M/s. SBI FACTORS & COMMERCIAL SERVICES P. LTD., MUMBAI V. DCIT CIR. - 3(3), MUMBAI

ITA 2650/MUM/2007

• Counselvise Citation: 265019914 RSA 2007
• Duration Of Justice: 4 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 09-08-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 05-04-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJIV DUTT
• Assessee Lawyers: B S CHANDRASEKAR
• Keywords: Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SMT.ASHA VIJAYARAGHAVAN, JM ITA NO.2650/MUM/2007 : ASST.YEAR 2003-2004 M/S.SBI FACTORS & COMMERCIAL SERVICES PRIVATE LIMITED, 903-906 RAHEJA CHAMBERS FREE PRESS JOURNAL MARG, NARIMAN POINT MUMBAI 400 021. PAN :AAACS7915F. VS. THE DY.COMMISSIONER OF INCOME-TAX CIRCLE 3(3) MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI PERCY J.PARDIWAL A, NITESH JOSHI & B.S.CHANDRASEKAR RESPONDENT BY : SANJIV DUTT DATE OF HEARING : 09.08.2011 DATE OF PRONOUNCEMENT : 12.08.2011 O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE ASS ESSEE ARISES OUT OF TH E ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 22.12.2006 IN RELATION TO THE ASSESSMENT YEAR 2003-2004. 2. THE ONLY ISSUE RAISED THROUGH VARIOUS GROUNDS IS AGAINST THE CONFIRMATION OF ADDITION OF RS.2,01,29,328. BRIEFLY STATED TH E FACTS OF THE CASE AR E THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF FACTORING OF DEBTS. ON THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT THE ASSESSING OFFICER NOTE D THAT A SUM OF RS.2,11,83,259 WAS CLAIMED AS BAD DEBTS. ON BEING CALLE D UPON TO JUSTIFY THE DEDUCTI ON, THE ASSESSEE SUBMITTED DETAILS. EXCEPT FOR THREE PARTIES VIZ. M/S.HINDUSTAN BREWERI ES AND BOTTLING LTD. RS.5,28,580, M/S.INNOVATIVE MARKETING CO. RS.42,830 AND M/S.DAMAN ROSINS PRIVATE LIMITED RS.4,82,520 TOTALING TO RS .10,53,930 THE ASSESSI NG OFFICER WAS NOT CONVINCED WITH THE DEDUCTION ON ACCOUNT OF BAD DEBT. HE, THEREFORE, MADE ADDITION OF RS.2,01,29,329 (2,11,83, 259 10,53,930). THE LEARNED CIT(A) NOTED THAT THE AMOUNTS IN QUESTION HAD NOT BECOME BAD AS THE ASSESSEE HAD EFFECTED RECOVERIES IN ITA NO.2650/MUM/2007 M/S.SBI FACTORS & COMMERCIAL SERVICES PVT.LTD. 2 SUBSEQUENT YEARS TOTALING RS.58.56 LAKH. THE LEARNED CIT(A) HAS DISCUSSED ALL THE THREE PARTIES SEPARATELY VIZ. M/S.PAL PAPE RS PVT. LTD., M/S.VA RIETY METALS PRIVATE LIMITED AND M/S.PATNI ENGG. LIMITED IN RESPECT OF WHICH TH E ASSESSEE HAD CLAIMED DEDUCTION FOR BAD DEBT, WHIC H WAS NOT ALLOWED. THE LEARNED CIT(A) OBSERVED THAT THE ASSESSEE MADE RECOVERY OF RS.17.70 LA KH FROM M/S.PAL PAPERS PRIVATE LIMITED IN FINANCIAL YEARS 2003-2004, 2004-2005 AND 2005-2006 OUT OF WHICH THE ASSESSEE OFFERED ONLY A SUM OF RS. 1 LA KH FOR TAX IN ASSESSMENT Y EAR 2005-2006. SIMILARLY AS REGARDS M/S.VARIETY METALS PRIVATE LIMITE D, THE LEARNED CIT(A) NOTED THAT A SUM OF RS.40.86 LAKH WAS RECOVERED IN ASSESS MENT YEAR 2006-2007 AND THE SAID AMOUNT WAS ALSO NOT OFFERED FOR TAXATION. IN HIS OPINION SINCE THE ASSESSEE FAILED TO PROVE THAT DEBT HAD BECOME BAD IN THIS YEAR, HE REFUSED TO TOUCH THE FINDING OF THE A.O. ON THIS ISSUE. