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TMI Blog1987 (9) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed mere provision of bad debt as allowable expenditure and was allowed treating it as bad debt. Again certain amounts which were considered as good were also claimed as bad debts in the statement of information regarding the bad debt filed. In view of this, there was an underassessment of income and therefore, notice u/s 148 was served on the assessee on 27-3-1982 but the assessee filed the return in response to this notice on 29-4-1982 showing the loss figure as it was shown in the revised return at Rs. 24,54,110." 2.2 The assessee raised the objection against the reopening before the IAC u/s 144B of the Act but the same was rejected as follows as stated in IAC's direction : "It is seen that originally some wrong claims put forth by the assessee were allowed which was not in accordance with the law and the same are required to be seen properly and in light of the relevant provisions of the Act. This cannot be said as mere change of opinion of the present ITO in respect of the issue involved." 2.3 On appeal also the Commissioner (Appeals) confirmed the validity of the reopening, vide para 2 of his order, the relevant portion of the order is reproduced below : "The Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case as a fit one to re-open u/s 147(b). ITO, Wd-A, BNR." It was further contended that the Income-tax Officer had orally informed the assessee that reopening was made because of the non-inclusion of sum of Rs. 77,754 in respect of the debt outstanding from M/s. Gayatri Cast (Bhavnagar) as far as the claim regarding the bad debt was concerned. He, therefore, drew our attention to page 62 of the paper book and submitted that in fact no such claim was made in respect of the bad debt and, therefore, there was no question of allowing the same. Besides, in respect of the various debts usually the Income-tax Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank. This apart, he also drew our attention to Circular NO. 27(19) IT/ 49 dated 2-9-1949 and 22-3-1950 appearing on pages 79 and 80 of the Paper Book for assessment year 1778-79 where position is clarified in connection with allowances in assessee's business income captioned as bad and doubtful debts / bad debts of banks. It is stated that when all the facts on which a public bank reached a decision that a particular debt or a part of it had become irrecoverable are placed before the Income-tax Officer he might take a reasonable view of the evidence before reaching his finding. Besides, it is also clarified in the said Circular that Income-tax Officers in actual practice do not go into the details of all the items of bad debts claimed by the bank but what they do is to select a few important items and call for evidence regarding the same only. This being the position it was stated that the original assessment completed by the Income-tax Officer had to be read in the context of above clarifications. Again, nowhere specific reasons are given by the Income-tax Officer for assuming jurisdiction u/s 147(b) of the Act. What was the specific information with the Income-tax Officer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pening u/s 147(a) of the Act it could be said that the facts stated above, even section 147(b) was also attracted. Placing reliance on in the case of Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC), it was stated that if on reconsideration of the material on record a factual error was found the reopening would be justified. In this case there was factual error in so far as there was no application of the mind by the Income-tax Officer with regard to the allowability or otherwise of the bad debt claim. This decision was considered by the Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996 but only part of the ratio laid down by the aforesaid decision was reversed and therefore, the decision in the case of Kalyanji Mavji & Co. as applied by the Commissioner (Appeals) fully governed the facts of the case. Further, reliance was also placed on in the cases of United India Fire & General Insurance Co Ltd. v. CIT [1985] 153 ITR 81 (Mad.), Smt. Saraswati Devi Lohia v. CIT [1964] 51 ITR 491 (All.) and ACED v. Balakrishna Menon [1967] 64 ITR 223 (Ker.)(FB). 2.8 While concluding this ground, the learned representative of the assessee clarified that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from external source has come. It is also an admitted position that no wrong principle of law was applied. What is stated is that on the basis of the same material on record the Income-tax Officer was of the view that he had not considered the factual aspects of claim with regard to the bad debt and that is why there was reason to believe that there was escapement of income. It was not change of opinion but reappraisal of the same evidence. It was also fairly admitted by the learned Departmental Representative that Income-tax Officer could not review his own order. But then we fail to understand on what material he could come to the conclusion that he did not apply his mind originally though he made an assessment u/s 143(3) and it is not as assessment which had to be rushed through because of the time barring month. The necessary details with regard to the bad debt claim as was usually asked for in assessee's case in past was also asked for while making the assessment for this year and the same was supplied with appropriate details. We do not know the time when and how the Income-tax Officer came to know about non-application of mind with regard to the aspect of the bad debt becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Kalyanji Mavji & Co. governs the facts of the case. While drawing our attention to the aforesaid case he drew our attention to four categories of the case covered by section 34(1)(b) of the Old Act [in pari materia with section 147(1)(b) of the present Act] and stated that the fourth category covered the facts of the case under consideration. The anatomy of the language stated in the fourth category is as under :- "Where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law." Where the information may be obtained even from the record of the original assessment (i) from an investigation of the materials on record or the facts disclosed thereby or (ii) from other enquiry or research into facts or law. We do not find any material clearly pointed out on the basis of which it can be stated that any investigation of the material on record or the facts disclosed or any inquiry or research into facts or law was ever undertaken by the Income-tax Officer. Had it been so he would have stated so in the reasons recorded u/s 148. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts being identical. We have also gone through the judicial pronouncements stated at the bar, but we would not deal with them here since we are of the opinion that the controversy can be decided and concluded on the basis of decisions of the Supreme Court as stated above. 