TMI Blog1991 (11) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome in which the income was computed in the following manner : Net income as per original return Rs. 26,233 Add: Unpaid salestax added as per section 43B Rs. 9,07,435 ----------------------------- Total Rs. 9,33,668 ------------------------------ Less: Trading loss in respect of irrecoverable amount of outstanding against M/s Usha Spinning Weaving Mills Pvt. Ltd. claimed as trading loss/bad debt Rs. 8,95,277 ------------------------------ Total Income Rs. 38,391 ------------------------------ The assessment under section 143(3) was completed on 27-3-1987 at an income of Rs. 9,50,020. The assessee preferred an appeal against the said order in which the main grievance of the assessee was that the ITO has erred in not entertaining and considering the revised return submitted prior to completion of the assessment proceedings. Some other disallowances made by the ITO were also challenged in that appeal. The CIT(A), vide his order dated 29th February, 1988 directed the ITO to consider the revised return of the assessee on merits and also sustained certain disallowances made out of travelling, telephone, depreciation etc. The first appeal marked as ITA No. 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A). 5. The assessee has raised as many as 19 grounds in this appeal. During the course of hearing the grounds challenging the validity of reopening of assessment already completed under section 143(1), the challenge to the proceedings under section 144A and the addition made in respect of outstanding sales-tax liability added in view of section 43B were not pressed. The only effective ground on which the learned counsel addressed his arguments relate to the deduction claimed in respect of the aforesaid sum of Rs. 8,95,277, which, according to him, ought to have been fully allowed under section 28 read with section 37 and/or 36 of the Act either as a trading, loss or as bad debt. The only other ground pressed before us relate to levy of interest under section 139(8) and under section 217 of the Act. 6. The learned counsel for the assessee vehemently contended that the amount outstanding against M/s Usha became irrecoverable in the previous year under consideration and represents a trading loss which was genuinely suffered by the assessee in this year and ought to have been allowed as a trading loss under section 28. A declaration for lock out of the factory of M/s Usha was an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount as outstanding against M/s Usha in the balance sheet submitted along with the original return of income. He had also added the amount of interest on the principal amount of outstanding balance which clearly shows that the assessee had every hope of recovering the said amount till the end of the accounting year and till the date of furnishing the original return of income. The IAC gave directions under section 144A on 6-3-1987 directing the ITO to make an addition of Rs. 9,07,435 on account of outstanding unpaid amount of sales-tax liability in view of section 43B. At this stage the assessee realised that this addition of outstanding unpaid sales-tax liability is bound to be sustained in view of section 43B. Therefore it tried to somehow claim some deduction to offset this addition of sales-tax liability. Accordingly he filed a revised return on 19-3-1987 in which this claim for deduction of trade loss/bad debt amounting to Rs. 8,95,277 was made for the first time. The entry of writing off the debt in question as a trading loss at the time of filing of the revised return cannot be considered to be a bona fide entry and it is merely an after-thought and cooked up entry made w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the year under consideration. More than 13 lakhs were recovered from this debtor in the immediately preceding year. A further recovery of Rs. 30,000 was made in this year. Interest was added by the assessee in the accounting year and the total amount was shown as outstanding in the balance-sheet submitted along with the original return. All these facts conclusively prove that the assessee had every hope of recovery of the said amount and it cannot be allowed as deduction under any provisions of the IT Act. He relied upon the detailed reasons mentioned in the assessment order, in the directions given under section 144A and in the order of the CIT(A). 8. We have carefully considered the rival submissions and have also gone through the orders of the departmental authorities as well as all other documents to which our attention was drawn during the course of hearing. We have also gone through the various judgments which were relied upon by the parties at the time of hearing. 8.1 The issues which require our consideration can be broadly classified as under : (a) Whether under the facts and circumstances of the assessee's case the desired deduction of Rs. 8,95,277 can be allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or otherwise of this deduction, therefore, cannot be considered under section 28 or under section 37 on the general principles in arriving at the true profits and gains of business as the same is governed by the specific provisions contained in sections 36(1)(vii) and 36(2). Reliance placed by the learned counsel for the assessee on the judgment of Hon'ble Gujarat High Court in the case of Equitorial (P.) Ltd. does not support the assessee's contention, as the facts of that case are clearly distinguishable. It is true that the Hon'ble Gujarat High Court in that case held that an irrecoverable debt can be allowed a trading loss under section 28. However, while giving this finding the Hon'ble High Court had clearly observed that a claim for bad debt under section 36(1)(vii) can be made only in respect of a trade debt which is due from customers for goods supplied or in respect of advances given in the normal course of money lending business of an assessee. In the case before the Hon'ble High Court the amount of advance given to the debtor concern did not represent an item of trade debt. It was, therefore, considered as not governed by the provisions of section 36(1)(vii) read with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's contention are that the declaration of lock out of the factory of the debtor company occurred in the year under consideration, several cheques given by the said debtor were dishonoured in the preceding year, recovery of only Rs. 30,000 could be made in the year under consideration and the subsequent events of winding up of the company and the letter of the agent showing that nothing can be recovered from the said debtor are material evidence which establishes that the debt in question had really become bad in the year under consideration. The further fact that the assessee has not been able to recover from the said debtor till to date or from the official liquidator also proves beyond doubt that the debt in question had really become irrecoverable and bad in the year under consideration. 8.6 As regards fulfilment of the fourth condition the revenue's contention is that the amount was not written off as trading loss or as bad debt and no such entry was made in the books of account at the time of filing the original return. The subsequent supplementary adjustment entries made by the assessee at the time of filing the revised return is an after-thought and was made merely wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 lakhs. It is also an admitted fact that the factory of the debtor company was closed and there was a lock out of that factory in the year under consideration. The Hon'ble Gujarat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd. at page 176 observed that subsequent events clearly show that the assessee company was justified in concluding that the amount was not recoverable in the year in question. On the strength of this judgment we can validly take into consideration the subsequent events. In the present case, the debtor company subsequently went into liquidation and the assessee till to date has not received any amount from the debtor company or from the official liquidator. In the accounting year under consideration the credit sales discontinued right from the beginning and no recoveries could be made beyond a meager sum of Rs. 30,000. All these facts, in our view, adequately establish the fact that the debt in question really became bad and irrecoverable in the accounting year itself. The mere fact that the assessee had in a routine manner made adjustment of accrued interest will not alter this basic fact that the debt in question had become bad in the accounting year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a bona fide manner and is made in respect of a debt which really became bad in the year of account, there is no justification in holding that the condition relating to writing off the amount as bad debt should not be considered to have been complied with merely because such an entry was not made at the time of filing the original return of income. This view is fortified by the judgment of Hon'ble Rajasthan High Court in the case CIT v. Mazdoor Kisan Sahkari Samiti [1970] 75 ITR 253 in which it was held that the assessee is entitled to grant of development rebate only if he creates a development rebate reserve in the books of account. It was held that such entries may be made at any time till the assessment proceedings are completed and it is not correct to state that they should have been made before the close of the accounting year. In view of aforesaid discussions, the fourth condition for grant of deduction as bad debt, in our view, also stands fulfilled. 8.10 While arriving at the aforesaid conclusions, we have carefully gone through the principles of law laid down by the Hon'ble Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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