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE FACT TH AT THE ASSESSEE WROTE OFF THE SAID SUM OF RS.2.01 CRORE UNDER CONSIDER ATION IN ITS BOOKS OF ACCOUNT AND CLAIMED DEDUCTION TOWARDS BAD DEBT, WHICH WAS REFUSED BY TH E AO AS IN HIS OPINION THE DEBT HAD NOT BECOME BAD. THE HONBLE SU PREME COURT IN THE CASE OF TRF LIMITED VS. CIT [(2010) 323 ITR 397 (SC)] HAS HELD THAT AFTER 01.04.1989 IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT HAS FURTHER BEEN LAID DOWN THAT IF TH E BAD DEBT HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE IT IS ENOUGH FOR CLAIMING DEDUCTION U/S.36(1)(VII). SIMILAR VIEW HAS BEEN CANVASSED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. STAR CHEMICALS (BOMBAY) PVT. LTD. [(2009) 313 ITR 126 (BOM.)] . IN THIS CASE, THE HONBLE HIGH COURT HELD THAT ONCE THE ASSESSEE HAS WRITTEN OFF DEBT AS BAD, REQUIREMENT OF SECTION 36(1)(VII) IS SATISFIED AND THE CLAIM FOR DEDUCTION OF BAD DEBT IS ALLOWABLE. FROM THE A BOVE DISCUSSED TWO JUDGMENTS, IT BECOMES MANIFEST THAT THE DEDUCTION ON ACCOUNT BAD DEBT IS TO BE ALLOWED IN THE YEAR IN WHICH THE AMOUNT IS WRITTEN OFF IN ITS BO OKS OF ACCOUNT PROVIDED THE CONDITIONS OF ITA NO.2650/MUM/2007 M/S.SBI FACTORS & COMMERCIAL SERVICES PVT.LTD. 3 SECTION 36(2) ARE FULFILLED. IN THE PRESENT CASE, IT HAS NOT BEEN ACCUSED BY THE AUTHORITIES BELOW THAT THE ASSESSEE DID NOT SATISFY THE CONDITIONS OF SECTION 36(2). THUS IN PRINCIPLE IT IS HELD THAT ONCE TH E AMOUNT OF DEBT IS WRITTEN OFF IN THE BOOKS OF ACCOUNT, THE CONDITION OF SECTION 36(1)(VI I) IS FULFILLED AND THE DEDUCTION HAS TO FOLLOW, OF COURSE SUBJECT TO THE SATISFACTIO N OF THE CONDITIONS OF SEC. 36(2). THERE IS NO REQUIREMENT TO DISTINCTLY PROVE THAT THE DEBT HAS, IN FACT, BECOME IRRECOVERABLE AS A PRE-REQUISITE CONDITION FOR ALLOWING OF DEDUCTION. 4. SECTION 41(4) PROVIDES THAT WHERE A DE DUCTION HAS BEEN ALLOWED IN RESPECT OF BAD DEBT OR PART OF DEBT U/S.36(1)(VII) AND IF SUBSEQUENTLY THE AMOUNT OR ITS PART IS RECOVERED AND SUCH RECOVERED PART IS GREATER THAN THE DIFFERENCE BETWEEN THE DEBT OR PART OF THE DEBT AND THE AMOUNT SO ALLOWED, THE EXCESS SHALL BE DEEMED AS PROFITS AND GAINS OF BUSINESS OR PR OFESSION AND ACCORDINGLY CHARG EABLE TO TAX AS INCOME OF THE PREVIOUS YEAR IN WHICH IT IS RECOVERED. WHEN WE C ONSIDER SECTION 36(1)(VII) IN JUXTAPOSITION TO SECTION 41(4) THE LEGA L POSITION WHICH EMERG ES IS THAT ON THE WRITING OFF OF THE AMOUNT OF BAD DEBT IN THE BOOKS OF ACCOUNT, THE ASSESSEE BECOMES ENTITLED TO DEDUCTION U/S.36(1)(VII) AND IF SUBSEQUENTLY SOME AMOUNT OUT OF SUCH DEDUCTION ALREADY ALLOWED IS REC OVERED, THE SAME IS CHARGEABLE TO TAX U/S.41(4) IN THE YEAR OF SUCH RECOVERY. WHEREAS THE GRANTING OF DEDUCTION ON THE FULFILLMENT OF THE REQUISITE CONDITIONS U/S. 36(1)(VII) IS THE DUTY OF THE ASSESSING OFFICER, OFFERING TO TAX THE AMOUNT SUBSE QUENTLY RECOVERED U/S.41(4) IS THE DUTY OF THE ASSESSEE. IT CANNOT BE THE POSITION THAT THE DEDUCTION IS MADE U/S.36(1)(VII) IN THE YEAR OF WRITE OFF BUT AMO UNT IS NOT OFFERED FOR TAXATI ON U/S.41(4) IN THE YEAR OF RECOVERY. 