DIPAK MISRA J.
1. In this appeal preferred under Section 260A of the Income-tax Act, 1961, the Revenue has called in question the penetrability and defensibility of the order dated November 2, 1999, passed by the Income-tax Appellate Tribunal (in short 'the Tribunal'), in I. T. A. No. 234/Jab of 1997 and I. T. A. No. 200/Jab of 1997.
2. The facts which are essential to be stated for the disposal of the present appeal are that the assessee filed its return of income for the assessment year 1994-95 declaring a net loss of Rs. 2,59,936. The audit copies of final accounts were filed along with the return. The case was selected for scrutiny and a notice under Section 143(2) of the Act was issued to the assessee. The notice was issued as it was observed by the Assessing Officer that the assessee-com-pany, who is engaged in the business of financing industrial enterprises, had not done any significant activity so as to get it reflected in the audit report except the fact that it had transferred the shares of Perfect Refractories Limited held as investment for consideration equal to the face value and that it had written off Rs. 3 lakhs which was given as loan to Moradabad Syntex Pvt. Ltd. It was also noticed by the Assessing Officer that the assessee had claimed administrative expenses to the tune of Rs. 1,24,749 as compared to Rs. 98,736 which was the amount claimed in the previous year. The Assessing Officer dealt with the facet of sale of shares and came to hold that the assessee had sold shares worth Rs. 5,40,640 of Perfect Refractories Limited to the directors of the company, Smt. Padma Maheshwari and Shri Rajesh Maheshwari, at the face value of Rs. 10 per share and then the transfer/sale had taken place a month before declaration of dividend. It was found on scrutiny of the accounts that the book value of these shares was Rs. 65 per share. In this backdrop, the assessee was specifically asked to show cause as to why the provisions of Section 94 of the Act should not be invoked as there had been avoidance of tax. The assessee filed its show cause and represented itself through its counsel. The stance of the assessee was that Smt. Padma Maheshwari had a deposit of more than Rs. 5 lakhs with the company for the last five years and the company was neither paying any interest on the same nor was refunding the said amount because of financial crisis. As there was insistence for refund, the shares of Perfect Refractories Ltd. were given to her deposit, still leaving a balance of Rs. 1,48,403 as on March 31, 1994. It was pleaded that there was no avoidance of income-tax and nor does the transaction attracted the mischief of Section 94 of the Act. It was also put forth that Smt. Padma Maheshwari was herself a taxpayer as she had shown income from dividend on the shares purchased by her.
3. The aforesaid contentions set forth by the assessee were not accepted by the Assessing Officer on the foundation that the managing director of Perfect Refractories Limited is the husband of Smt. Padma Maheshwari who had been given shares on the face value and the assessee-company was not only in possession of information but was having special knowledge that the dividend was likely to be declared within a short period. On this basis, the Assessing Officer treated the transfer to be unexceptional and systematic attracting the mischief of Section 94 of the statute. While dealing with the factum of non-avoidance of income-tax the Assessing Officer came to hold that there had been transfer of shares at a lower rate at the face value for which a separate proceeding under the Gift-tax Act has been initiated. While dealing with the written off loan of Rs. 3 lakhs advanced to Moradabad Syntex Limited, the Assessing Officer recorded a finding that the loan was advanced in the year 1987 at the rate of 15 per cent, interest per annum and the explanation preferred was that the aforesaid company had lost all its capital, and the said company was approaching the BIFR in an effort to revive the unit and in that context the competent authority of the company had written to the assessee-company that it would inform about further developments. In this background, the Assessing Officer came to hold that the loanee-company has not yet been declared as a sick industrial unit; that there was no liquidation proceeding against the said company ; and that the audit report of Moradabad Syntex Ltd., had written back unpaid interest of the loan amount. Being of this view the Assessing Officer added Rs. 91,748 as sale transaction of shares to Smt. Padma Maheshwari, Rs. 3 lakhs towards disallowance of written off bad debts of Moradabad Syntex Ltd. and interest of Rs. 59,512 towards accrued interest at the rate of 15 per cent, on the amount deposited with the above-company. It is pertinent to state here that some more amounts were added but we are not concerned with the same in the present appeal.
4. Being aggrieved by the aforesaid order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Jabalpur. The first appellate authority took note of the reasoning of the Assessing Officer and came to hold that the activity of the company was required to be investigated and transfer of shares, etc., and to bring on record the reasons for its conclusion. With regard to report of bad debts of Rs. 3 lakhs the first appellate authority scanned the reasons ascribed by the Assessing Officer and concurred with him. However, as far as the addition of income of Rs. 59,512 as accrued interest is concerned the Commissioner of Income-tax (Appeals) came to hold that the addition was not correct and directed deletion of the same.
