Per Shri P. J. Goradia, Accountant Member - all these appeals involve same common grounds and therefore, they are consolidated and disposed of by this common order. The grounds are taken serially as per assessment years.
2. A common ground in respect of these two years in directed against the assumption of jurisdiction regarding reopening u/s 147(b) of the Act.
2.1 The assessee is a nationalised bank carrying on banking business.
It follows calendar year in respect of the books maintained on mercantile basis. The assessment order passed on 16th September, 1983 u/s 143 / 144B/ 147(b) of the Act reads as follows in respect of the reopening of the assessment : "In this case the original assessment was made on 18-12-1979 determining loss at Rs. 24,54,110. Since it was found that the income chargeable to tax had escaped assessment for this year in view of the fact that the assessee claimed mere provision of bad debt as allowable expenditure and was allowed treating it as bad debt. Again certain amounts which were considered as good were also claimed as bad debts in the statement of information regarding the bad debt filed. In view of this, there was an underassessment of income and therefore, notice u/s 148 was served on the assessee on 27-3-1982 but the assessee filed the return in response to this notice on 29-4-1982 showing the loss figure as it was shown in the revised return at Rs. 24,54,110." 2.2 The assessee raised the objection against the reopening before the IAC u/s 144B of the Act but the same was rejected as follows as stated in IACs direction : "It is seen that originally some wrong claims put forth by the assessee were allowed which was not in accordance with the law and the same are required to be seen properly and in light of the relevant provisions of the Act. This cannot be said as mere change of opinion of the present ITO in respect of the issue involved." 2.3 On appeal also the Commissioner (Appeals) confirmed the validity of the reopening, vide para 2 of his order, the relevant portion of the order is reproduced below : "The Income-tax Officer accepted the statement filed by the assessee at the time of the original assessment and wrongly claimed the bad debt and this statement led the Income-tax Officer to believe that the statement filed by the assessee regarding the bad debt was correct. It is the assessee who has made the Income-tax Officer to from opinion at the time of the original assessment, on account of the bad debts.
Therefore, in this case, it cannot be said that there is a change of opinion as contended by the learned counsel.
Thus, in view of these facts, I find that the Income-tax Officer, in the case of the assessee had come to the conclusion that the assessee, at the time of assessment of the original assessment furnished certain information and such information was not correct information and this fact led the Income-tax Officer to believe and to form the wrong opinion with regard to the allowability of the bad debt and doubtful debt. The Income-tax Officer has recorded his reasons in the order-sheet at to how he has reopened the assessment u/s 147 (b). thus, taking into account all these decisions, as cited above, also considering the objections of the assessee, I am of the opinion that the Income-tax Officer has reopened the assessment u/s 147(b) and such proceedings are valid one." 2.4 Before us, the learned representative of the assessee vehemently attacked the various aspects on the basis of which the reopening was sought to be justified by stating firstly that in t spite of specific requests no reasons were given officially to the assessee. However, after some time the Income-tax Officer was kind enough to give the reasons on 23-11-1984 which reads as under : 1/27-3-1982 I have information in my possession that assessee company has not disclosed full particulars regarding write off of bad debts and hence there is a under-assessment. I, therefore, consider this case as a fit one to re-open u/s 147(b). ITO, Wd-A, BNR." It was further contended that the Income-tax Officer had orally informed the assessee that reopening was made because of the non-inclusion of sum of Rs. 77,754 in respect of the debt outstanding from M/s. Gayatri Cast (Bhavnagar) as far as the claim regarding the bad debt was concerned. He, therefore, drew our attention to page 62 of the paper book and submitted that in fact no such claim was made in respect of the bad debt and, therefore, there was no question of allowing the same. Besides, in respect of the various debts usually the Income-tax Officers ask the details regarding the history of the debt, steps taken and the status of the debt and the same were given together with the return of income filed originally and it was highlighted that all the necessary details so as to enable the Income-tax Officer to evaluate the claim regarding bad debt allowance was given and the Income-tax Officer had after application of the mind allowed the same.
