TMI Blog2003 (7) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... revised return filed on 11th September, 1997 the assessee claimed deduction of Rs. 98,61,884 which were credited in earlier year on account of price escalation from Madhya Pradesh Government for supply of country liquor during the Financial year 1985-86 to Financial year 1990-91. 2.3 The assessee company was one of the partners in the erstwhile firm M/s Associated Distilleries. The assessee company succeeded to the business of the said firm as a going concern w.e.f. 1st April, 1990. The erstwhile firm viz., Associated Distilleries as well as the assessee company supplied country liquor to M.P. Government during the period 23rd October, 1985 to 31st March, 1991 corresponding to the assessment years 1987-88 to 1991-92 and charged Rs. 5,02,82,790 by way of cost price bills. Subsequently, the assessee made claims for price escalation and raised supplementary bills in respect of Rs. 1,15,05,321 and demanded the said payment from the M.P. Government. There is no dispute that the claims for price escalation were credited by the assessee to the sale account in each of the relevant years and accordingly offered for taxation. Since the State Government of M.P. did not accept the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) read with section 36(2) were not applicable since the sum of Rs. 98,61,884 was never acknowledged by the State Government of Madhya Pradesh at any time whatsoever. Relying on the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, the assessee contended that writing off a business loss in the books of account could not be a condition precedent for acceptance of a claim under section 28(i) read with section 2 of the Act. 2.6 The ld. CIT(A) accepted the submissions of the assessee and held that the excess credit of Rs. 98,61,884 could not be classified as debt as a bad debt presupposes the existence of a debt. The ld. CIT(A) has stated that the State Government of Madhya Pradesh at any point of time had acknowledged the amount of Rs. 1,15,05,321 raised by the assessee in its supplementary bill as debt due by it. Therefore, the demand or claim which was not acknowledged by the other side but disputed by it could never be regarded as 'debt' proper. The Ld. CIT(A) relying on the decision of the Madras High Court in the case of CIT v. Vanguard Insurance Co. Ltd. [1974] 97 ITR 546 held that a debt must be an admitted debt if it is to qualify fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 36(2) was not fulfilled. The Ld. D.R. submitted that it was not a business loss of the assessment year under appeal and as such the same could not be allowed in any other provision of sections 28 to 43D save and except under section 36(1)(vii) read with section 36(2) of the Act. On the other hand, the Ld. A.R. of the assessee justified the order of the ld. CIT (A). He contended strenuously that the State Government of Madhya Pradesh never acknowledged the claim of the assessee as a debt and it was a unilateral claim of the assessee for price escalation, the same did not become a contractual debt between the parties and accordingly, provision of section 36(1)(vii) is not applicable. The Ld. A.R. of the assessee submitted that the sales booked by raising the supplementary bills in the earlier years were tentative price and the final prices were determined later on resulting into a loss to the assessee of Rs. 98,61,884 which had been crystalised in April, 1995, when the assessee received the letter of the State Government of Madhya Pradesh on 19th April, 1995 and referred page 63 of the paper book to substantiate his submission. In support of his submission, the Ld. A.R. of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that one is bound to pay another a pecuniary due; a liquidated demand; a sum of money due by certain and express agreement. It includes any claim or demand upon which a judgment for a sum of money or directing the payment or money can be recovered in an action. Debt denotes not only the obligation of the debtor to but also the right of creditor to receive and enforce payment." 2.11 The Apex Court in the case of A.V. Thomas Co. Ltd. v. CIT [ 1963] 48 ITR 67 has considered debt for the purpose of section 10(2)(xii) of the Income-tax Act, 1922. It was stated by Their Lordships that what is meant by debt in that connection was laid down by Rowlatt Justice in Curtis v. J . G. Oldfield Ltd. [1925] 9 Tax Case 319 as follows:-- "Then the rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come into swelled the profits". Therefore, a debt in such case is an outstanding which if recovered would have swelled the profits. It means something which is related to business or results fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered view that the plea of the assessee that it was a unilateral claim of the assessee and there was no actionable claim of the assessee on the Madhya Pradesh Government we do not find any force in the said submissions of the assessee for the reasons that if there had been