5. Being dissatisfied with the order passed by the first appellate authority, the assessee preferred an appeal and the Revenue also preferred an appeal as there was deletion of accrued interest before the Tribunal. The Tribunal dealt with both the appeals in a composite manner by the impugned judgment. It, while dealing with the appeal of the assessee, expressed the opinion that there was a dispute that the assessee was engaged in money lending business and it had bona fide belief that the amount advanced to Moradabad Syntex Ltd. had become a bad debt and irrecoverable. Accepting the contention of the assessee, the Tribunal directed the Assessing Officer to allow the claim of Rs. 3 lakhs as bad debt and concurred with the finding of the Commissioner of Income-tax (Appeals) as far as deletion of accrued interest is concerned. As far as the transfer of shares is concerned the Tribunal accepted the contention of the assessee that the authorities below were not justified in taxing Rs. 91,748 in invocation of the provision contained in Section 94(2) of the Act which in the facts and circumstances of the case is not applicable. The Tribunal expressed the opinion that there was no justification for addition of the same as the transaction made by the assessee is squarely covered under the Explanation enshrined under Section 94(3)(b) of the Act. Being of this view it deleted the addition and allowed the appeal. It is relevant to state here that as the assessee succeeded on these counts before the Tribunal it did not find any merit in the appeal of the Department and accordingly dismissed the same.
This court at the time of admission of the appeal had framed the following substantial questions of law :
'(a) Whether the Tribunal was justified in deleting the addition of Rs. 91,748 made by the Assessing Officer invoking the provisions of Section 94(2) of the Income-tax Act, 1961 ?
(b) Whether the Tribunal was justified in holding that the assessee was entitled to the benefit of the provisions of Section 94(3)(b) of the Income-tax Act, 1961, in respect of the dividends on the shares transferred to one of its directors ?
(c) Whether the Tribunal was justified in holding that the debit of Rs. 3 lakhs was allowable as deduction under Section 36(1)(vii) of the Income-tax Act, 1961 from the income of the assessment year 1994-95 ?'
support of this appeal it is submitted by Mr. Rohit Arya, learned senior counsel for the Revenue, that the Tribunal has grossly erred in holding that the debit of Rs. 3 lakhs was allowable under Section 36(1)(vii), though no evidence was brought on record to show that there had been determination that the debt had really become bad. It is submitted by him that the first appellate authority had given adequate reasons and has rightly come to hold that the claim of the assessee is premature and has not ripened and the Tribunal has erred in dislodging the said finding. It is contended by him that a debt can become bad if it becomes irrecoverable and in the case at hand it was not barred by the law of limitation ; that there was no denial by the loanee that it was incapable of paying or would not pay ; that the authorities have given germane and cogent reasons, that the assessee had not initiated proceeding for recovery and the company had not gone for liquidation ; that the loanee has shown the existing loan in its books of account; and that there is no proof of bad debt. As far as the second facet is concerned it is submitted by Mr. Arya that the assessee-company had not been involved in many an activity and the transfer was made knowingly and with special knowledge to avoid tax. It is further submitted by him that doing systematically does not mean that it should be regular or recurring, but can also engulf singular, planned and designed activity. Mr. Rohit Arya, learned senior counsel to bolster his submission has placed reliance on the decisions rendered in the cases of CIT v. Santosh Rice Mills : [1990]181ITR447(MP) and Travancore Tea Estates Co. Ltd. v. CIT : [1992]197ITR528(Ker) .