Not only that usually the Income-tax Officers ask the assessee to submit the details in respect of the debts exceeding an amount of Rs. 1 lakh but in this case even the debts for which lesser amounts were outstanding were also called for certain details and the same were supplied. The Income-tax Officer was also apprised of the facts regarding writing off of the debts by the bank because the fool-proof system with in built checks usually prevail in the banking system regarding appraisal of the various debts and the steps being taken from time to time. It was submitted that periodical statements in respect of the outstanding debts, overdue debts, sticky loans, guaranteed debts, etc., usually go to the Zonal Office as well as the other controlling offices and there is also periodical checks by officers of the Inspection Department of the Bank besides supervision by the Reserve Bank. There is also internal audit which reports from time to time regarding recovery of the doubtful debts and the debts which are not recoverable and after scrutinising all the relevant factors and the material the Committee of Directors or the Board of Directors take the appropriate decision regarding irrecoverable debt for which appropriate provision is made by creating provision of bad and doubtful debts and appropriate debit is given either to the interest account or to the commission account which ultimately are transferred to profit and loss account. That apart even the statutory auditors concentrate on the scrutiny of the debts and after verifying the necessary documents, security, steps taken by the bank, hope of recovery, etc., approval is made in respect of the appropriate provision required to be made in respect of the debts not recoverable. In case by chance there is any recovery out of the debts written off the same is taken care of by appropriate reduction in the claim in respect of the bad debt of the relevant year. Therefore, usually there is no chance of any wrong claim by the bank. This apart, he also drew our attention to Circular NO.27(19) IT/ 49 dated 2-9-1949 and 22-3-1950 appearing on pages 79 and 80 of the Paper Book for assessment year 1778-79 where position is clarified in connection with allowances in assessees business income captioned as bad and doubtful debts / bad debts of banks. It is stated that when all the facts on which a public bank reached a decision that a particular debt or a part of it had become irrecoverable are placed before the Income-tax Officer he might take a reasonable view of the evidence before reaching his finding. Besides, it is also clarified in the said Circular that Income-tax Officers in actual practice do not go into the details of all the items of bad debts claimed by the bank but what they do is to select a few important items and call for evidence regarding the same only. This being the position it was stated that the original assessment completed by the Income-tax Officer had to be read in the context of above clarifications. Again, nowhere specific reasons are given by the Income-tax Officer for assuming jurisdiction u/s 147(b) of the Act. What was the specific information with the Income-tax Officer is nowhere stated. It is not the case of the department that the assessee filed inaccurate particulars and therefore, reopening was justified u/s 147(a) of the Act. He went to the extent of saying that in fact there was no change of opinion even by the income-tax Officer but because of certain audit observation he was constrained to invoke the provisions of sec. 147.
2.5 With regard to the necessary provision having been created and the amount lying to the debit of the respective debtors not having been written off it was stated that such compliance is as per the law for which reliance was placed on in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95 (Guj. ). In that decision even the Circular issued by the SBDT is also considered and if appropriate provision is made in the accounts it satisfied the requirement regarding writing off of the debt in the books.
2.6 In respect of the second year it was submitted that there were no reasons given either to the assessee or even produced before the ITAT and therefore, the ratio of decision in the case of P. V. Doshi v. CIT [1978 113 ITR 22 (Guj.) was directly applicable.
