1. The Department is in appeal before us against the order of the learned CIT(A), dt. 17th Oct., 1994, for asst. yr. 1991-92. The only ground raised in the appeal is against the deletion of disallowance of Rs. 1,83,500 made on account of bad debts.
2. The assessee individual, besides trading in optical frames and lenses, is also a money-lender. For the year under appeal he had declared loss of Rs. 1,83,500 from money-lending business. The assessee had advanced a sum of Rs. 1,83,500 to one Shri Shankarlal of Ichalkaranji and it was written off in the books of account by the assessee on 31st March, 1991, as irrecoverable debt, According to the AO the assessee had written off the debt within a very short time, namely, within 2 months only and this according to him was highly improbable for a money-lender to do. He rejected the explanation of the assessee that the same was written off on humanitarian grounds. The claim for deduction of bad debts was, therefore, rejected. The CIT(A) deleted the addition on the ground that after the amendment in Section 36(1)(vii) there was no need for the assessee to show as to what steps had been taken for recovery and writing it off as irrecoverable was sufficient.
3. The contention of the learned Departmental Representative was that a bad debt can be written off only when it has become bad and that it has become bad has to be shown to the taxing authorities. Hence, according to him, simply writing off the debt would not entitle the assessee to claim deduction under Section 36(1)(vii). The learned counsel for the assessee, at the outset, clarified that the debt was not written off within two or three months of giving the advance, but it was written off two years after the date of advance. Further, the debt was written off because according to the assessee it had become irrecoverable and hence the deduction be allowed.
4. On due consideration of the rival contentions and the material on record, we are inclined to accept the contention of the learned counsel. Before Clause (vii) of Sub-section (1) of Section 36 was amended w.e.f. 1st April, 1989, the wordings of the said clause were "any debt, or part thereof, which is established to have become a bad debt in the previous year". In place of these words, now the wordings are "any bad debt or part thereof which is written off as irrecoverable....". The difference in the wordings shows that earlier the assessee was required to satisfy the taxing authority that debt which he is writing off is established to have become bad. Hence, much depended on the satisfaction of the AO about the debt having become bad. This entailed considerable litigation because satisfaction in such matters was quite subjective. Hence, in order to reduce the scope of litigation, the amendment was brought to the effect that it would be sufficient if in the opinion of the assessee a debt has become bad and is written off in the books of account. Hence, if the contentions of the learned Departmental Representative are to be accepted, we are afraid, we may be going back to the pre-amended position which is not warranted after the amendment.
5. Let us examine the issue in a little greater detail. It is no doubt true that the debt which is written off as irrecoverable by the assessee must be a bad debt. The onus is, of course, on the assessee to show that the write off of the alleged bad debt is proper and permissible, but certainly the Department cannot insist on a demonstrative proof. This was the observation of the Bombay High Court in the case of Jethabhai Hirji & Jethabhai Ramdas v. CIT (1979) 120 ITR 792 (Bom) at p. 805. The Court observed as follows : "While the onus of establishing that the write off of the alleged bad debt is proper and permissible in the circumstances of the case is undoubtedly upon the assessee, the Department cannot insist on the demonstrative proof which is quite infallible." The above observations make it quite clear that there can be no infallible evidence to show that the write off is proper and permissible in the circumstances of the case. This fallible character itself led to litigation since the Department, by and large, did not accept the evidence produced by the assessee about a debt going bad. It was in the light of this background that a suggestion was mooted to the Board by some of the Chambers of Commerce, to the effect that, in the case of banks, the AO should give full deduction for all bad and doubtful debts actually written off in the books of the banks, without any questioning, since the banks are in a better position to decide whether any of their debts are realisable or not. From asst. yr.
1989-90, the view of the Chambers of Commerce had been given statutory recognition in respect of all types of business (p. 2047--Law of Income-tax by Sampath Iyenger--Vol. II, 8th Edition), 6. Another aspect of the matter is that there always has been an attempt to. bring taxable income closer to the real income. In this connection it may be worthwhile noting that the provision for deduction of bad debts was introduced in the income-tax law for the first time in 1939, but even prior to the insertion of such provision in the 1922 Act, the Privy Council in CIT v. Sir S.M. Chitnavis (1932) 6 ITC 453 (PC) had ruled that such bad debts were necessarily allowable as deduction on grounds of first principles of accountancy. At p, 457 of the report, the Privy Council observed as follows (as reproduced in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) at p.
128): "Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of an year, and in assessing the amount of the profits and gains of an year, account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." 7. The amendment brought into effect from 1st April, 1989, by the Direct Tax Laws (Amendment) Act, 1987, gives expression to the views expressed by the Privy Council as far back as in 1932. Circular No.551, dt. 23rd Jan., 1990, issued by the Board explaining the provisions of the Amending Act echoes this intention of the legislature in the following words at para 6.1 of the circular [(1990) 183 ITR 7 (St)] : "Under the old provisions of the IT Act, the computation of taxable income under the head "profits and gains of business or profession" deviated considerably from the concept of commercial profits or real income. This was because of certain provisions in the Act which disallowed expenses actually incurred or laid down artificial ceilings on allowable business expenses.
With a view to bring the taxable income closer to the real income the Amending Act, 1987, has either amended or omitted some of the provisions of the Act, which put restrictions on the allowability of business expenses. These are indicated below : (ii) .. Provisions relating to allowability of the bad debts are amended [Sections 36(1)(vii) and 36(2)].
From the above explanation given by the Board, it is clear that by amending Section 36(1)(vii), what the legislature has done is merely to bring taxable income closer to the real income. The Board further explained the amended provision at para 6.6 of the said circular as follows : "6.6. Amendments to Sections 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts. The old provisions of Clause (vii) of Sub-section (1) r/w Sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the AO in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987, has amended Clause (vii) of Sub-section (1) and Clause (i) of Sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee." 8. Thus, on the basis of the above discussion, we are of the considered opinion that once the assessee has written off a debt as irrecoverable, the AO need not enquire as to whether it has been property written off or not. It is, undoubtedly, a liberal approach adopted by the legislature to curtail litigation. This view is also reflected by the Ahmedabad Bench of the Tribunal in the case of ITO v. Ashok Kumai Lalit Kumar (1995) 52 TTJ (Ahd) 173 : (1995) 53 ITD 326 (AM). In the said case, the Tribunal did not allow the deduction as bad debt since it had not gone into the profits earlier. In the alternative, assessee claimed it as a trading loss under Section 28(i) and/or under Section 37 of the Act. This claim of the assessee was also negatived by the Tribunal.