no valid claim, no direction could be issued by the Madhya Pradesh High Court to the Government of Madhya Pradesh to settle the claim of the assessee within a specified period of one month and admitting the claim of the assessee for a sum of Rs. 16,43,436.94 against the claim of the assessee of Rs. 1,15,05,321.10. Once the assessee had posted entries in the P L Account, and also shown as credit sales, the outstanding at the close of the accounting year is to be carried forward in next accounting year only as trade debtor. Therefore, the balance amount of Rs. 98,61,884.16 is prima facie a trade debt which was rejected by the State Government in the assessment year under appeal. Since the assessee had not written off the amount in the assessment year under appeal as is required under section 36(2) of the Act, we are of the considered view that the Assessing Officer is justified not to allow the said claim as bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ground No.1 of the appeal is allowed in favour of the Department. The ground No.2 of the appeal is as under:-- "That on the facts and in the circumstances of the case, the CIT(A) was not justified in deleting Rs. 7,18,512 being disallowance made in respect of foreign travel." 3.1. The assessee debited an amount of Rs. 7,18,511.75 on account of foreign travel in its account. The Assessing Officer has stated that the assessee furnished some evidence for purchase of foreign currency but no documents/evidence were furnished for proving the purpose of such foreign tour. Therefore, the Assessing Officer disallowed the claim of foreign travel expenses and added the same to the total income of the assessee. The assessee filed appeal before the First Appellate Authority. 3.2 The assessee contended before the Ld. CIT(A) that the expenses were incurred by the two Directors of the assessee company for promoting assessee's products in the overseas market the Ld. CIT (A) considered the submission of the assessee and has stated that it is not in dispute that the assessee was engaged in export business. The ld. CIT(A) further observed that it is a common phenomenon that not all overseas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,06,023 --------------- 1997-98 Singapore 3,06,023 --------------- 3.4 We have carefully considered the submissions of the ld. representatives of the parties and the orders of the authorities below. We have also considered the details as are given in respect of the exports made by the assessee company to European and other countries, the details of which are mentioned hereinabove as well. The Department has not disputed the above facts that the export of the business in the following financial year increased to Rs. 12,36,62,547 as against Rs. 98,91,000 in financial year 1995-96. The ld. A.R. has further submitted that the aforesaid expenses on foreign trips were incurred by the assessee exclusively for business purposes and nothing has been brought by the Department to controvert the above submissions of the assessee. In view the above, we do not find any reason to interfere with the order of the Ld. CIT(A). Accordingly, the ground No.2 of the appeal is rejected and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st March, 1986. During the term between 1981 and 1986, policy was formulated to do away with the process of inviting tenders and to constitute Experts Committee to cull out relevant data for making recommendations to the Government for price fixation for supply rate of country liquor. The Apex Court (AIR 1987 SC, 251) permitted continuance of policy for five years. Pending recommendation and eventual fixation, Ad hoc rates for continuance of supply were fixed for the period from 1-4-1987 to 31-3-1991, subject to adjustment later on price fixation. The petitioners maintain that on correct fixation, they are entitled to receive substantial amount, as quantified above, from the respondents. Tortured and troubled by inordinate delay and plunged into the state of economic crises, the petitioners have filed this petition." After taking into account reply filed by the respondentand after hearing both the parties, Hon'ble High Court further observed that: "The counsel for the petitioners urged that the delay is simply intolerable and mandate contained in Article 14 seems to have been put in the cold storage. The counsel for the respondent submitted that the Experts Committee has put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 1981 to 31st March, 1986, that these are not the most reasonable rates...." Their Lordships then further observed: "...The Cabinet Sub Committee, therefore, felt that the system of rate fixation prevalent in West Bengal was the most beneficial to the State Government because it provided for the rate fixation by an expert committee which would take into account the escalation or de-escalation in the price of raw materials, varying labour cost and fluctuating market condition every year and arrive at a reasonable rate, fair both to the licensee and to the State Government...." 