from alienating its property. However, it was not subject to charge by the assessee. Series of events like 24 in number can lead any reasonable man of ordinary prudence to believe that the debt has become bad. We accordingly hold that when the assessee wrote off the sum, he was under a bona fide belief and hence the debt written off as bad debt is allowable. The principal sum is allowable as loss u/s 28/37 of the Act. The compensation and interest component is allowable u/s 36(1)( vii ) read with section 36(2) of the Act. In the result the appeal is allowed. - DEEPAK R. SHAH AND JOGINDER SINGH, JJ. S. Venkatesan for the Appellant. Mrs. Neeraj Bhansal for the Respondent. ORDER Deepak R. Shah, A.M. - This appeal by assessee is directed against the order of learned Commissioner of Income-tax (Appeals)-VI, Bangalore dated 28-9-2004. 2. The first ground of appeal is against disallowance of a sum of Rs. 19,24,09,280 written off as bad debt being amount due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to write off. The assessee has not initiated any legal action. ( iii )The debtors are not declared bankrupt or insolvents. ( iv )Sizeable sum is being paid after the assessee initiating legal action as well as prior to write off when the debt was rescheduled along with compensation payable. 3.2 Before learned CIT(A), it was pleaded that taking into consideration, the general depression in the trade and also the condition of Mr. P. Dayananda Pai i.e., M/s. Vinayaka Enterprises, would could not pay this monies despite exposing itself to criminal proceedings under section 138 of the Negotiable Instrument Act, the said sum had became bad and irrecoverable according to the judgment of the appellant. Accordingly, taking into consideration the debtors inability to pay and honour the commitment, the same was written off as bad debts for the year ended 31-3-2001. Further, the appellant firm after write off of the bad debt had also filed civil suit for the recovery of the said sum and criminal complaints under section 138 of the Negotiable Instrument Act, 1881 were also filed. During the pendency of the suits and complaints, Sri P. Dayananda Pai i.e., M/s. Vinayaka Enterprises, had made c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second agreement was entered into in 1998, the appellant continue to have charge on the land of 84 acres and 23 guntas. Thus the assessee was fully secured. The assessee filed application before the Court directing restrain on the debtors from alienating the property being 84 acres and 23 guntas and another property of 44 acres and 3.5 guntas. The total value of both these lands was over Rs. 21 crores. The assessee initiated the action after write off and not before write off. Thus the claim of bad debt is not genuine or bona fide. ( vi )The debtors never disputed the liability. On the contrary they acknowledged the debts even when the firm M/s. Vinayaka Enterprises merged into M/s. Canara Housing Development Corporation. The total liability to the appellant firm was also acknowledged by new firm. ( vii )Since the debts are fully secured and since the debtors are not declared insolvent, the action of appellant to write off without considering the debtors position and any step to realize the debt cannot be construed as bona fide . ( viii )Since the decision to write off is not bona fide and since debt has not become bad as on 31-3-2001, the decision of Hon ble Gujarat High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mehow demonstrate that the debt has become bad and irrecoverable. The write off should be bona fide and not a mere guess work. The assessee wrote off only to save tax on huge profit earned by it during the year. The debtor has paid the sum in earlier year as well as in subsequent years. The amount was paid subsequent to initiation of civil and criminal action. The assessee could have resorted to such action and exhaust the remedy available under law prior to the write off. The ordinary prudent man will not write off the sum merely because some cheques were dishonoured. When a claim is made for bad debt, the condition prescribed under section 36(1)( vii ) read with section 36(2) is required to be fulfilled. Since the conditions are not fulfilled the claim is not admissible. 6. In reply Shri Venkatesan submitted that the position as prevailing as on the date of write off is to be seen. If in any subsequent year the assessee has recovered the sum, the same is chargeable to tax as per provisions of the Act. However, when several cheques bounced the assessee gets a first hand bona fide impression that the debtor was unable to pay and hence debt has become bad. 7. We have carefully consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra ) will not be applicable under the present law. The decision was rendered in the context of Indian Income-tax Act, 1922 wherein under section 10(2)( xi ), there was no condition that for claim of bad debt, the debt should have been taken into account in computing income either of the current year or of the earlier years. At the same time such a bad debt would be allowable as a loss incidental to business on ordinary principle of commercial accounting. Thus the decision of Hon ble Mysore (Karnataka) High Court will be considered in the context that though the claim is not admissible under section 36(1)( vii ) but can be claimed under section 28/37 of the Act. In the present case it is seen that the amount was advanced in the course of business of property development. The amount was advanced for acquiring certain lands for development. Thus the advance is in the course of business and accordingly to be allowed if otherwise proved to be a bona fide write off. We shall therefore examine whether the write off is bona fide or not. 7.2 Section 36(1)( vii ) as amended from assessment year 1989-90 grants deduction in respect of any bad debt which is written off as irrecoverable in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of write off. The debtors will see that the cheque do not bounce but for genuine difficulty in payment of sum. It is clear that bouncing of cheque will attract criminal proceedings against the debtor and no person will face any criminal proceedings but for the genuine hardship and financial crunch. Series of events like 24 in number can lead any reasonable man of ordinary prudence to believe that the debt has become bad. We accordingly hold that when the assessee wrote off the sum, he was under a bona fide belief and hence the debt written off as bad debt is allowable. The principal sum is allowable as loss under section 28/37 of the Act. The compensation and interest component is allowable under section 36(1)( vii ) read with section 36(2) of the Act. 8. The next ground of appeal is regarding charge of interest under section 234B. 8.1 The assessee filed return of income declaring loss of Rs. 3,51,66,754. The loss was arrived at after claim of bad debt amounting to Rs. 19.24 crores. Since the assessee was under bona fide belief that it has incurred loss, it was not under obligation to pay advance tax as per provision of section 208 of the Act. Since the assessee is not liable to p ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