However, the following observations are noteworthy : "The conditions relating to grant of deduction as a bad debt and a trading loss have undergone a significant change by an amendment of Section 36(1)(vii) and Section 36(2) made by the Direct Tax Law (Amendment) Act, 1989, w.e.f. 1st April, 1989, which is applicable from asst. yr. 1989-90. The old provision, as it existed prior to 1st April, 1989, provided that the debt must be established to have become bad in the previous year. This led to a litigation on the question of year of allowability of bad debt in the particular year.
In order to eliminate the dispute relating to year of its allowability and also to rationalise the provision, it has now been provided that claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. But such a liberal approach about the year of allowability cannot be extended to deduction allowable in respect of trading loss under Section 28 and/or under Section 37." Thus, the Ahmedabad Bench of the Tribunal has taken note of the liberal approach adopted in Section 36(1)(vii) about the year of allowability of a bad debt.Dy.
CIT v. India Thermit Corporation Ltd. (1996) 56 ITD 307 (Del) is also noteworthy. At p. 311, the Tribunal has observed as follows : "Therefore in our considered opinion the debt written off has to be bad debt. It is the prior condition for allowability of the deduction under Section 36(1)(vii) even after the amended provision.
Once the debt is established to be bad, deduction will have to be allowed for the year in which the assessee writes off the same. AO cannot question the year in which the debt becomes bad." (underline, italicised in print, by us).
In the said case, it was the finding of the Tribunal that the CIT(A) did not consider as to what was written off was a bad debt or not.
Earlier in para 5 we have observed that deduction can be allowed only of bad debt that is written off and not of any other debt. In the case before us the CIT(A) has given the following finding : "Since the money was not forthcoming and the appellant was fairly certain that the same was irrecoverable, the amount was written off." This finding of the CIT(A) is not disputed by the Department. Hence, the deduction claimed by the assessee has to be allowed.
10. At this juncture, it is also worth considering the consequences that may follow if the assessee is not allowed deduction in the year of write off. Prior to its omission by the Direct Tax Laws (Amendment) Act, 1987, Clauses (iii) and (iv) of Sub-section (2) of Section 36 read as follows : "(iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year), but the AO had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) and the AO is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of Sub-section (6) of Section 155 shall apply; " 11. Clause (iii) deals with the situation where the assessee had written off a debt but the same was not allowed as a deduction on the ground that it had not become bad the in that year and that the claim was premature, In such an event it enabled the assessee to claim and oblige the AO to allow the deduction for the debt in such year as it was accepted to have become bad. Clause (iv) deals with the situation where the assessee had written off and claimed a bad debt in a particular previous year but the officer took the view that it had become bad even in an earlier year, It enabled the AO to reopen the assessment of the earlier year in question and give the assessee the benefit of the deduction for the bad debt in that year. Both these clauses have been omitted by the Amending Act of 1987. The effect of the amendment has been explained by the Board in Circular No. 551 referred to earlier. Para 6.7 of the said circular is reproduced below : "6.7 Clauses (iii) and (iv) of Sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the ITO was satisfied that the debt did not become bad in the year in which it was written off by the assessee.
These clauses have become redundant, as the bad debts are now being straightaway allowed in the year of write off. The Amending Act, 1987, has, therefore, amended these clauses to withdraw them after the asst. yr. 1988-89." Thus, the effect would be that if the assessee is not given deduction in the year of write off, then in no other year it would be possible for the AO to give deduction to the assessee. If the AO is of the view that the debt has become bad in any of the subsequent years, assessee would be denied deduction thereof because he would not have written off the debt in that year since he had already written it off earlier.
Thus, by denying the deduction in the year of write off, assessee would be denied the deduction under Section 36(1)(vii) forever.
Simultaneously, Sub-section (6) of Section 155 has also been omitted by the Amending Act, 1987. This provision enabled the AO to allow deduction for the earlier previous year. Hence, we emphatically reiterate that by not allowing the deduction in the year of write off, the assessee is permanently deprived of the deduction. On the other hand, by allowing the deduction, the Revenue is not permanently prejudiced. If the assessee recovers any debt of which he had claimed deduction earlier, it will be brought to tax by virtue of Section 41(1) of the Act.
12. In majority of the decisions of the Tribunal available so far, the issue has been decided in favour of the assessee, The said decisions are as follows : 2. Jayanti Commerce Ltd. v. Asstt. CIT (1997) 58 TTJ (Cal) 136 : (1997) 61 ITD 183 (Cal)Corporation of U.P. Ltd. v. Dy. CITJ.D. Castings and Forgings (P) Ltd. v. Asstt. CIT (1998) 100 Taxman 109 (Cal) (Mag) We do not wish to canvass the view that simply because majority of the Benches of the Tribunal have decided the issue in favour of the assessee, the same should be accepted. It is the reasoning behind the conclusion which expresses the intention of the legislature that has to be considered. In this connection, we would like to quote the observations of the Supreme Court given in the case of CIT v. P.J.Chemicals Ltd. Etc. (1994) 210 ITR 830 (SC), at p. 841 : "On a consideration of the matter the view that commends itself as acceptable is the one which has commended itself to the majority of the High Courts. It is, of course, not the numerical strength that prevails though the fact that a particular view has commended itself to a majority of the High Courts in the country is a matter for consideration--but the tensile strength of the acceptable logic in those decisions. It is aptly said that "a judge who announces a decision must be able to demonstrate that he began from recognized legal principles and reasoned in an intellectually coherent and politically neutral way to his result." In the present case the reasoning underlying and implicit in the conclusion reached by the majority of the High Courts cannot be said to be an unreasonable view and on a preponderance of preferability that view commends itself particularly in the context of a taxing statute." 13. Thus, reading the provisions in totality, we are of the opinion that irrespective of the age of the debt, irrespective of the steps taken by the assessee to recover the debt, if the assessee honestly feels a debt to be irrecoverable and based on his honest belief and judgment, writes off the debt in a particular year, deduction thereof has to be allowed in the year of write off. It need not be emphasised that it is only the assessee who can judge whether a particular debt is irrecoverable or not. We, therefore, uphold the order of the CIT(A).
15. Since I have not been able to persuade myself to agree with the findings and the conclusion of my learned Brother I propose a separate order in this Departmental appeal relating to asst. yr. 1991-92. Before proceeding further it has become necessary for me to point out that my learned Brother has relied upon various judgments in the proposed order which were neither cited before us nor had we any occasion to consider the same. In my humble view reference to any decisions without confronting the affected parties has serious consequences of the decision being in Violation of the principles of natural justice. In my humble view whereas it may be open to us to support our findings by the decisions of the jurisdictional High Court or that of the Supreme Court being of binding nature we will be violating principles of natural justice by relying upon some decisions affecting the other parties without giving them a chance of defence. Ordinarily, I would have preferred to write an order taking an independent view on the basis of the pleadings of the parties and the material on record. However, the proposed order has placed additional burden upon me of dealing with the case law referred to in the proposed order.
