Arvind Products Ltd, Ahmedabad V. The Dy.CIT., Circle-1, Ahmedabad

ITA 1067/AHD/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9454 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 30-12-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 11-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DINESH SINGH
• Assessee Lawyers: P M MEHTA
• Keywords: Depreciation; Reasonable cause; Bad and doubtful debts; Unabsorbed depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH (BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER & SHRI KUL BHARAT, JUDICIAL MEMBER) ITA NO: 1067/AHD/2011 (ASSESSMENT YEAR: 2006-07) ARVIND PRODUCTS LIMITED ARVIND MILLS PREMISES, NARODA ROAD, AHMEDABAD 1 ST FLOOR, JITENDRA CHAMBERS, ASHRAM ROAD, AHMEDABAD V/S DCIT CIRCLE-1, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AABCA2391L APPELLANT BY : SHRI P.M. MEHTA , A.R. RESPONDENT BY : SHRI DINESH SINGH, SR. D.R. ( )/ ORDER DATE OF HEARING : 21-01-2016 DATE OF PRONOUNCEMENT : 19 -02-2016 PER ANIL CHATURVEDI, ACCOUNTANT MEMBER 1. THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF CIT(A)-VI, AHMEDABAD DATED 14.12.2010 FOR A.Y. 2006-07. ITA NO. 1067 /AHD/2011 . A.Y. 2006-0 7 2 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER. 3. ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE B USINESS OF TEXTILES. ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y. 2006-0 7 ON 26-12-2006 DECLARING NIL INCOME. THE CASE WAS SELECTED FOR SC RUTINY AND THEREAFTER THE ASSESSMENT WAS FRAMED UNDER SECTION 143(3) VIDE ORD ER DATED 31.12.2008 AND THE TOTAL INCOME WAS DETERMINED AT RS. NIL BUT AFTER DISALLOWING THE CLAIM OF BAD DEBTS AND PRIOR PERIOD EXPENSES AND AF TER SETTING OFF OF UNABSORBED DEPRECIATION. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO VIDE ORDER DATED 1 4.12.2010 DISMISSED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS:- 1. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE AP PELLANT'S CASE, THE ORDER PASSED BY CIT(A) IS BAD IN LAW AND DESERVES TO BE CANCELLED A S HE HAS PASSED AN ORDER WITHOUT CONSIDERING AND APPRECIATING THE FACTS OF CASE OF A PPELLANT. 2. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE AP PELLANT'S CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN UPHOLDING DISALLOWANCE OF THE APPELLANT'S CLAIM FOR DEDUCTION OF BAD DEBTS OF RS 34,27,583. HE OUGHT TO HAVE ALLOWED DEDUCTION AS CLAIM WAS IN COMPLIANCE WITH ALL THE CONDITIONS STIPULATED BY TH E RELEVANT PROVISIONS OF SECTION 36. 3.1IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN UPHOLDING DISALLOWANCE OF PRIOR PERIOD EXPENDITURE FOR RS 2,35,195. 3.2WITHOUT PREJUDICE TO ABOVE, LD. CIT(A) OUGHT TO HAVE DIRECTED A.O TO ALLOW EXPENDITURE IN THE RELEVANT ASSESSMENT YEAR TO WHIC H IT PERTAINS. 4. BEFORE US, AT THE OUTSET, LD. A.R. SUBMITTED THAT 1 ST GROUND BEING GENERAL REQUIRES NO ADJUDICATION AND GROUND NO. 3 WITH RESP ECT TO PRIOR PERIOD EXPENSES IS NOT PRESSED DUE TO THE SMALLNESS OF AMO UNT. CONSIDERING THE AFORESAID SUBMISSIONS OF THE ASSESSEE THESE 2 GROUN DS ARE DISMISSED. ITA NO. 1067 /AHD/2011 . A.Y. 2006-0 7 3 GROUND NO. 2 IS WITH RESPECT TO DENIAL OF CLAIM OF BAD DEBTS. 