6. It was in this background that the Experts Committee appointed by the State Government was to fix the price of liquor and consider assessee's claim for enhancement in rates over and above the ad hoc rates on which supplies were being made by the assessee. In the present case, the State Government had agreed to an ad hoc rate, subject to such adjustment as the rates fixed by the Experts Committee would have resulted in, but, in anticipation of Experts Committee's approval to certain degree of enhancement in rates at which supplies were to be made, the assessee raised 'supplementary bills' and bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate Government of Madhya Pradesh on account of supply of liquor during the assessment years 1987-88 and 1991-92 and, pending settlement of claim by the Madhya Pradesh Government, it (Government of MP) was debtor of the assessee" and that "the plea of the assessee that it was a unilateral claim of the assessee and that there was no actionable claim of the assessee on the Madhya Pradesh Government, we do not find any force in the submission of the assessee for the reason that if there had been no valid claim, no directions could have been issued by the Madhya Pradesh High Court to the Government of Madhya Pradesh to settle the claim of the assessee within a specified period of one month, and, thereafter, admitting the claim of the assessee for a sum of Rs. 16,43,436.94, against the claim of the assessee of Rs. 1,15,05,321.10". Learned brother has then concluded as follows: "Once the assessee had posted entries in P L account, and also shown as credit sales, the outstanding at the close of the accounting year is to be carried forward in next accounting year only as a trade debtor. Therefore, the balance amount of Rs. 98,61,884.16 is prima facie a trade debt which was rejected by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had two components one, reflected by the ad hoc prices about which there was no dispute; and - two - reflected by the supplementary bills which, as claimed by the assessee, was on account of the enhancement in prices, over and above the ad hoc prices, which the State Government was to permit on fixation of correct prices. It is the second component of sales billing which is in dispute before the Tribunal and it was this component on account of which the assessee carried the matter before the Hon'ble MP High Court, in writ petition, but then, as noted above, the assessee's case was not for realisation of dues on account of second component of sales billing, but rather a prayer for expediting process of price fixation which, in assessee's perception, would have resulted in crystallization of State Government's liability, on account of this component, to the assessee. In this situation, to my mind, it could not be said, that the amount of Rs. 1,15,05,321.10, on account of supplementary bills, reflected 'debt' or liability payable by the State Government to the assessee. As far as the State Government was concerned, this amount was at best a 'contingent liability' or 'claim not ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the existence could have been in fact if the assessee had a said sum accepted to be a debt by the State Government. In my view, therefore, revenue's reliance on Besumal Jagat Narain's case is misplaced. 12. The revenue's plea, which has found favour in brother's draft order, is that the amount in question represented "a trade debt which was rejected by the State Government in the assessment year under appeal" but then it is difficult to comprehend as to how can a debt be 'rejected', though, of course, a claim can rejected or, to put in more appropriate words, repudiated. It is also an admitted position that in the present case, the amount of billing over and above the ad hoc rates, termed as 'supplementary bills', was only an assessee's claim on the State Government which was, pursuant to the directions of the Hon'ble M.P. High Court, examined by the Experts Committee and partially accepted by the State Government in the light of the recommendations of the Experts Committee. In this situation, the portion of claim which was rejected by the M.P. State Government cannot be said to be in the nature of 'rejection of debt', and, in any event, the expression 'trade debt which was rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely after quoting the extracts: "A debt in such cases is an outstanding which, if recovered, would have swelled profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the section, debt means something more than a mere advance. It means something related to business or results from it. To be claimable as bad or doubtful debt, it must be shown as a proper debt." 16. Hon'ble Supreme Court itself, in the case of CIT v. Abdullabhai Abdulkadar [1961] 41 ITR 545 - referred to, with approval, in the above case, explained the context of Justice Rowlatt's observations, by observing as follows: "Reference may also be made to an English decision in Curtis v. J G Oldfiled Limited [1925] 9 