16. The dispute in the appeal is relating to a claim of Rs. 1,83,500.
The assessee had claimed loss in money-lending business of Rs. 1,83,500. The facts relating to this loss may be derived from para 7 of the assessment order. A sum of Rs. 1,83,500 was claimed to have been advanced to Mr. Shankarlal, proprietor of M/s Anmol Fabrics, Inchalkaranji, on 3rd Jan., 1991, and 10th Jan., 1991. This amount was written off on 31st March, 1991. A letter written in Hindi by Mr.
Shankarlal dt. 16th March, 1991, was filed before the AO. The AO has doubted the authenticity of the letter. This letter has not been placed before us nor are the contents brought to our notice. The AO has pointed out that in fact a loan of Rs. 5,50,500 had been advanced to the debtor. A sum of Rs. 2.00 lakh had been paid by cheque by debit to the joint current account No. 333 with Corporation Bank, Amboli Branch.
The joint account-holders are the assessee, one Mr. Anil H Rastogi and Mr. Arun H Rastogi. The other two parties had filed the returns of income and their assessment was made under Section 143(1). The AO pointed out that the loan confirmation letter filed by the assessee has reflected the advance of Rs. 1,83,500 as on 3rd Jan., 1991, when a sum of Rs. 2,05,000 only had been advanced by the three persons on 3rd Jan., 1991. In para 8 of the order the AO has pointed out that the reasons for writing off of 1/3rd share in the loan are best known to the assessee. It has farther been pointed out that no prudent businessman will write off the amount big or small in a shortest time after advancing the amount. The AO has further pointed out that the writing off of the loan on humanitarian grounds to save a party from financial crisis cannot be allowed as a bad debt in the account of money-lending business. This finding is sought to be supported by the decision of the Madras High Court in the case of Amarchand Sobhachand v. CIT (1965) 56 ITR 594 (Mad) affirmed by the Supreme Court in the case of Amarchand Sobhachand v. CIT (1971) 82 ITR 591 (SC). The final conclusion of the AO contained on p. 5 of the order is as under : "The assessee's claim is made only with the clear intention of reducing taxation liability. In view of (he above facts and circumstances of the case, the story made by the assessee is incredulous and deserves to be rejected outright......" 17. It is clear from the facts cited above that the claim of the assessee was rejected on two grounds. One is that the assessee had not given any reasons as to why the loan advanced in January, 1991 had been written off on 31st March, 1991, barely within three months of its advance. Secondly, the evidence placed before the AO gave the impression that the debt was written off in order to save the debtor from financial crisis on humanitarian grounds, the deduction of which was not permissible under the provisions of the Act.
18. The assessee appealed to the CIT(A) and claimed that the finding of the AO that the debt had been written off within two or three months of giving the advance was incorrect as the amount had actually been written off two years after the date of advance. It was further claimed that after the amendment of Section 36 any amount written off by the assessee is allowable as a deduction. The findings and the conclusion of the CIT(A) is contained in para Nos. 3 and 4 of his order. I consider it worthwhile to quote the same : "3. The second ground relates to non-allowance of claim of bad debts amounting to Rs. 1.83,500. The AO has discussed this issue at para 7, p. 3 of the assessment order. It is admitted that the assessee is carrying on money-lending business and in doing this business the assessee had claimed loss of Rs. 1,83,500. The assessee had advanced a sum of Rs. 1,83,500 to one Shri Shankarlal, prop. M/s Anmol Fabrics. Ichalkaranji, on 3rd Jan., 1991 and 10th Jan., 1991.
Necessary letters of confirmation are placed on record. The said amount was, however, written off on 31st March, 1991. Shri Shankarlal resides at Ichalkaranji. It is stated that the amount was advanced to the party for business purpose and the amount was written off as the debtor was expressing his inability to pay.
Attempts were made to recover the amount. However, as no recovery could be made nearly for two years, loss was written off as bad debt.
4. I have considered this matter carefully. The assessee had advanced the money in course of its money-lending business. It is not necessary to show to the IT authorities any more as to what steps for recovery were taken. Since the money was not forthcoming and the appellant was fairly certain that the same was irrecoverable, the amount was written off. What is required now is whether the amount is written off or not. As the appellant has written off the amount in the books, the same is to be allowed as a deduction. The AO is directed to allow the same and delete the addition of Rs. 1,83,500." 19. The learned Departmental Representative contended that the decision of the CIT(A) is contrary to the facts on record and contrary to law.
The learned counsel for the assessee, on the other hand, sought to defend the order of the CIT(A).
20. We have given our careful consideration to the rival contentions.
The first issue is as to whether the gap between the date of advance of money and the end of the previous year is less than three months or more than two years. The AO has indicated the dates on which the amount has been advanced to the debtor. These dates are mentioned on p. 4 of the order as 3rd Jan., 1991 and 10th Jan., 1991. The previous year of the assessee ends on 31st March, 1991. The period from the date of advance till the end of the previous year is less than three months and not two years as claimed before us. It was not explained before us as to how the AO's finding that there was a gap of two to three months only from the date of advance and end of previous year, is being questioned. My learned Brother has accepted the claim made by the learned counsel for the assessee that there was a gap of more than two years between the advancement of the loan and the write off. The finding of my learned Brother in this regard is as under: "The learned counsel for the assessee, at the outset, clarified that the debt was not written off within two or three months of giving the advance, but it was written off two years after the date of advance. Further, the debt was written off because according to the assessee it had become irrecoverable and hence the deduction be allowed.
On due consideration of the rival contentions and the material on record, we are inclined to accept the contention of the learned counsel. Before Clause (vii) of Sub-section (1) of Section 36 was amended, w.e.f. 1st April, 1989, the wordings of the said clause were "any debt, or part thereof which is established to have become a bad debt in the previous year". In place of these words, now the wordings are "any bad debt or part thereof which is 'written off as irrecoverable........." 21. Though my learned Brother has observed that we are inclined to accept the contention of the learned counsel, yet he has not given any reasons for accepting the statement of the learned counsel that the debt was not written off" within two or three months of giving the advance, but it was written off two years after the date of advance. I must admit my failure to appreciate the contention advanced on behalf of the learned counsel. As pointed out earlier, the AO has given the dates on which the money was advanced to the party. There are two dates on which the amount of Rs. 5,50,500 had been advanced by the assessee.
These dates are specifically indicated in the assessment order as under : (by DD) (including DD charges of Rs. 500 that is to be added separately) 22. It is evident from the assessment order that the previous year of the assessee ends on 31st of March, 1991. The amount has been written off on 31st of March, 1991. By simple calculations the contention advanced on behalf of the assessee is bound to be rejected. The gap between the date of advancement of the money in the money-lending business and the date of the write off as a bad debt is less than three months and, therefore, I do not agree with the finding of my learned Brother that there was a gap of more than two years between the date of advancing the money and the write off made by the assessee as on the end of the previous year. The facts are on record. There is no dispute about the dates and, therefore, in my humble view the finding of the AO that there was gap of less than three months is unassailable. I, therefore, confirm his finding in this regard.