2.7 The learned Departmental Representative was firm on justifying the reopening u/s 147(b) of the Act. According to him, originally the assessee had filed the return of income where bad debt claim of Rs. 9 lakhs approximately was made but only in revised return of income the bad debt claim was revised to Rs. 15 lakhs approximately. He then brought to our notice one of the items in the list of bad debt claim and stated that the debt written off was actually loss due to embezzlement and therefore, the same did not fall for consideration u/s 36 but the same could be considered only u/s 28. He also pointed out few more instances where it was stated that either the suits were pending or guarantors were there and therefore, there was no question of allowing the bad debt claim. Since the Income-tax Officer had not applied the mind the these aspects of the claim made by the assessee and since on reconsideration of the evidence on record the Income-tax Officer was of the opinion that there was an escapement of income which could be said an information within the meaning of sec. 147(b) of the Act. He then read out the language of Explanation 2 of sec. 147 and submitted that though the explanation had relevance only with regard to reopening u/s 147(a) of the Act it could be said that the facts stated above, even section 147(b) was also attracted. Placing reliance on in the case of Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC), it was stated that if on reconsideration of the material on record a factual error was found the reopening would be justified. In this case there was factual error in so far as there was no application of the mind by the Income-tax Officer with regard to the allowability or otherwise of the bad debt claim. This decision was considered by the Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996 but only part of the ratio laid down by the aforesaid decision was reversed and therefore, the decision in the case of Kalyanji Mavji & Co. (supra) as applied by the Commissioner (Appeals) fully governed the facts of the case. Further, reliance was also placed on in the cases of United India Fire & General Insurance Co Ltd. v. CIT [1985] 153 ITR 81 (Mad.), Smt. Saraswati Devi Lohia v. CIT [1964] 51 ITR 491 (All.) and ACED v. Balakrishna Menon [1967] 64 ITR 223 (Ker.) (FB).
2.8 While concluding this ground, the learned representative of the assessee clarified that even with regard to the loss from business the same was required to be treated as claim in respect of the bad debt as per the relevant Circular, instruction issued by Reserve Bank of India/ Finance Ministry. Again, the decision in Smt. Saraswati Devi Lohias case (supra) was not at all applicable to the facts of the case since there was further information Bringing to out notice the reassessment order, he drew our attention to the words "so allowed treating it as bad debt" mentioned in the first paragraph of one of the assessment orders implying thereby that Income-tax Officer had fully applied the mind when originally the claim was allowed.
3. In our opinion, jurisdiction for reopening of assessment has not been legally assumed and therefore, the reassessment has to be canceled. The reasons are as follows. The crucial words in the language of sub-clause (b) of section 147 are "... had in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year". The first requisite for reopening is the information. The next requisite is the consequent belief and the third requisite is the escapement of income based on such belief. Therefore, the reason to believe should be as a consequence of information and what is that information in this case Nowhere it is stated before assuming jurisdiction u/s 147. Section 148(2) requires the issue of notice after recording his reasons for issuing such notice. This makes it amply clear that the Income-tax Officer has to record the reasons and not merely state the word information in place of reasons. This is necessary because unless the reason are recorded it cannot be found that there is nexus between the reasons and reasonable belief regarding escapement. During the course of arguments a query was raised from the Bench as to whether the Income-tax Officer is not supposed to record his reasons since in this case as stated on behalf of the revenue, that there was no application of mind by the Income-tax officer while making the original assessment It was clarified by the learned representative of the revenue that it would be ideal but generalised language that he had information in his possession would also meet the requirement of the law. In our opinion, on the facts of the case, this cannot be so because it is an admitted position that no information from external source has come. It is also an admitted position that no wrong principle of law was applied. What is stated is that on the basis of the same material on record the Income-tax Officer was of the view that he had not considered the factual aspects of claim with regard to the bad debt and that is why there was reason to believe that there was escapement of income. It was not change of opinion but reappraisal of the same evidence. It was also fairly admitted by the learned Departmental Representative that Income-tax Officer could not review his own order. But then we fail to understand on what material he could come to the conclusion that he did not apply his mind originally though he made an assessment u/s 143(3) and it is not as assessment which had to be rushed through because of the time barring month. The necessary details with regard to the bad debt claim as was usually asked for in assessees case in past was also asked for while making the assessment for this year and the same was supplied with appropriate details. We do not know the time when and how the Income-tax Officer came to know about non-application of mind with regard to the aspect of the bad debt because the reopening is also made for other ground viz. that mere provision was made in the accounts instead of writing off of the bad debt itself. Again, there is no clear case of any wrong allowance in respect of the bad debt because the instances which were highlighted during the course of submissions only were in respect of certain debts where either the legal suits were pending in the Court or no amount was recovered in spite of the decree in favour of the bank or nothing can be recovered from the guarantor.