6. Sumit Nema, learned counsel for the assessee-respondents, sounding a contra note, has submitted that the concept of bad debt was quite different before the present provision was brought on the statute book. To highlight the impact and import of the amendment he has drawn inspiration from the circular issued by the Central Board of Direct Taxes. Learned counsel has also submitted that the bad debt need not be established and once a finding has been recorded by the Tribunal that a particular sum is bad debt it is a question of fact and does not involve any substantial question of law. To buttress his submission on this score he had placed reliance on the decisions rendered in the cases of Travancore Tea Estates Co. ltd. v. CIT : [1998]233ITR203(SC) ; Travancore Tea Estates Co, Ltd. v. CIT : [1992]197ITR528(Ker) ; CIT v. Santosh Rice Mills : [1998]230ITR813(MP) . With regard to transfer of shares Mr. Nema has proposed that the words used in the section are of immense signification and in the case at hand there was no system endeavoured to avoid the tax. It is contended by him that in the absence of regular transaction and in the absence of satisfying the ingredients as provided under the relevant provision, the transaction cannot come within the mischief to be categorised as transaction meant to avoid the tax. In this regard learned counsel has commended us to the decisions rendered in the cases of Gurdial Singh Uppal v. CIT and CIT v. Sakarlal Balabhai : [1968]69ITR186(Guj) . In addition to the aforesaid contention it is also put forth by him that there has been no avoidance of tax as the director has paid the tax on the dividend when the company had shown loss. It is also urged by Mr. Nema that the Revenue has been benefited by such transaction and, therefore, the question of avoidance of tax does not arise.
7. First we shall take up the issue with regard to the concept of bad debt. In this context Section 36(1)(vii) is relevant. The said provision is reproduced for proper appreciation :
'36. (1)(vii) 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 assessee for the previous year :
Provided that in the case of an assessee to which Clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause ;
Explanation.--For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.'
8. The submission of Mr. Rohit Arya is that the amount can be written off as bad debt if it is irrecoverable. He has referred to the order of the Assessing Officer to show that the reasons are cogent and germane. He has also drawn our attention to the order passed by the first appellate authority to show that if debts are not determined to be bad they cannot be claimed as bad debts at all and, therefore, the finding that the claim of the assessee is premature is justified. In the case of Trwancore Tea Estates Co. Ltd. v. CIT : [1992]197ITR528(Ker) , the court held as under (page 536) :
'In order to rank a debt as a bad debt, it should have found its place in the balance-sheet as a trading debt to swell the profits of the business. The debt should be proved to be bad in the previous year and it should have been written off by the assessee in the relevant previous year. The debt may become bad when it is proved to be irrecoverable on account of the fact that the debtor is in a bad financial position or that it has become irrecoverable. So long as there is a ray of hope to recover the debt, however dim it may be, and so long as the debt is in the process of realisation, it cannot be said that it has become irrecoverable. The burden of proof that there is a debt owing to the assessee, that it has been taxed in the earlier years, that the debt arose in the course of business of the assessee and, finally, that it has become bad in the year of account are all on the assessee. The question whether it has become bad during the year of account is a question of fact. If the finding of the Tribunal is based on admissible evidence, the finding will not be disturbed. The assessee has no option to treat a debt as bad when he chooses to do so. This has to be ascertained having regard to the circumstances of the debtor and the difficulty or impossibility of recovery of the same. Therefore, the question whether the debt has become bad will have to be determined by the fact-finding authority. Of course, it has been held that a trading loss has a wider connotation than a bad debt. A bad debt which cannot be written off may be allowed as a trading loss, provided the loss is incurred wholly and exclusively for the purpose of the business of the assessee.'
9. The submission of Mr. Rohit Arya is that when there has been no liquidation and the period of limitation has not fossilised the claim as the loanee does not deny to pay it. Hence, it cannot be regarded as bad debt. In this regard, Mr. Nema has drawn our attention to paragraph 6.6 of the relevant circular issued by the Central Board of Direct Taxes. The said clause reads as under (see [1990] 183 ITR 37) :
'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) read with 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 Assessing Officer 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'.
In the aforesaid clause the purpose of the amendment has been highlighted as on the earlier provision the assessee was required to establish that the debt has become bad. By the amendment, as classified by the circular, the procedure has become quite simple. That apart, whether a debt is a bad debt or not, as submitted by Mr. Nema, is a question of fact and does not give rise to question of law. In the case of Santosh Rice Mills : [1998]230ITR813(MP) , a Division Bench of this court referred to the factual scenario and took note of the ordinary course of business and the financial condition of the party with which the assessee has entered into business. The Division Bench also referred to the reasons ascribed by the Tribunal and eventually held as under (page 816) : 'From the above-quoted observations of the Tribunal, it is clear that the Tribunal has categorically held that the Income-tax Officer had failed to examine Seema Traders and had no material before him to show that the Cuttack party was in a sound financial position in September, 1976, and, therefore, there was nothing suspicious about the transactions between Seema Traders and the assessee. We find that the said finding is based on proper appreciation. It is clear that in the absence of any cogent material to indicate to the contrary, there was no reason to assume that the assessee had engaged in any suspicious dealings with the Cuttack party and the Tribunal was, therefore, quite justified in holding that the assessee was entitled to deduct Rs. 45,370 as bad debt. The Supreme Court in Bank of Bihar Ltd, v. CIT : [1962]45ITR427(SC) , has observed that the question, whether a debt is bad, is one of fact and if there is some evidence to justify the conclusion of the Tribunal it is not open to the High Court in a reference under the Act to re-appreciate the evidence. The said observations of their Lordships fully apply to the facts of the present case.'