23. The next question that arises for consideration is about the genuineness of the claim. The AO, as already pointed out, has recorded a categorical finding that the story made by the assessee is incredulous and deserves to be rejected outright. The learned CIT(A) has not dealt with this issue at all. He has expressed the view that when an amount of debt is written off by the assessee the same has got to be allowed as a deduction in view of amended provisions of Section 36. The decision of the CIT(A) is capable of two interpretations. One is that he has totally ignored the finding of the AO regarding the claim being incredulous and make-belief story, in which case the order of the CIT(A) will not stand the test of law. The second possible interpretation of the decision of the CIT(A) is that the assessee is entitled to deduction on the basis of the write off of the amount written off in the books of account notwithstanding the fact that such a claim may be with the clear intention of reducing the tax liability.
If the decision of the CIT(A) is interpreted to have ignored the finding of the AO, then that finding of the AO becomes final as not having been controverted and rebutted by any evidence. Then the next question that arises is as to whether the claims made with a clear intention of reducing tax liability are allowable as a deduction simply on the basis of write off made by the assessee in the books of account.
In my considered view the assessee will not be entitled to deduction in respect of any claim written off in the books of account unless the claim is established to be genuine. No material has been placed on record to rebut the finding of the AO that the claim is not genuine.
Therefore, the assessee was bound to fail. The amendment of Section 36(1)(vii) does not give a tool in the hands of the assessee for claiming a deduction of any amount written off in the books of account.
24. Section 36(1)(vii) before its amendment by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989, provided for deduction in respect of any debt which was established to have become bad in the previous year. Since there was lot of litigation in regard to the year of allowability of the deduction, the legislature in its wisdom, amended the law to provide for a deduction in the year in which any bad debt or part thereof is written off as irrecoverable in the accounts of the assessee for the previous year The learned CIT(A) has taken the view that the amendment incorporated by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989, has made it obligatory upon the AO to allow the claim of write off merely on the basis of an entry in the books of account of the assessee and the AO has no power to enquire about the genuineness of the claim. I am of the considered view that none of the decisions support the finding that a claim of the assessee of any amount written off is allowable merely on the basis of an entry made in the books of account and the AO is precluded from making any inquiry in regard to the genuineness of the claim. The aforementioned interpretation if accepted will produce undesired or so to say absurd results. The assessee in order to reduce the profits may write off any debt as on the close of the previous year. As in this case the advance is stated to have been made in January, 1991 and barely after (sic-within) three months, the amount is claimed to be irrecoverable and is claimed to have become a bad debt. When the claim is questioned, the assessee claims the benefit of the amended provisions of Section 36(1)(vii). It is well-settled principle of law that when a return of income is filed by the assessee, the AO has the power to gather material from the assessee as well as from any other sources. The correctness of the return and the claims made can be subjected to scrutiny and in this connection the power of the AO is unfettered by the amendment of Section 36(1)(vii). Keeping in view the scheme of assessment it is difficult to perceive that, the legislature would have intended to give a tool in the hands of the assessee for getting a deduction in respect of the amounts written off without it being required to be supported by evidence. Such an interpretation would produce undesired or so to say absurd results.
25. It is well-settled principle that an interpretation which gives rise to absurd results is to be avoided. Reliance may be placed on the decision of the Supreme Court in the case of K.P. Varghese v. ITO (1981) 131 ITR 597 (SC).
26. The learned AM in para 9 of the proposed order has referred to the finding of the CIT(A). To quote "in the case before us the CIT(A) has given the following finding: Since the money was not forthcoming and the appellant was fairly certain that the sum was irrecoverable the amount was written off. This finding of the CIT(A) is not disputed by the Department. Hence, the deduction claimed by the assessee is to be allowed".
27. With due respects to the learned AM, I have a strong reservation regarding the aforementioned finding. This is an opinion given by the CIT(A) in the order and is not a finding based on any material. There was a gap of only two months between the advancing of the money and the end of the previous year and, therefore, there was no question of the money not being forthcoming and the appellant has been fairly certain that the sum was irrecoverable. It is to be borne in mind that the assessee is engaged in the money-lending business. Advancing of money to parties is the business of the assessee. The assessee had advanced the money as a loan and the assessee was entitled to interest for the period for which the loan was not returned to the assessee. It is not known as to for what period of time the loan had been granted by the assessee to the loanee. It is also not known as to what happened in a short period of two months that made it fairly certain to the assessee that the amount of loan was irrecoverable. It is not correct to say that the finding of the CIT(A) has not been challenged by the Revenue.
Each sentence recorded by the appellate authority is not required to be challenged specifically. The finding of the CIT(A) has been challenged before us by way of an appeal and, therefore, it is not right to say that the observations made by the CIT(A) referred to above have been accepted by the Department.
28. The learned AM has also recorded a finding that with the amendment of Section 36(1)(vii) and Section 36(2) by the Amendment Act of 1987 the AO has no option but to allow the claim in respect of a debt when a claim is made by the assessee. I have strong reservation on the correctness of this finding. In my considered view the amendment made in Section 36(1)(vii) and Section 36(2) was with a definite purpose of curtailing litigation in respect of year of allowability of a bad debt.
It is well-known that there was lot of litigation in regard to the year of allowability of deduction on account of bad debts. Section 36(1)(vii) before its amendment read as under : "(vii) Subject to provisions of Sub-section (2) the amount of any debt or part thereof which is established to have become bad debt in the previous year." 29. It is clear from the language of the section that the law required the assessee to establish that a debt had become bad in the previous year in which the claim was made. In several cases though the assessee was able to establish that a debt had become bad, yet the claim was not allowed as in the opinion of the AO the debt had become bad in some other previous year. In order to obviate the difficulty the law was amended by the Amendment Act of 1987. The sub-section now reads as under: "Subject to the provisions of Sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assesses for the previous year." 30. It is noteworthy that whereas in the pre-amended provision the words "any debt" were used, now the amended provision incorporates the words "any bad debt". So it is evident from the language of post-amendment of Section 36(1)(vii) that a deduction is permissible in respect of any bad debt and not of any debt. Every debt cannot be said to be a bad debt. Once it is established that there is a bad debt, then the assessee has the option of claiming the deduction in any previous year and the AO shall have no jurisdiction to question the year of allowability of the claim. However, it is necessary for the assessee to establish that a debt had become bad. If the debt is not a bad debt, the same cannot be claimed as a deduction under Section 36(1)(vii). If every debt were to be allowed as a deduction, then the assessee interested in evasion of tax would get a free hand which is not intended nor is it desirable to interpret the law in such a manner so as to give a tool in the hands of tax evaders. In my considered view Section 36(1)(vii) permits a deduction of bad debt and not of any debt.