4. The next common ground pertains to all the assessment years under consideration and the same is with regard to claim in respect of the bad debts. It is the case of both the sides that on merits the controversy is identical with identical facts, the only difference being in respect of the amounts of claims in various assessment years. Therefore, the submissions were confined to the facts and circumstances and the controversy involved in assessment year 1978-79. While completing the reassessment vide order passed on 16th September, 1984 u/s 143(3) / 144B/ 147(b) the basis on which the Income-tax Officer sought to disallow the claim of the assessee as stated in the draft assessment order passed on 14th March, 1984 is as under :- "The assessee has claimed a sum of Rs. 26,97,891 as bad and doubtful debts written off by debiting the same to the commission account. The total bad debts are shown at Rs. 54,26,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. The provisions of section 36(2) lay down certain conditions for such deduction. One of these conditions is that such deduction shall be allowed only when such a bad debt or part thereof has been written off as irrecoverable in its accounts for the previous year. In this connection, his attention was also drawn to the well settled position in law that so long as there is any ray of hope left to recover the debt, however dim it may be and so long as a debt is in the process of realisation, it cannot be said that the debt had become irrecoverable - B. C. G. A. (Punjab) Ltd. v. CIT [1937] 5 ITR 279 (Lahore) - and that a debt does not become bad by the mere circumstances that the debtor gets into difficulties - Som Chand Maluk Chand v. CIT [1936] 4 ITR 382 (Lahore). These decisions are still considered as good law. 4.5 It appears to be the main contention of the learned counsel of the assessee that once the assessee has determined a debt or part thereof as irrecoverable, the ITO has no option but to accept the claim of the assessee. In this connection, he has submitted that there are 10 parties/accounts in respect of which a sum of Rs. 26,97,891 has been determined as bad deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Government of India from time to time, the total of such advances aggregating to almost Rs. 100 crores. (b) At the end of every accounting year the assessee undertakes thorough and systematic review of bad, doubtful or weak debts and ascertains the position regarding individual accounts. the value of the securities available is also ascertained together with values of the collateral securities, etc. After such evaluation a debt or part thereof which is found to be bad and irrecoverable ask bad debt and thereafter appropriate write off is made to the debit of the appropriate revenue account. (c) The write off is not made in the individual debtors account as per the uniform practice followed by the bank but provision for bad and doubtful debts is created and the same is reduced from the reserved of the bank while reflecting the same in the balance sheet as per the appropriate schedule prescribed in the scheme in the relevant Act. (d) Such evaluation of the debt undergoes critical examination by the Reserve Bank, Internal Auditors, Statutory Auditors, Inspection Department as also the State Bank of India-the holding company of the assessee. (e) In the income-tax proceedings the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the submissions and materials to which our attention was drawn. We have also considered the relevant judicial pronouncements with regard to the merits of the claim. 5.1 To advert briefly on system and checks we find that the bank, being responsible for the safety of advances, prescribes various steps and measures to be followed like post-disbursement inspection to ensure end use of funds, submission of stock statements by the borrowers having cash credit limits and periodical inspection of the units etc. These steps are to be undertaken by the operating staff at the branches and wherever the quantum of advances warrants, field officers are appointed by the bank, specially to look after the advances. The follow up measures are reviewed by the bank at various levels, by calling for requisite data / particulars from the branches by their respective controlling offices. In spite of close monitoring and follow-up of advances, inevitably some of the advances tend to become bad for various reasons beyond the control of the bank. When the conduct of the borrowal accounts is not satisfactory or the repayment of the dues is not as per the schedule prescribed by the bank, more vigorou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stent with the policy of prudent banking, these sticky accounts are also reviewed annually and the portion of the outstanding which is considered doubtful of recovery is quantified and provided for, besides a 'Floating Provision' to take care of possible bad debts in priority sector advances. This provision which is not linked to any particular identified accounts is considered as a 'free reserve' and the amount of the provision is not claimed as a deduction in computing the taxable income of the bank. 5.4 While different provisions for bad and doubtful debts are made as per the banking norms in vogue, only the provision covering the 'Bad and irrecoverable' portion of Protested Bills Account corresponding to identified bad debts is claimed as a deduction as 'Bad debts written off' in the income-tax assessment of the bank. 5.5 In respect of the amounts involved in frauds and embezzlement of funds, the actual practice uniformly followed by the bank-in fact for that matter, by the State Bank of India and all its subsidiary banks like the State Bank of Saurashtra is to transfer the amounts to Protested Bills Account pending recovery proceedings, if any, wherever possible. These accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th regard to the bad debt claim and it becomes too difficult for an Income-tax Officer to sit over judgment taken by various expert authorities specialised in banking. That is why the Finance Ministry has in various circulars hinted at sympathetic approach while evaluating the claim in respect of the bad debt made by the banks. Besides, the matter has to be judged in the light of present environment concerning the lending policies of the Government. Perhaps a time has come when a part of the total advances becoming irrecoverable has to be accepted as normal incident of the banking business and that is why probably a beginning was made in the Income-tax Act by the finance Act, 1979 having inserted clause (vii) to sub-sec. (1) of sec. 36 whereby certain percentage of the aggregate average of the advances made at least by the rural branches of the bank is made allowable as ad hoc deduction without there being proof regarding the bad debt and that again is over and above the amount actually proved to have been bad. This amendment is made with effect from 1-4-1980. Of course, we do not find claim on the basis of this sub-clause in any of the years concerned, probably because there did n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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