5. A.O ON PERUSING THE PROFIT AND LOSS ACCOUNT, NOTICE D THAT ASSESSEE HAS CLAIMED BAD DEBTS OF RS. 34,27,583/-. ASSESSEE WAS ISSUED SHOW CAUSE NOTICE AND WAS ASKED TO JUSTIFY ITS CLAIM AND EFFOR TS MADE BY IT TO RECOVER THE DEBTS. IN RESPONSE TO THE QUERY OF A.O., ASSESSEE INTER ALIA SUBMITTED THAT CONSIDERING THE COSTS INVOLVED, IT HAD DECIDED NOT TO PURSUE LEGAL ACTION. THE SUBMISSIONS OF ASSESSEE WERE NOT FOUND ACCEPTAB LE TO A.O. HE ALSO NOTICED THAT ASSESSEE HAD MADE PROVISION FOR BAD DE BTS OF THE AFORESAID AMOUNT. HE WAS OF THE VIEW THAT A MERE PROVISION FO R BAD DEBTS IS NOT SUFFICIENT FOR MAKING THE CLAIM AND THAT UNLESS THE AMOUNT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS, THE SAME CANNOT BE A LLOWED AS BAD DEBTS. HE WAS FURTHER OF THE VIEW THAT ASSESSEE HAD ALSO NOT DEMONSTRATED ANY EFFORTS MADE BY IT TO RECOVER THE AMOUNT AND THE WRITING OF F OF DEBTS WITHOUT ANY REASONABLE CAUSE CANNOT BE ALLOWED AND FOR THIS PRO POSITION, HE ALSO RELIED ON THE DECISION IN THE CASE OF DHALL ENTERPRISE & E NGINEERS PVT. LTD. VS. CIT REPORTED IN 207 CTR (GUJ.) 729. HE ACCORDINGLY DISA LLOWED THE CLAIM OF BAD DEBTS. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CAR RIED THE MATTER BEFORE LD. CIT(A) WHO UPHELD THE ORDER OF A.O BY HOLDING AS UN DER:- 3.3 I HAVE CONSIDERED THE FACTS OF THE CASE, ASSESS MENT ORDER AND APPELLANT'S SUBMISSION. ASSESSING OFFICER MADE DISALLOWANCE ON TWO COUNTS N AMELY- 1-APPELLANT HAS NOT WRITTEN OFF BAD DEBT IN THE ACCOUNTS OF THE DEBTORS AND 2-A PPELLANT HAS NOT ESTABLISHED THE DEBT AS BAD. AS REGARDS BAD DEBTS NOT WRITTEN OFF IN THE ACCOUNT S, APPELLANT SUBMITTED THAT IT HAS DEBITED BAD DEBTS IN PROFIT AND LOSS ACCOUNT AND CR EDIT OF THE SAID AMOUNT IS TAKEN TO THE DEBTORS ACCOUNT IN THE MAIN LEDGER. IT IS NOT IN DI SPUTE THAT INDIVIDUAL DEBTORS ACCOUNT WERE NOT CREDITED AND AMOUNT DUE CONTINUED TO REMAI N IN THEIR ACCOUNTS, APPELLANT SUBMITTED THAT WRITING OFF IN PROFIT AND LOSS ACCOU NT IS ENOUGH AND IN SUPPORT OF ITS CLAIM ITA NO. 1067 /AHD/2011 . A.Y. 2006-0 7 4 CERTAIN DECISIONS OF GUJARAT AND BOMBAY HIGH COURTS WERE SUBMITTED IN WHICH THE CREDIT OF BAD DEBTS WRITTEN OFF WAS TAKEN TO BAD DEBTS RES ERVE ACCOUNT AND IT WAS CONSIDERED AS COMPLIANCE TO THE REQUIREMENT OF SECTION 36 (1) (VI I) OF IT ACT. HOWEVER THESE DECISIONS HAVE NOT CONSIDERED THE AMENDMENT BROUGHT TO THIS S ECTION BY EXPLANATION INSERTED BY FINANCE ACT 2001. SINCE EXPLANATION CLARIFIED THAT BAD DEBTS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS .OF ASSESSES SHALL NOT INCLUDE ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN THE ACCOUNTS OF THE ASSESSES; IT IS MANDATO RY TO WRITE OFF DEBTORS ACCOUNTS FOR CLAIMING DEDUCTION OF BAD DEBTS. IF THE DEBTOR'S AC COUNTS ARE NOT WRITTEN OFF, THE CREDIT OF SUCH BAD DEBTS WILL GO TO RESERVE ACCOUNT WHICH IS NOTHING BUT IN THE NATURE OF PROVISION FOR BAD AND DOUBTFUL DEBTS. EVEN IF