With due respects to the learned AM I differ with his opinion and hold that it is necessary for the assessee to establish when called upon to do so that a debt has become bad. Once that is established then it will not be open to the AO to dispute the year of allowability.
31. My learned Brother in para 4 of the proposed order has held that in view of the difference in the words of Section 36(1)(vii) w.e.f. 1st April, 1989, earlier the assessee was required to satisfy the taxing authority that the debt which he is writing off is established to have become bad. Hence, much depended on the satisfaction of the AO about the debt having become bad. As I have already pointed out, the amendment has not brought about the change in regard to the nature of the debt allowable as a deduction. The deduction under Section 36(1)(vii) is permissible only in regard to the bad debts and not in regard to any debt. I have explained earlier that the words before the amendment were any debt or part thereof which is established to have become bad debt in the previous year. Now the amended law has taken away the power of the AO in regard to the year of allowability but the power of the AO to consider the nature of the debt and to be satisfied that the debt is a bad debt has not been taken away by virtue of the amendment. The amendment has specifically used the words "bad debt" instead of the word "debt". It is well-settled principle of interpretation that the legislature does not use the words unnecessarily. The very fact that instead of the word "debt" the legislature in its wisdom has used the words "bad debt" would support the view that the intention of the legislature was not to allow a deduction in respect of any debt but only in respect of bad debts relating to business of the assessee. Section 139(1) makes it obligatory upon the assessee to file the return of income. The AO has the option to accept the return or to issue a notice to the assessee for supporting the return. The AO is required to make the assessment on the basis of the material filed before him and the material gathered by him. The law empowers the AO to gather material. The AO has the power to scrutinize the evidence produced by the assessee. When the claim of deduction is made it is open to the AO to verify the correctness of the claim. The AO has recorded a finding that the claim made by the assessee is not genuine. In view of this finding the claim of the assessee does not fall under Section 36(1)(vii). The claim is, therefore, disallowable on that ground especially when the CIT(A) has not recorded any finding to the contrary.
32. As already pointed out, even if we have to fall back on Section 36(1)(vii), the claim is not allowable. My learned Brother has referred to the decision of the Bombay High Court in the case of Jethabhai Hirji & Jethabhai Ramdas v. CIT (1979) 120 ITR 792 (Bom) and has quoted the Mowing observation : "While the onus of establishing that the write off of the alleged bad debt is proper and permissible in the circumstances of the case is undoubtedly upon the assessee, the Department cannot insist on the demonstrative proof which is quite infallible".
33. Whereas the decision recognized the fact that there can be no infallible evidence to show that the write off is proper and permissible in the circumstances of the case, the decision does not support the proposition that the assessee is not required to give any evidence whatsoever. In para 6 of the order my learned Brother has touched upon the bringing of taxable income closer to the real income.
Since I have highlighted the risk of real income escaping the taxable net if the law is interpreted in the manner in which the learned CIT(A) has interpreted, then it will give rise to disastrous results. My learned Brother has referred to the decision of the Ahmedabad Bench of the Tribunal in the case of ITO v. Ashok Kumar Lalit Kumar (1995) 52 TTJ (Ahd) 173: (1995) 53 ITD 326 (Ahd) and has quoted the observations as under: "The conditions relating to grant of deduction as a bad debt and a trading loss have undergone a significant change by an amendment of Section 36(1)(vii) and Section 36(2) made by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, which is applicable from asst. yr. 1989-90. The old provision as it existed prior to 1st April, 1989, provided that the debt must be established to have become bad in the previous year. This led to a litigation on the question of year of allowability of bad debt in the particular year.
In order to eliminate the dispute relating to year of its allowability and also to rationalise the provision, it has now been provided that claim for bad debt will be allowed in the year in which such a bad debt hay been written off as irrecoverable in the accounts of the assessee. But such a liberal approach about the year of allowability cannot be extended to deduction allowable in respect of trading loss under Section 28 and/or under Section 37".
34. The finding in this case supports my view that the amendment brought about in Section 36(1)(vii) is only in order to eliminate the dispute relating to the year of its allowability. The disputes relating to bad debts prior to amendment in Section 36(1)(vii) were of two types. One was as to whether the debt had become bad and the second type of dispute was the year in which the debt had actually become bad.
The deduction of a bad debt was permissible, only in the year in which such debt had become bad. Therefore, in some cases deduction was not allowed to the assesses in the year in which a deduction was claimed not because the debt had not become bad but because it had not become bad in that year. In other words, the disputes extended to the year of allowability. With the amendment in Section 36(1)(vii) the dispute relating to the year of allowability will no longer arise as a deduction which is allowable in law will be allowed in the year the assessee has written off that amount. The requirement of law to support the deduction has not been given a go by. Similarly, reference has been made to the decision of the Delhi Bench of the Tribunal in the case of India Thermit Corporation Ltd. (supra). My learned Brother has quoted from page No. 311 as under: "Therefore, in our considered opinion the debt written off has to be bad debt. It is the prior condition for allowability of the deduction under Section 36(1)(vii) even after the amended provision.
Once the debt is established to be bad, deduction will have to be allowed for the year in which the assessee writes off the same. AO cannot question the year in which the debt becomes bad." (underline, italicised in print, by us).
35. A plain reading of the quotation should not leave one in doubt that the Bench has highlighted that it is the prior condition for allowability of the deduction under Section 36(1)(vii) even after the amended provision that what is allowable as a deduction is a bad debt.
Once the debt is established to be bad (underline, italicised in print, mine) the deduction will have to be allowed for the year in which the assessee writes off the same. The decision clearly supports my view. In para No. 9 my learned Brother has pointed out that in para 5 we have observed that deduction can be allowed only for a bad debt that is written off and not of any other debt. In other words, my learned Brother seems to agree with me that the deduction permissible under Section 36(1)(vii) is that of a bad debt and not of any debt written off by the assessee. The finding recorded by the CIT(A) which is assailed before us is that a deduction is permissible in respect of any debt and that it is not necessary for the assessee to establish that it was a bad debt. My learned Brother has quoted from the decision of the CIT(A) the following finding : "Since the money was not forthcoming and the appellant was fairly certain that the same was irrecoverable, the amount was written off".
36. After this quotation my learned Brother has recorded the following finding : "This finding of the CIT(A) is not disputed by the Department.
Hence, the deduction claimed by the assessee has to be allowed".
37. I have not been able to persuade myself to accept this finding of my learned Brother. Para 4 of the CIT(A)'s order has been reproduced by me in full in para 18 of this order as against one sentence reproduced by the learned AM. The finding of the CIT(A) has to be read as a whole.