From the material which was filed at the time of original assessment it cannot be said that such claim as made could not be considered as bad if considered in the context of system in which the bank evaluates the financial aspects of the irrecoverable debts. During the course of assessment proceedings only relevant and appropriate details are put on record as asked for. Further discussions are usually held at the time of assessments and thereafter the decisions are taken regarding the allowability of the bad debt claim. Therefore, it is not possible to believe that Income-tax Officer did not apply the mind. This is especially so because the claim is to be allowed only when the same is established to have become bad and it is only the INcome-tax Officer who had to satisfy himself whether the debt was established to have become bad or not. It is for him to obtain the necessary details so as to enable him to come to the conclusion whether the debt is established as bad or not. Once the debt is allowed as bad debt it has to be believed that the Income-tax Officer is satisfied about the factotum regarding the debt having been established as bad. Now to say that the Income-tax Officer did not do what he should have done would require clear factual aspects pinpointing out details to be brought on record as to how a particular claim on the basis of material by no stretch of imagination could be accepted as allowable and therefore, it could reasonably be presumed that the Income-tax Officer did not apply the mind. A fact had again to be borne in mind that the Income-tax Officer himself did not record such language regarding non-application of mind in the reasons recorded u/s 148(2) of the Act.
3.1 Coming now to the legal complexities on the basis of cases relied upon by the revenue, according to the learned Departmental Representative, the decision in the case of Kalyanji Mavji & Co.
(supra) governs the facts of the case. While drawing our attention to the aforesaid case he drew our attention to four categories of the case covered by section 34(1) (b) of the Old Act [in pari materia with section 147(1) (b) of the present Act] and stated that the fourth category covered the facts of the case under consideration. The anatomy of the language stated in the fourth category is as under :- "Where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law." Where the information may be obtained even from the record of the original assessment (i) from an investigation of the materials on record or the facts disclosed thereby or (ii) from other enquiry or research into facts or law. We do not find any material clearly pointed out on the basis of which it can be stated that any investigation of the material on record or the facts disclosed or any inquiry or research into facts or law was ever undertaken by the Income-tax Officer. Had it been so he would have stated so in the reasons recorded u/s 148. It is not done and therefore, we refrain to presume that the same was done. Therefore, the mandatory condition prescribed u/s 148(2) is not complied with validly. Since this is the position, even applying the ratio laid down by Kalyanji Mavji & Co.s case (supra) the conclusion has to be reached in favour of the assessee because the same decision further holds on page 288 that where the Income-tax Officer had no subsequent information but merely proceeded to reopen the original assessment without any fresh facts or materials or without any inquiry into the materials, provisions of section 34(1) (b) would not apply.
3.2 The learned Departmental Representative further submitted that decision in the case of Indian & Eastern Newspaper Society (supra) overruled only a particular part of the decision rendered in the case of Kalyanji Mavji & Co. (supra), that is to say only the cases covered in the second category as stated on page 288 of 102 ITR which are now required to be excluded from the purview of section 147(b), otherwise rest of the cases covering remaining three categories are still governed by the provisions of section 147(b). But then while going through the decision in the case of Indian & Eastern Newspaper Society (supra), we find following observations on pages 1004 and 1005 :- "It appears to us, with respect, that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on repressing the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him the power. That was the view taken by this Court in Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC), CIT v.A. Raman & Co. [1968] 67 ITR 11 (SC) and Bankipur Club Ltd. v. CIT [1971] 82 ITR 831 (SC) and we do not believe that the law has since taken a different course. Any observations in Kalyanji Mavji & Co. v.CIT [1976] 102 ITR 287 (SC) suggesting the contrary do not, we say with respect, lay down the correct law." From the above proposition we have no hesitation in stating that the controversy before us should be treated as covered by the aforesaid observations of their Lordships of the Supreme Court, the facts being identical. We have also gone through the judicial pronouncements stated at the bar, but we would not deal with them here since we are of the opinion that the controversy can be decided and concluded on the basis of decisions of the Supreme Court as stated above.