Tax Cases 319. In that case, managing director of a company of wine and spirit merchants embezzled monies of the company and that was claimed as a bad debt and it was held that it was not a trading loss and was, therefore, not an admissible deduction. In that case the contention of the Crown (the revenue) was that the sum was not an ordinary trading loss and, therefore, could not be a bad debt and that the loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h can be covered by the bad debts allowable as deduction, whereas in the present case the connotation of 'debt' per se is the basic issue. The observations were made, as elaborated above, in different contexts. I am, therefore, not inclined to approve revenue's reliance on these judgments, so far as the issue in this appeal is concerned. In any event, none of the observations support the case of the revenue either. 19. It is not in dispute that pursuant to the direction of the Hon'ble High Court, the assessee's claim was settled vide order dated 19th April, 1995, passed by the Excise Commissioner and a copy of which is placed at pages 33-34 of the paperbook. It was as a result of this exercise, which was admittedly completed in the relevant previous year, that assessee's unilateral claim to the extent of Rs. 98,61,884 was formally repudiated. Since this amount was already included in revenues of earlier years and duly offered for taxation, the assessee was quite justified in reversing those income entries and claiming deduction in respect of income offered for taxation in earlier years which never infact accrued. In any event, there is no dispute about the loss having actually oc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing point of difference and refer the same to the Hon'ble President of the Income-tax Appellate Tribunal in accordance with the provisions of sub-section (4) of section 255 of the Income-tax Act, 1961. The point of difference is as under: "Whether, on the facts and in the circumstances of the case, the assessee's claim of deduction of Rs. 98,61,884 constitutes a 'bad debt' or not and whether, therefore, the claim of deduction can be declined on the ground that conditions laid down under section 36(1)(vii) read with section 36(2) were not fulfilled in the assessment year 1996-97 (i.e., the year under appeal)?" THIRD MEMBER ORDER 1. The appeal of the revenue for the assessment year 1996-97 was heard by "An Bench of the Tribunal. As a result of difference of opinion amongst the Members, the Hon'ble President has nominated me as Third Member under section 255(4) of the Income-tax Act, 1961 it respect of the following point of difference: "Whether, on the facts and in the circumstances of the case, the assessee's claim of deduction of Rs. 98,61,884 constitutes a 'bad debt' or not and whether, therefore, the claim of deduction can be declined on the ground that conditions laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1998-99. Subsequently, the assessee realized that since by order of the State Government excess claim of the assessee of Rs. 98,61,884 had been rejected in April, 1995, therefore it claimed the said sum as business loss under section 28(r) r.w.s. 29 of the Act by filing a second revised return on 11-9-1997 for the year under appeal reducing the total income to Rs. 42,75,970, inasmuch as, according to the assessee, the deduction should be allowed in the assessment year 1996-97, i.e. the assessment year relating to previous year in which the loss crystallised. 3. The Assessing Officer while framing the assessment under section 143(3) for the year under appeal did not allow the claim of loss of Rs. 98,61,884 as deduction from income of the assessee. According to him the assessee had not written off the said amount as bad debts in the accounts of the previous year relevant to the assessment year 1996-97, but written it off in the subsequent year, i.e. assessment year 1998-99. According to Assessing Officer, this loss can only be allowed as a bad debt under section 36(1)(vii) and the deduction will be admissible in the assessment year 1998-99. It Was observed by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal and is therefore allowable as trading/business loss in computing its total income for the assessment year 1996-97 under section 28 read with section 29 of the Act" 5. Being aggrieved, the Revenue came in appeal before the Tribunal. The Ld. Judicial Member proposed an order by virtue of which he reversed the order of the CIT(A) by holding that since the assessee had admittedly not written off the amount as bad debt in the assessment year under appeal, the Assessing Officer was justified to disallow the claim of deduction of the assessee of Rs. 98,61,884 in the assessment year 1996-97. According to him, it was a trade debt, hence allowable under section 36(1)(vii) of the Act. However, since it was not written off under section 36(2) during the year, therefore, the Assessing Officer rightly disallowed the same. Whereas the Ld. Accountant Member found no justification for the Assessing