The CIT(A) has recorded a finding that the assessee was fairly certain that the sum was irrecoverable and that the amount was written off but no basis has been indicated either by the assessee nor any reasons given by the CIT(A) as to under what circumstances the amount has become bad. The Department in the grounds of appeal before us specifically contested that, the findings recorded by the AO have not been appreciated by the CIT(A) and the addition has wrongly been deleted.
38. Therefore, in my considered view, it is not correct to say that the finding of the CIT(A) has not been challenged. The finding of the CIT(A) is not based on any evidence but upon his personal opinion. In the final analysis I record my conclusions as under : (1) That the AO was right to hold that the assessee had written off a debt within less than three months from the date of advance and the CIT(A) was wrong to accept the claim of the assessee that the debt was more than two years old as on the end of the previous year.
(2) That the AO has recorded a finding of fact regarding the transaction being not genuine. This finding has not been rebutted by any evidence. The CIT(A) has also not specifically recorded any finding regarding the genuineness of the transaction to the contrary.
(3) That the AO is empowered to demand evidence in support of the claim of deduction. Section 36(1)(vii) r/w Section 36(2) as amended by the Amendment Act of 1987 has taken away the power of the AO to question the year of allowability of a deduction relating to a bad debt. The deduction permissible under Section 36(1)(vii) is in regard to a bad debt and if the assessee fails to establish on being asked to do so that the debt had become bad, the AO is justified in disallowing the claim.
(4) That in this case it is a matter of fact that the assessee did not establish that the loan advanced to Shri Shankarlal was a genuine loan and had become bad debt as on the end of the previous year. The AO was thus justified in disallowing the claim of Rs. 1,83,500. The decision of the CIT(A) that after the amendment of Section 36(1)(vii) and Section 36(2) by the IT Amendment [sic-Direct Tax Laws (Amendment)] Act of 1987, the deduction is permissible in respect of any debt written off by the assessee in the books of account and the ITO has no power to question the assessee on this account, being erroneous and contrary to law, in my view, deserves to be set aside and addition restored. I direct accordingly.
1. The appeal No. 7445/Bom/1994 was heard by 'B' Bench of the Tribunal, constituted of Shri M.A. Bakshi, JM, and Shri Pradeep Parikh, AM. Since there has been a difference of opinion amongst the two Members, we hereby request you to kindly nominate a Third Member, in accordance with the provisions of Section 255(4) for disposal of the appeal.
2. The issues on which there has been a difference of opinion, are as under: (1) Whether the assessee had written off a debt within the period of less than three months at the end of the previous year from the date of advance or more than two years from the date of advance? (2) Whether the assessee is entitled to deduction in respect of the claim of a debt notwithstanding the uncontroverted finding of the AO that the claim was not genuine? (3) Whether the assessee is entitled to deduction of any debt written off in the books of account as a bad debt and the AO has no power to question the genuineness of the claim? 3. The JM has agreed with the AO that the assessee had written off the debt within a period of less than three months from the date of the advance as on the end of the previous year. The learned AM has accepted the contention on behalf of the assessee that there was a gap of more than two years from the date of advance till the end of the previous year.
4. The AM has held that the assessee is entitled to deduction in respect of any debt which is claimed to be a bad debt by the assessee and the AO has no power to question the claim. The JM has held that the AO has the power to enquire into the genuineness of the claim and unless the claim is established to be genuine, the assessee is not entitled to deduction. The AM has further held that amendment brought about in Section 36(1)(vii) and Section 36(2) has taken away the power of the AO to question the claim when made by the assessee on the basis of entries in the books of account. The JM, on the other hand, has held that the aforementioned amendment has brought about only one change, i.e., the year of allowability. The assessee has to establish when called upon to do so that the debt was a bad debt and his failure would warrant a disallowance.
5. The dissenting orders and necessary records are forwarded along with this reference.
1. There being a difference of opinion between the Members constituting the Division Bench, the Hon'ble President has referred, under Section 255(4) of the IT Act, 1961, the following points of difference to me as a Third Member to resolve the controversy : "(1) Whether the assessee had written off a debt within the period of less than three months at the end of the previous year from the date of advance or more than two years from the date of advance (2) Whether the assessee is entitled to deduction in respect of the claim of a debt notwithstanding the uncontroverted finding of the AO that the claim was not genuine (3) Whether the assessee is entitled to deduction of any debt written off in the books of account as a bad debt and the AO has no power to question the genuineness of the claim ?" 2. The brief facts in this case are that the assessee is an individual engaged in the business of trading in optical frames and lenses and also doing money-lending business. The assessee declared a loss of Rs. 1,83,500 from money-lending business. The assessee had advanced a sum of Rs. 1,83,500 to one Shri Shakarlal of Ichalkaranji in the month of January, 1991, and it was written off in the books of account of the assessee as on 31st March, 1991, as irrecoverable debts. The AO disallowed the claim on the basis that the assessee had written off the debt within a very short period, i.e., within two months only and this, according to him, was highly improbable for a money-lender to do. The CIT(A) deleted the disallowance on the ground that after the amendment to Section 36(1)(vii) of the Act, there was no need for the assessee to establish as to what steps had been taken for recovery and writing it off as irrecoverable debt was sufficient.
3. Before the Division Bench, the contention of the learned Departmental Representative was that even if the assessee has written off a debt as bad debt, he has to show that the debt has become bad.
Simply writing off the debt would not entitle him to claim it as a bad debt under Section 36(1)(vii) of the Act. The learned counsel for the assessee had pointed out that after the amendment, it is not necessary for the assessee to prove that the debt has become bad and simply writing it off in his books of account is sufficient. Earlier, it was the obligation of the assessee to discharge and show that the debt has become bad. From the reference under Section 255(4) of the Act I find that there is also a question relating to the period within which the debt was written off. However, at this stage, it is clear that the debt has been written off within a period of three months.
On consideration of these arguments, the learned AM in his detailed order from paras 4 to 13, opined that after the amendment in Section 36 of the Act w.e.f. 1st April, 1989, and on inclusion of the words "any debt or part thereof which is written off as irrecoverable" substituting the earlier words "any debt or part thereof which is established to have become a bad debt in the previous year" the intention of the legislature is clear. Therefore, now it is not necessary for the assessee to satisfy the tax authority with evidence that the debt has become bad. If the assessee in his prudence writes off in his books of account, the debt as a bad debt it is sufficient compliance of the provision. Therefore, he after considering various decisions such as Jethabhai Hirji & Jethabhai Ramdas v. CIT (1979) 120 ITR 792 (Bom) at p. 805, CIT v. Sir S.M. Chitnavis (1932) 6 ITC 453 (PC), Circular No. 551, dt. 23rd Jan., 1990, issued by the CBDT as appearing in (1990) 183 ITR 7 (St) and the decisions of Tribunal Benches, viz., Dy. CIT v. Paks Trade Centre (1995) 53ITD 313 (Cal); Jayanti Commerce Ltd. v. Asstt. CIT (1997) 58 TTJ (Cal) 136 : (1997) 61 ITD 163 (Cal); Pradeshiya Industrial & Investment Corporation of U.P.Ltd. v. Dy. CITJ.D. Castings & Forgings (P) Ltd. v. Asstt. CIT (1998) 100 Taxman 109 (Cal) (Mag) and also taking support from the decision of the Hon'ble Supreme Court in CIT v.P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) at p. 841, came to the conclusion that the assessee would be entitled for deduction if he writes off the debt in the books in the year under consideration and it is not necessary for him to establish that the debt has become bad.