SUCH ACCOUNT IS NOT NAMED AS BAD DEBTS RESERVE ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS ACC OUNT, IT IS OF A SIMILAR NATURE. WHEN PROFIT AND LOSS ACCOUNT IS DEBITED WITH THE AMOUNT OF BAD DEBTS NOT WRITTEN OFF IN THE ACCOUNT OF DEBTORS, SUCH DEBIT CAN COME ONLY FROM P ROVISION OR RESERVE ACCOUNT WHICH IS CREATED FOR FUTURE WRITE-OFF OF DEBTS. IN VIEW OF T HIS, THOUGH APPELLANT'S P&L ACCOUNT REFLECTS DEBIT FOR BAD DEBTS, THE SAME IS NOT COMIN G FROM AMOUNTS WRITTEN OFF IN THE ACCOUNTS OF DEBTORS. THE CREDIT OF SUCH SEPARATE RE SERVE ACCOUNT FOR BAD DEBTS IS NOT THE BAD DEBTS WRITTEN OFF AND THEREFORE APPELLANT DID N OT FULFILL THE VITAL CONDITION REQUIRED FOR CLAIM OF BAD DEBTS. IN VIEW OF THIS THE DISALLO WANCE OF BAD DEBT MADE BY THE ASSESSING OFFICER IS CONFIRMED. AS REGARDS ASSESSING OFFICER'S OTHER ARGUMENT THAT BAD DEBT WAS NOT ESTABLISHED TO BE BAD IS NOT RELEVANT AFTER THE DECISION OF APEX COURT IN THE CASE OF TRF LTD. IN THIS DECISION HONORABLE SUPREME COURT MENTIONED THAT REQUIREMENT OF ESTABLISHING THE DEBT AS BAD IS NO LONGER THERE AFTER 1989. CONSIDERING THIS, THE D ISALLOWANCE OF BAD DEBT ON THIS ISSUE CANNOT BE SUSTAINED. HOWEVER SINCE APPELLANT CANNOT BE ALLOWED THE CLAIM IN VIEW OF THE FACTS MENTIONED IN PREVIOUS PARA, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER GETS CONFIRMED. 6. AGGRIEVED BY THE ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 7. BEFORE US, LD A.R REITERATED THE SUBMISSIONS MADE B EFORE A.O AND LD. CIT(A) AND FURTHER SUBMITTED THAT OUT OF THE TOTAL BAD DEBTS RS. 34,27,583/- ITA NO. 1067 /AHD/2011 . A.Y. 2006-0 7 5 RS. 22,12,000/- CONSTITUTES THE AMOUNT DUE FROM DEL UXE ROAD LINES PVT. LTD. ON ACCOUNT OF THE GOODS THAT WERE BURNT IN FIR E IN RIOTS ON 31.10.2002 AND THE AMOUNT WAS NOT RECOVERABLE AND WAS THEREFOR E WRITTEN OFF. WITH RESPECT TO THE BALANCE AMOUNTS, HE SUBMITTED THAT I T REPRESENTS THE BALANCES WHICH WERE WRITTEN OFF DUE TO THE REASON THAT THE B ILLS WHICH WERE RECEIVED FROM THOSE PARTIES WERE DISCOUNTED WITH THE BANKERS BUT AT THE TIME OF PAYMENT THE PARTIES DEFAULTED. HE FURTHER SUBMITTED THAT THOUGH THE NOMENCLATURE USED BY THE ASSESSEE IS PROVISION FOR BAD DEBTS BUT IN FACT IT IS THE WRITING OFF DEBTS AS BAD. HE FURTHER SUBMITTED THAT THE ASSESSEE HAD ALSO MADE SIMILAR PROVISIONS IN 2003-04 AND WAS ALLOWED BY THE REVENUE AUTHORITIES. HE FURTHER SUBMITTED THAT THE AMOUNT I S REDUCED FROM THE TOTAL DEBTORS AND THEREFORE IT AMOUNTS TO WRITING OFF FRO M THE AMOUNTS DUE FROM THE PARTIES AND FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF VIJAYA BANK VS. CIT REPOR TED IN 2010 323 ITR 166. HE FURTHER SUBMITTED THAT AFTER 01.04.1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT HAS IN FACT BEC OME IRRECOVERABLE AND IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE. HE THEREFORE SUBMITTED THE RATIO OF DECIS ION IN THE CASE OF DHALL ENTERPRISE IS NO MORE A GOOD LAW IN VIEW OF THE DEC ISION OF HONBLE APEX COURT IN THE CASE OF TRF LTD. (SUPRA). LD. A.R. ALS O POINTED TO PAGE 11 OF