In the case of Travancore Tea Estates Co. Ltd. : [1998]233ITR203(SC) , the apex court held as under :
'This case is about writing off of bad debts. It is well settled that whether a debt has become bad or the point of time when it became bad are pure questions of fact.
There is no question of law involved in this appeal. We, therefore, decline to go into the controversy raised. The appeal is dismissed. There will be no order as to costs.'
If the present factual scenario is appreciated on the anvil of the aforesaid pronouncements of law and the circular issued by the Central Board of Direct Taxes it is deducible that in the present case the assessee had written off the bad debt as the loanee company though has not admitted it as bad, as it expressed its financial condition by indicating that it is not in a position even to pay interest and they are approaching the BIFR in an effort to revive the unit. The company may not go into liquidation but when the financial condition is not good and that has been taken note of by the Tribunal and the asses-see-company treats the loan as a bad one being in a position of irrecoverable, the same is a finding of fact and does not involve substantial question of law. Thus, we do not find any flaw in the order passed by the Tribunal.
The second limb of controversy relates to justifiability of the conclusion that the assessee was entitled to the benefit of the provision of Section 94(3)(b) of the Act in respect of the dividend on the shares transferred to one of its directors. The submission of Mr. Arya is that the director is the wife of the managing director of Perfect Refractories Ltd. and, therefore, it was known that the shares shall fetch more money and hence, there was avoidance of tax. It is also put forth by him, as has been indicated before, that there has been systematic transaction to avoid the tax. Mr. Nema, learned counsel, has argued in oppugnation and interpreted the provision in a different manner by relying on certain decisions, as has been stated earlier.
To appreciate the submission of learned counsel on this score it is relevant to refer to Section 94(3) of the Act. It reads as under :
'(3) The provisions of Sub-section (1) or Sub-section (2) shall not apply if the owner, or the person who has had a beneficial interest in the securities, as the case may be, proves to the satisfaction of the Assessing Officer-
(a) that there has been no avoidance of income-tax, or
(b) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred to in Sub-section (1) or Sub-section (2).'
In this context we may profitably refer to the decision rendered by the Punjab and Haryana High Court in the case of Gurdial Singh Uppal wherein the Division Bench after referring to the reasons ascribed by the Tribunal wherein the Tribunal had also made a reference to the decision rendered in the case of Sakarlal Balabhai : [1968]69ITR186(Guj) and after comparing to the old provision of Section 44F with Sub-section (2) of Section 94 of the present Act came to hold that the ratio laid down in the case of Sakarlal Balabhai : [1968]69ITR186(Guj) is fully applicable to the provisions enshrined under Section 94(3)(b) of the 1961 Act. It is pertinent to state here that in the case of Sakarlal Balabhai : [1968]69ITR186(Guj) , the Division Bench of the Gujarat High Court interpreting Section 44F of the old Act and in that context Bhag-wati C. J. (as his Lordship then was) referred to the concept of punitive nature of the section and eventually held as under (page 215) :
'Turning to the first condition, the main question which arises for consideration is as to what is the true meaning of the expression 'exceptional and not systematic'. 'Exceptional' is defined in the Shorter Oxford Dictionary as 'unusual, of the nature of or forming an exception' and 'systematic' is defined as 'involving or observing a system : acting according to system, regular, methodical: carried on as a regular reprehensible practice.' These words according to their plain natural meaning connote that the avoidance of tax must be by way of an exception to the regular practice of the assessee and must not be part of a regular practice followed by the assessee. The Revenue, however, pleaded that the word 'systematic' did not involve the idea of number and that it only meant that the avoidance must be according to plan or organized method, that is, must be designed or deliberate. But this construction cannot be accepted and there are several reasons why it does not appeal to us. One reason is that the requirement that the avoidance must be intentional or designed is already brought in by Sub-section (2) and if the avoidance is not designed or deliberate it would not be avoidance within the meaning of that sub-section and Section 44F would not apply and there would. be no necessity to provide for exemption under the proviso. Secondly, if the Legislature wanted to prescribe in the proviso that the avoidance must not be designed or deliberate, the Legislature could have used the words 'designed' or 'purposeful' or 'deliberate' or 'intentional' but instead the Legislature used the word 'systematic'. Moreover it is a well-settled rule of interpretation that where two or more words susceptible of analogous meaning are coupled together noscuntur a sociis they take as it were their colour from each other. Being associate words they explain and limit the application of each other. The juxtaposition of the words 'exceptional and not systematic' shows that the Legislature was using the word 'systematic' in contradistinction to 'exceptional'. The avoidance of tax must be exceptional, that is, by way of exception to the normal practice of the assessee and it should not be systematic, that is, part of a regular reprehensible practice carried on by the assessee.