Therefore, he held that the assessee is entitled for deduction under Section 36(1)(vii) of the Act.
4. The learned JM, first of all, discussed the dispute of period in his order, which is mentioned as two years and not two months. However, now it is an admitted position that the debt was written off within three months. Therefore, this question becomes academic. He has further elaborated the facts of the case in his order and came to the conclusion that even after the amendment, which was brought on the statute book by the Finance Act, 1987, w.e.f. 1st April, 1989, in Section 36(1)(vii), it is still the obligation of the assessee to prove that the debt has become bad in the year in which it was written off.
Simply writing it off in his books of account is not sufficient. In support of his view, the learned JM relied on the decision of the Madras High Court in Amarchand Sobhachand v. CIT (1965) 56 ITR 594 (Mad), which was affirmed by the Hon'ble Supreme Court in its decision reported at (1971) 82 ITR 591 (SC). He further interpreted the ratio laid down by the Hon'ble Supreme Court in K.P. Varghese v. ITO and Anr.
(1981) 131 ITR 597 (SC) with reference to the facts of the present case. He thus observed that the very fact that instead of the word 'debt' the legislature in its wisdom has used the words 'bad debt' would support the view that the intention of the legislature was not to allow a deduction in respect of any debt, but only in respect of bad debts relating to the business of the assessee. So, it is obligatory for the assessee to prove that the debt has become bad. He has distinguished the decisions relied upon by the learned AM. That is how the difference of opinion has been referred to me for resolving the issue.
5. The learned Departmental Representative, submitted that under the amended clause the requirement of establishing that the debt became bad in the relevant accounting year is dispensed with, but the subject-matter of the clause is still "any bad debt" and not "any debt". The assessee cannot arbitrarily, irrationally or mala fide treat a good debt as bad and write it off in his accounts. In this connection, she referred to para 612 of the book. 'The Law and Practice of Income-tax', Eighth Edition of Kanga and Palkhivala, She further contended that it is a question of fact as to whether a debt has become a bad debt or not. It is not left to the assessee's choice to determine when a particular debt became a bad debt or irrecoverable by merely writing off the debt or the loan or part of it in his books. The assessee must satisfy the AO that in fact the debt or the loan became irrecoverable in the year of account. In this connection, reliance was placed on the decision of the Bombay High Court in Raja Bahadur Mukundlal Bansilal v. CIT (1952) 22 ITR 94 (Bom). She further contended that before the amendment, the assessee was to prove that the debt had become bad in the relevant previous year. Such requirement led to enormous litigation and, therefore, the amendment was brought, so as to eliminate the controversy with regard to the year in which the debt had become bad. If the debt had become bad, it would be allowed in the year in which it was written off by the assessee. However, nowhere did it say that any debt could be written of and claimed as a bad debt. Had that been the intention of the legislature it would have mentioned "any debt or part thereof" which is written off as irrecoverable. On the contrary, the amended clause mentions "any bad debt". In support whereof, reliance was placed on the decision of the Delhi Bench of the Tribunal in Dy. CIT v. India Thermit Corporation Ltd. (1996) 56 ITD 307 (Del). She has also referred to the decision of the Ahmedabad Bench of the Tribunal in Dy. CIT v. Gobind Glass Industries Ltd. (2000) 110 Taxman 139 (Ahd) (Mag.) and also the decision of the Chennai Bench of the Tribunal in Newdeal Finance & Investment Ltd. v. Dy. CIT (2000) 69 TTJ (Chennai) 410 : (2000) 74 ITD 469 (Chennai). On the other hand, the learned counsel for the assessee very strongly supported the findings of the learned AM. He has also relied on the following decisions :Newdeal Finance & Investment Ltd. v. Dy. CIT 6. I have considered the rival submissions and have gone through the material available on record. I have also gone through the decisions cited at the Bar. There is no dispute about the fact that the assessee besides trading in optical frames and lenses is also doing money-lending business and during the course of which has advanced a sum of Rs. 1,83,500 on 3rd Jan., 1991 and 10th Jan., 1991. At the time of closing his books as on 31st March, 1991, the assessee has written off in his books of account the said advance as irrecoverable debt and it was claimed as a bad debt under Section 36(1)(vii) of the Act. I am concerned in this case with asst. yr. 1991-92 where the amended provisions of Section 36(1)(vii), are applicable. Before the amendment by the Finance Act, 1987, w.e.f. 1st April, 1989, in Section 36(1)(vii), the words used were "any debt or part thereof which is established to have become a bad debt in the previous year". The words "any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year" have been inserted by the amendment. Now the question arises whether there is still an obligation on the assessee to prove that the debt has become bad despite the fact he has written off the same as irrecoverable in his books of account. If one goes through the intention of the legislature in substituting these words, it will be clear from the substitution itself that the intention of the legislature was to leave it to the prudence of the businessman to judge himself as to whether a particular debt has become irrecoverable or not. Previously, the words used were "any debt or part thereof which is established to have become bad". It is significant in the sense that it was obligatory for the assessee to prove or show with demonstration that such a debt has become bad. By taking away the words "which is established to have become bad", the intention of the legislature is clear that it did not want to burden the assessee to prove that the debt has become bad. It is now left to the prudence and judgment of the businessman to consider it as a bad and irrecoverable debt and write off the same in his books of accounts.