4. The next common ground pertains to all the assessment years under consideration and the same is with regard to claim in respect of the bad debts. It is the case of both the sides that on merits the controversy is identical with identical facts, the only difference being in respect of the amounts of claims in various assessment years.
Therefore, the submissions were confined to the facts and circumstances and the controversy involved in assessment year 1978-79. While completing the reassessment vide order passed on 16th September, 1984 u/s 143(3) / 144B/ 147(b) the basis on which the Income-tax Officer sought to disallow the claim of the assessee as stated in the draft assessment order passed on 14th March, 1984 is as under :- "The assessee has claimed a sum of Rs. 26,97,891 as bad and doubtful debts written off by debiting the same to the commission account. The total bad debts are shown at Rs. 54,26,000 out of which Rs. 27,28,109 have been added back by the assessee but the remaining amount of Rs. 26,97,891 have been thus claimed as admissible by not adding it back to the result disclosed. The claim of the assessee is that the amounts are written off to the commission account after due consideration by the Highest Authority of the Bank and finding it to be not recoverable at any future date. It is however admitted that this is mere provision in the sense that the corresponding accounts of the parties concerned are not credited with the relevant amount and the recovery proceedings against each of the parties involved are in progress; and in that sense the debts cannot be said to have been completely written off in the books of account. It is, therefore, not deductible expenditure from the business income. In view of this the sum of Rs. 26,97,891 remains to be added as further income of the assessee." An objection raised by the assessee in letter dated 29th March, 1984 was confined to narrow controversy on the aspect whether actually there was write off of bad debt or not since in the draft assessment order only this aspect was touched by the Income-tax Officer. The objection raised by the assessee is in the following language :- "3. your finding that on account of writing off the bad debts of Rs. 26,97,891 without completely writing off the relevant amounts by passing corresponding entries in the parties accounts, the said debts cannot be said to have been completely written off in the books of account, and that therefore the said bad debts are not deductible in the computation of income, is not based on just and proper appreciation of relevant facts, evidence on record, and settled principles of law." However, when the instructions were issued by the IAC u/s 144B of the Act it appears he enlarged the controversy with regard to the basis on which the bad debt claim was sought to be disallowed. The IACs direction as incorporated in final assessment order at page 44 of the paper books is as under : "4.4 Having heard the submission of the learned counsel of the assessee, his attention was drawn to the provisions of section 36(1) (vii) which state that subject to the provisions of section 36(2), the amount of any debt or any part thereof which is established to have become a bad debt in previous year shall be allowed in computing the business income of the assessee. The provisions of section 36(2) lay down certain conditions for such deduction. One of these conditions is that such deduction shall be allowed only when such a bad debt or part thereof has been written off as irrecoverable in its accounts for the previous year. In this connection, his attention was also drawn to the well settled position in law that so long as there is any ray of hope left to recover the debt, however dim it may be and so long as a debt is in the process of realisation, it cannot be said that the debt had become irrecoverable - B. C. G. A. (Punjab) Ltd. v. CIT [1937] 5 ITR 279 (Lahore)-and that a debt does not become bad by the mere circumstances that the debtor gets into difficulties - Som Chand Maluk Chand v. CIT [1936] 4 ITR 382 (Lahore). These decisions are still considered as good law.