This is the view we are inclined to reach on a plain natural construction of the words used but we find that it is amply supported by a decision of the English Court in Bilsland v. Commissioners of Inland Revenue [1936] 20 TC 446; [1936] 2 All ER 616 (KB). The provision which came up for construction in that case was Sub-section (4) of Section 33 of the English Finance Act, 1927, which was couched in the same language as our proviso and construing the words 'exceptional and not systematic', Lawrence J. said :
'In my opinion, the words 'exceptional and not systematic' in subsection (4), have relation primarily to number. To read the word 'systematic' as meaning 'planned' or 'devised', as was contended for the Crown, appears to me to be impossible in the context. The more planned or devised the avoidance is, the more exceptional it is. Moreover, 'exceptional' means, in my view, taken out of something ; it cannot mean taken out of the ordinary rule ; it must mean in this context taken out of the system, and that implies that there must be more than one instance in the system. It seems to me impossible to say fairly that a single avoidance of tax is systematic and not exceptional.' It is significant to note that though this decision deprived the Revenue of a large amount of tax which it would otherwise have obtained if Section 33 of the English Finance Act, 1927, were held applicable, the Crown accepted the decision as correct and did not appeal from it. Since the time it was given in 1936 it has always been regarded as good law by authors of all standard text books. Wheatcroft says in his book on Income Tax Law (at page 1767) :
'... But it should be noted that this provision only applies when this method is used systematically ; in this, as in some other are as the law, the dog is allowed but one bite.' It may also be noted that Section 44F was introduced in our Act by an amendment made in 1939 after the decision in Bilsland's case [1936] 20 TC 446 ; [1936] 2 All ER 616 (KB). The Legislature when it enacted Section 44F must be taken to have been aware of the decision in Bilsland 's case [1936] 20 TC 446 ; [1936] 2 All ER 616 (KB), interpreting the words 'exceptional and not systematic' and yet the Legislature retained the same phraseology as in Section 33, Sub-section (4). It may, therefore, be reasonably assumed that the words 'exceptional and not systematic' were used by the Legislature in the proviso in the same sense in which they had been judicially interpreted in Bilsland's case [1936] 20 TC 446 ; [1936] 2 All ER 616 (KB). If this is the true meaning it is clear that the avoidance of tax in the present case was exceptional and not systematic, for there was only one instance of such avoidance in the accounting year and it is not possible to say that it was part of a regular practice followed by the assessee.'
We may state here that we have quoted extensively from the aforesaid judgment as the said decision in our considered view squarely applies to the present case. There has been no systematic effort by the assessee to avoid the tax. It has been done only once. In the absence of any kind of regular transaction or recurrent transaction the provisions of Sub-sections (1) and (2) of Section 94 are not attracted. The submission of Mr. Arya is that a singular transaction if planned or designed or contrived can earn the status of 'exceptional' and 'systematic' does not impress us. We are in respectful agreement with the view expressed by the Gujarat High Court in the case of Sakarlal Balabhai : [1968]69ITR186(Guj) which has been followed by the Punjab and Haryana High Court in the case of Gurdial Singh Uppal .
We may note here that Mr. Nema has addressed us that there has been no avoidance of tax as the company has paid the tax on the basis of transfer of shares to the Income-tax Department on the foundation that there has been income by the director which ordinarily the company would not have paid had the shares not been transferred as the company showed loss which was accepted by the Assessing Officer. We are not inclined to advert to the said issue as we have already held that Section 94 (1) and (2) are not attracted to the present case as the whole transaction comes within the Explanation to Section 94(3)(b) of the Act.
In view of the our preceding analysis, we do not find any merit in this appeal and the same is accordingly dismissed without any order as to costs.