THE PAPER BOOK BEING THE LETTER OF BANK OF BARODA D ATED 24.07.006 AND POINTED THAT IN THE CASE OF UNREALIZED EXPORT BILLS IN THE CASE OF SHEEBA INTERNATIONAL & GLOBE IMPEX, THE BANKER HAS ALSO GI VEN PERMISSION FOR WRITE OFF OF THE EXPORT BILLS. HE THEREFORE SUBMITTED THA T THE CLAIM OF ASSESSEE OF BAD DEBTS BE ALLOWED. LD. D.R. ON THE OTHER HAND SU PPORTED THE ORDER OF A.O AND LD. CIT(A) AND FURTHER SUBMITTED THAT THE ASSES SEE HAS TO DEMONSTRATE ITA NO. 1067 /AHD/2011 . A.Y. 2006-0 7 6 THAT THE DEBT HAS BECOME BAD FOR CLAIMING THE DEDUC TION. HE THUS SUPPORTED THE ORDER OF A.O AND LD. CIT(A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ISSUE IN THE PRESENT CASE, IS WITH RESP ECT TO WRITE OFF OF BAD DEBTS. ON PERUSING THE SCHEDULE 12 OF THE PROFIT AN D LOSS ACCOUNT WHICH IS PLACED AT PAGE 2 OF THE PAPER BOOK, IT IS SEEN THAT UNDER THE MAIN HEAD SCHEDULE 12-OTHERSAMOUNT OF RS.34.28 LACS IS STAT ED AS BAD DEBTS WRITTEN OFF MEANING THEREBY THAT ASSESSEE HAS INDEED WRITT EN OFF THE AMOUNT AS BAD DEBTS IN THE PROFIT &LOSS ACCOUNT AND HAS THUS COMP LIED WITH THE REQUIREMENT OF SECTION 36(1)(VII) OF THE ACT AND IN VIEW OF THE RATIO OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF TRF L TD. VS. CIT REPORTED IN [2010] 323 ITR 397 (SC) WHEREIN THE HONBLE APEX CO URT HELD THAT AFTER 01.04.1989 IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT HAS BECOME IRRECOVERABLE AND THAT IT IS ENOUGH IF THE B AD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. WE FURTHER FIND THAT HONBLE APEX COURT IN THE CASE OF VIJAYA BANK VS. CIT REPOR TED IN (2010) 323 ITR 166 (SC) HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSE E. THE HEAD NOTE OF WHICH READS AS UNDER: SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961 B AD DEBTS ASSESSMENT YEARS 1993-94 AND 1994-95 WHETHER WHERE ASSESSEE BANK HAD WRITT EN OFF IMPUGNED BAD DEBT IN ITS BOOKS BY WAY OF A DEBIT TO PROFIT AND LOSS ACCOUNT, SIMULTANEOUSLY REDUCING CORRESPONDING AMOUNT FROM LOANS AND ADVANCES TO DEB TORS DEPICTED ON ASSETS SIDE IN BALANCE SHEET AT CLOSE OF YEAR, ASSESSEE WAS ENTITL ED TO DEDUCTION UNDER SECTION 36(1)(VII) AND FOR THAT PURPOSE, IT WAS NOT NECESSARY FOR IT T O CLOSE INDIVIDUAL ACCOUNT OF EACH OF ITS DEBTORS IN ITS BOOKS HELD, YES. ITA NO. 1067 /AHD/2011 . A.Y. 2006-0 7 7 9. IN VIEW OF THE AFORESAID FACTS AND SEEN IN THE LIG HT OF THE DECISIONS OF HONBLE APEX COURT CITED HEREINABOVE, WE ARE OF THE VIEW THAT ASSESSEE HAS COMPLIED WITH THE REQUIREMENT OF THE PROVISIONS OF SECTION 36(1)(VII) OF THE ACT AND THEREFORE THE AMOUNT IS ALLOWABLE AS DEDUCT ION AS BAD DEBTS AND THEREFORE WE DIRECT THE A.O. TO ALLOW THE SAME. IN THE RESULT, THIS GROUND OF ASSESSEE IS ALLOWED. 10. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY AL LOWED. ORDER PRONOUNCED IN OPEN COURT ON 19 - 02 - 2016. SD/- SD/- (KUL BHARAT) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: 19/02/2016 TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO:- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT, AHMEDABAD