Officer having disallowed the claim of deduction made by the assessee of Rs. 98,61,884 in the assessment year under appeal because, according to him, section 36(1)(vii) and section 36(2) of the Act have no application in the matter and it is allowable as business loss. Thus the difference of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not acknowledged the supplementary bill/claim raised by the assessee at any point of time. He placed reliance on the decision of Madras High Court in the case of Vanguard Insurance Co. Ltd. in support of the proposition that a debt must be an admitted debt if it is to qualify for deduction as bad debt. Further reliance was placed on the decision of Punjab Haryana High Court in the case of Basumal Jagat Narain at page 453, where it has been held that a proper debt means one is bound to pay another a pecuniary due, a liquidated demand upon which a judgment for a sum of money or directing the payment or money can be recovered in an action. It is not only the obligation of the debtor to pay but also the right of creditor to receive and enforce payment. On the basis of these decisions, it was held that in this case the claim of price escalation was made unilaterally by the assessee which was not accepted by the State Government at any point of time. Therefore, it is not a debt. The loss arose out of the carrying on the business of the assessee, resulted in connection with the transaction between the supplier and the buyer, is a business loss. The supplementary claim of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituting experts committee for making recommentions to the Government for price fixation for supply rate of country liquor. On this background, the Hon'ble High Court directed the State Government to fix up the price without any further delay. The reason for moving the matter before the Hon'ble High Court was that the State Government was delaying the matter of fixation of price of the country liquor. The ld. Accountant Member in his order has highlighted the system of sales revenue booked by the assessee. According to the Ld. Accountant Member, one is reflected by the ad hoc price about which there is no dispute. The other is reflected by supplementary bills which was on account of the enhancement in prices over and above the ad hoc price which the State Government was to permit on fixation of correct price. This is the second component of sales billing which is in dispute before the Tribunal Admittedly, the second component of enhanced bill was never accepted by the M.P. Government because there was no fixation of price. The assessee went before the Hon'ble High Court with a prayer for fixation of the price and not for realization of disputed amount, because this amount related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Privy Council in that case that a debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in present or in future. But a sum payable upon a contingency does not become a debt until the said contingency has happened. In the case of CWT v. Pierce Leslie Co. Ltd. [1963] 48 ITR 1005 (Mad.) at 1016, it has been held after following the decision of Webb v. Stenton [1983] 11 QBD 518 to the effect that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation and that contingent liability is not a debt is now well settled. 12. In the case of Sutlej Cotton Mills, the Hon'ble Supreme Court has held that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. 13. In this case, the income had already been assessed to tax in assessment years 1988-89 to 1991-92 and in view of the Hon'ble M.P. High Court order dated 10-1-1995 this loss occasioned to the assessee vide letter dated 19-4-1995 of M.P. Govt. Although no entry was made in the books of account for writing off, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: "In the present case, the loss in question is irrecoverable debt which is to be allowed under section 36(1)(vii) provided the conditions laid down in section 36(2) are satisfied. As there is a specific provision in the statute for allowing this kind of loss, compliance with that provision is a must. Since the assessee had not fulfilled the conditions specified in section 36(2), I am not inclined to allow the sum of Rs. 98,61,884 as deduction from income of the assessee." From the above it is clear that the Assessing Officer has not disputed that the assessee had, in fact, suffered a loss. However, according to him, it should be allowed as a bad debt. In view of the above discussions, I hold that in the present circumstances of the case, the claim of the assessee which was repudiated by the State Government, cannot be treated as a debt and I, therefore, concur with the finding of the Ld. Accountant Member that it should be allowed as business loss during the assessment year under appeal. 15. Let the matter be placed before the regular Bench for passing the consequential order in accordance with the majority view. Per. B.R. Mittal, J.M.-- On a difference of opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