5. ADVERTING TO THE FACTS OF THE INSTANT C ASE IT IS NOTICED THAT THE LEARNED CIT(A) HAS RECORDED A CATEGORICAL FI NDING THAT THE ASSESSEE DID RECOVER A SUM OF RS.58.56 LAKH UP TO THE DATE OF PASSING OF THE IMPUGNED ORDER OUT OF WHICH ONLY A SUM OF RS.1 LAKH WAS OFFERED BY TH E ASSESSEE FOR TAXATION U/S. 41(4). THE LEARNED COUNSEL ITA NO.2650/MUM/2007 M/S.SBI FACTORS & COMMERCIAL SERVICES PVT.LTD. 4 FOR THE ASSESSEE CANDIDLY ADMITTED THIS FACTUAL POSITION BUT CONTENDED THAT THE REMAINING AMOUNT WAS NOT SHOWN AS TAXABL E FOR THE REASON THAT THE ASSESSING OFFICER HAD ALREADY MADE A DDITION BY NOT ALLOWING DE DUCTION ON ACCOUNT OF BAD DEBT IN THE YEAR IN QUESTION. 6. THE CORRECT POSITION IS THAT THE DEDUCTION IS TO BE ALLOWED IN THE YEAR OF WRITE OFF AND THE AMOUNT RECOVERED S UBSEQUENT TO WRITE OFF IS TO BE TAXED U/S 41(4) IN THE YEAR OF RECOVERY. HOWEVER IN THE PECULIAR FACTS OF THIS CASE IT IS SEEN THAT THE AO DID NOT ALLOW DEDUCTION IN THE YEAR OF WR ITE OFF, TO WHICH THE ASSESSEE WAS ENTITLED AS PER THE LAW, AND THE ASSES SEE CONSEQUENTLY ERRED IN OFFERING THE RECOVERIES IN THE SUBSEQUENT YEARS DESPITE CHALLENGE TO THE ADDITION FOR THE INSTANT YEAR. AS THE AO HAD NOT ALLOWED DEDUCTION FOR BAD DEBTS IN THIS YEAR, HE WAS CONSTRAINED TO TAX RECOVERIES U/S 41(1) IN THE SUBSEQUENT Y EARS OF RECOVERIES. IF THE DEDUCTION IS ALLOWED FOR THE AMOUNT WRITTEN OFF AS DEDUC TION IN THIS YEAR, IT WOULD AMOUNT TO DOUBLE DEDUCTION, VIZ., FI RSTLY, BY REDUCING THE TOTA L INCOME WITH THE AMOUNT ALLOWED AS DEDUCTION IN THIS YEAR AND SECONDLY, BY NOT INCREASING THE INCOME OF THE SUBSEQUENT YEARS IN WH ICH RECOVERIES WERE EFFECTED , FOR WHICH THE ASSESSMENTS HAVE BEEN FINALIZED ACCEPTIN G THE POSITION. IT WOULD BE A HEADS WIN AND TAILS WIN SITUATION FOR THE ASSESSEE, WHICH IS NOT POSSIBLE TO SUSTAIN. 7. IT IS SEEN THAT THERE MAY ARISE SOME DIFFICULTY IN GIVING EFFECT TO THE DIRECTION THAT THE RECOVERIES BE TAXED IN SUBSEQUENT YEARS BECAUS E OF LIMITATION COMING IN THE WAY AS PER THE RELEVANT SE CTIONS FOR WHICH THE ASSESSM ENTS HAVE ALREADY BEEN FINALIZED. IN ORDER TO CIRCUM VENT SUCH A SITUATION, THE POSSIBLE SOLUTION IS TO ALLOW DEDUCTION U/S.36(1)(VII) IN THIS YEAR TO TH E EXTENT OF THE AMOUNT WHICH HAS REMAINED EVENTUALLY UNRECOVERED SUBJ ECT TO THE ADJUSTMENTS FOR THE AMOUNTS ALREADY INCLUDED IN THE TOTAL INCOME U/S.41(4) IN SUBSEQUENT YEARS. RECOVERIES EFFE CTED IN THESE THREE ACCOUNTS AFTER THE DATE OF THE IMPUGNE D ORDER SHOULD ALSO BE TAKEN INTO CONSIDERATION WHILE GIVING EFFECT TO OUR ABOVE DIRECTIONS. IF HOWEVER THE RECOVERIES ITA NO.2650/MUM/2007 M/S.SBI FACTORS & COMMERCIAL SERVICES PVT.LTD. 5 HAVE BEEN MADE IN THE SOME YEAR(S) FOR WHICH THE ASSES SMENT(S) IS / ARE PENDING, THEN THE RESORT BE MADE TO THE CORRECT PROVISIONS, IN THE SENSE THAT THE AMOUNT BE TAXED U/S 41(1) IN SUCH YEAR(S) BY ALLOWI NG DEDUCTION ON ACCOUNT OF BAD DEBT TO THAT EXTENT IN THE YEAR UNDER CONSID ERATION. WE ORDER ACCORDINGLY. NEEDLESS TO SAY THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPOR TUNITY OF HEARING BY THE AO IN SUCH FRESH PROCEEDINGS. 8. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN TH E OPEN COURT ON THIS 12 TH DAY OF AUGUST, 2011. SD/- SD/- (ASHA VIJAYARAGHAVAN) (R.S.SYAL) JUDICIAL MEMBER ACC OUNTANT MEMBER MUMBAI : 12 TH AUGUST, 2011. DEVDAS*` COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - XXXII, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.