If he writes it off as irrecoverable in his accounts in the previous year, it is sufficient compliance of the provisions to claim the deduction under Clause (vii) of Sub-section (1) of Section 36 of the Act. The onus is of course on the assessee to show that he has written off the debt which is permissible under the amended provisions. But the Department cannot insist on a demonstrative proof of the same. Here I would like to mention that in the case of Jethabhai Hirji & Jethabhai Ramdas v. CIT (supra) at p. 805, the Hon'ble jurisdictional High Court has observed as under : "While the onus of establishing that the write-off of the alleged bad debt is proper and permissible in the circumstances of the case is undoubtedly upon the assessee, the Department cannot insist on the demonstrative proof which is quite infallible." The learned AM has relied upon the decision of the Privy Counsel in CIT v. Sir S.M. Chitnavis (supra), where it was ruled that such bad debts were necessarily allowable as deduction on grounds of first principles of accountancy. At p. 437 of the reports, the Privy Council observed as follows [as reproduced in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) at p. 128] : "Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of an year and in assessing the amount of the profits and gains of an year, account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." In this connection, I would like to mention here the intention of the legislature, as interpreted by the Board. The Board explained the amended provision at para 6.6 of the Circular No. 551, dt. 23rd Jan., 1990, as under: "6.6 Amendments to Sections 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts. The old provisions of Clause (vii) of Sub-section (1) r/w Sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the AO in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987, has amended Clause (vii) of Sub-section (1) and Clause (i) of Sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee." Under these circumstances, it is clear that it is not obligatory for the assessee to place demonstrative proof for establishing a debt as bad, if he has taken steps to write it off in the previous year, left to his prudence, and it is sufficient compliance for claiming a debt as bad debt under Section 36(1)(vii) of the Act. Similar view has been expressed by various Benches of the Tribunal, some of which are cited by the learned counsel for the assessee and have been mentioned above.
In a recent decision in CIT v. Girish Bhagwat Prasad (2002) 256 ITR 772 (Guj), the Gujarat High Court has also taken a similar view. In that case, the assessee had written off an amount of Rs. 4,36,367 on account of its having become a bad debt. The AO held that the assessee could not prove that the debt had become bad and that the assessee did not try to recover the amount, and further that mere delay in recovery did not convert the debt into a bad debt. On appeal, the CIT(A) found that the amended provisions of Section 36(1)(vii) of the Act were applicable under which the assessee was not required to establish that the debt had become bad in the previous year and mere writing off of the amount as bad debt was sufficient. Even on the merits, the first appellate authority found that there was no chance for the assessee to recover the amount and hence, the debt really became bad. The Tribunal also upheld the contention of the assessee on the basis of the provisions of Section 36(1)(vii) of the Act which came into force from 1st April, 1989. On an application filed under Section 256(2) of the Act, the High Court held as under: "....that under the provisions of Section 36(1)(vii) of the Act, deduction had to be allowed in computing the income referred to in Section 28 of the Act of the amount. of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year subject to the provisions of Sub-section (2). Prior to the amendment from 1st April, 1989, the allowance under this clause was confined to the debts and loans which had become irrecoverable in the accounting year. Thus, under the provisions of Section 36(1)(vii) as in force from 1st April, 1989, all that the assessee had to show was that the bad debt was written off as irrecoverable. The genuineness of such a claim made by the assessee was not in doubt. Therefore, no question of law arose for reference." 7. The learned JM has opined that it is still necessary to prove the debt as bad while claiming the deduction under Section 36(1)(vii) of the Act. He has mentioned that the pre-amended provisions used the words "any debt". Now the amended provision has been incorporated to use the words "any bad debt". So according to him, it is necessary that assessee has to prove the debt as a bad debt. So far as this view is concerned, if one looks into the pre-amended provisions, it will be seen that the words "any debt or part thereof" are accompanied by the words "which is established to have become bad", which means that the legislature in its wisdom desired proof from the assessee to establish that the debt has been proved as a bad debt, Simply using the words "any bad debt" in the amended provision will not still make obligatory on the assessee to prove it as a bad debt. The words used are "any debt which is written off", It means that it is left to the wisdom of the businessman to write off a debt as bad debt if he considers that it is irrecoverable. So the requirement of proving the debt as a bad debt is no more there as per the intention of the legislature; In support of his view, the learned JM has relied on the decision of the Hon'ble Supreme Court in the case of Amarchand Sobhachand v. CIT (supra). This case was originally decided by the Madras High Court, which is reported in (1965) 56 ITR 594 (Mad) (supra). In this case, it was found that the assessee, which carried on business in drugs and chemicals and other goods, and also in money-lending, had transactions for several years with a Bombay firm, one of whose partners, having a 16 per cent shares, was the father of three partners of the assessee. The assessee had dealings for several years with the Bombay firm. The Bombay firm become debtor of the assessee and there was a flow of monies from the assessee to the Bombay firm till 10th March, 1952. In April, 1952, the Bombay firm became insolvent. In Samvat 2008 ending with 18th Oct., 1952, the assessee wrote off the sum of Rs. 2,60,385 due from the Bombay firm as irrecoverable and claimed deduction thereof as a bad debt. On these facts, the Hon'ble Supreme Court has laid down the principle that a bad and doubtful debt due to an assessee in respect of banking or money-lending business is allowable under Section 10(2)(xi) of the IT Act, 1922, if it is a debt written off as irrecoverable in respect of loans made in the ordinary course of such business. A bad and doubtful debt in respect of a business other than banking or money-lending is allowable even if it is not in respect of a loan; but a debt due in the course of the business of money-lending is not allowable unless it is in respect of loans made in the ordinary course of business. An "accommodation" advance is a neutral expression; it may be of the nature of a loan advanced in the ordinary course of business by a money-lender; it may be an advance in the money-lending or other business of the assessee, but not in the nature of a loan; or it may be wholly unrelated to the business of the taxpayer, From the ratio laid down by the Hon'ble Supreme Court it is clear that if the loan is not given in the ordinary course of business of the assessee it cannot be claimed as a bad debt. The learned JM has overlooked these essentials of the decision, Therefore, in my view, the case cited by the learned JM is distinguishable on these facts from the case of the assessee.
Under these circumstances, no support can be taken from this decision.
On the facts and circumstances of the case and present statutory provision on the issue and also taking support from the decisions of the various Benches of the Tribunal, and also the decision on Hon'ble Gujarat High Court mentioned above, I am of the opinion that the learned AM has rightly allowed deduction under Section 36(1)(viii) of the Act to the assessee. I therefore, concur with his view. The matter will now be placed before the regular Bench to dispose of the appeal in accordance with the majority opinion.
1. In view of the difference of opinion between the learned JM and the learned AM, the following points were referred to the Third Member: "(1) Whether the assessee had written off a debt within the period of less than three months at the end of the previous year from the date of advance or more than two years from the date of advance (2) Whether the assessee is entitled to deduction in respect of the claim of a debt notwithstanding the uncontroverted finding of the AO that the claim was not genuine (3) Whether the assessee is entitled to deduction of any debt written off in the books of account as a bad debt and the AO has no power to question the genuineness of the claim ?" 2. Shri J.P. Bengra, the Hon'ble Vice-President (Mumbai), was nominated as the Third Member. In his order, dt. 8th Oct., 2002, the Third Member concurred with the view taken by the learned AM and held that the amount written off by the assessee as bad debt is allowable as deduction under Section 36(1)(vii) of the Act in the year under consideration. In accordance with the majority view, the issue stands decided in favour of the assessee and against the Revenue.