4.5 It appears to be the main contention of the learned counsel of the assessee that once the assessee has determined a debt or part thereof as irrecoverable, the ITO has no option but to accept the claim of the assessee. In this connection, he has submitted that there are 10 parties/accounts in respect of which a sum of Rs. 26,97,891 has been determined as bad debts in A. Y. 1978-79. I may add that the assessee has also determined a sum of Rs. 27,70,780 in respect of 201 loan accounts in A. Y. 1980-81 and Rs. 16,97,211 in respect of 612 loan accounts in A. Y. 1981-82. In my opinion, the contention of the assessee in this regard is not correct. What is required to be established is that these debts have become bad and the assessee cannot raise the plea that the jurisdiction of the ITO is excluded from going into the question whether these amounts have really become bad. What the ITO of the Act (sic). The reliance placed upon by the assessees advocate on the decision of Gujarat High Court in the Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166 is also equally misplaced inasmuch as the same is without any reference to the facts and circumstances of this case." Even in final assessment order the Income-tax Officer reproduced the basis of the draft assessment order as was adopted by him and in addition also incorporated in the subsequent paragraphs the direction issued by the IAC.4.1 The matter was agitated in appeal by the assessee in vain.
According to the Commissioner (Appeals) (without reference to particular debts), negotiations were going on with debtors for recovery of the dues. Besides in some cases suits in the Courts had been filed which remained pending. Again, in respect of two large amounts suits were pending in the Civil Court as also in the Criminal Court. He, therefore, felt that these facts clearly went to show that the claim of the assessee-company for the bad debts was not at all mature. Besides, there was mere provision of the bad debt and therefore, requirement regarding write off of the bad debt was not complied with. He further observed that the assessee had not taken steps to recover all the dues.
4.2 At the time of hearing before us, the learned representative of the assessee reiterated the submissions made before the authorities below from time to time and also highlighted the facts regarding system prevailing in respect of the identification of the debts as bad and the provision required to be made on the basis of debts found to be bad. It was submitted, on the system regarding evaluation of the debts from time to time, as follows : (a) Lending of funds is made under different schemes in accordance with the submissions and regulations laid down by the Reserve Bank of India and the Government of India from time to time, the total of such advances aggregating to almost Rs. 100 crores.
(b) At the end of every accounting year the assessee undertakes thorough and systematic review of bad, doubtful or weak debts and ascertains the position regarding individual accounts. the value of the securities available is also ascertained together with values of the collateral securities, etc. After such evaluation a debt or part thereof which is found to be bad and irrecoverable ask bad debt and thereafter appropriate write off is made to the debit of the appropriate revenue account.
(c) The write off is not made in the individual debtors account as per the uniform practice followed by the bank but provision for bad and doubtful debts is created and the same is reduced from the reserved of the bank while reflecting the same in the balance sheet as per the appropriate schedule prescribed in the scheme in the relevant Act.
(d) Such evaluation of the debt undergoes critical examination by the Reserve Bank, Internal Auditors, Statutory Auditors, Inspection Department as also the State Bank of India-the holding company of the assessee.
(e) In the income-tax proceedings the assessee always furnishes every year to the Income-tax officer a partywise list of irrecoverable debts in respect of which the deduction is claimed at the instance of the Income-tax Officer and in accordance with the past practice further details factual as well as historical are also supplied in respect of those accounts in which substantial amounts are written off. The details supplied included the amounts outstanding, the nature of the debt, marketability and the value of the securities available, amount receivable from credit guarantee organization of the Reserve Bank of India and other relevant material factors leading to the write off.
(f) The write off is usually authorised by the Committee of the Directors who meet from time to time regarding sanctioning of the limits in respect of the advances, recovery of the funds advanced, steps required to be taken chances of recovery, etc. considered and then decision is taken in respect of the amount required to be written off. He then also brought to our notice various Circulars and Instructions and Clarifications issued by Ministry of Finance in respect of the claim for bad debts by the nationalised banks, how required to be considered in the tax assessment and points required to be borne in mind by the income-tax officials so as to restrain litigation in respect of the bad debt claims. In respect of the evidence required to be laid, the burden of proof and the onus, reliance was placed on various judicial pronouncements especially the following : (a) Lords Dairy Farm Ltd. v. Cit [1955] 27 ITR 700 (Bom.) (b) Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792(Bom.) (c) Vithaldas H. Dhanjibhai Bardanwalas case (supra) (d) Equatorial (P.) Ltd. [1974] Taxation 37(3)-82 (Guj.) (e) CIT v. Abdul Razak & Co.
[1982] 136 ITR 825 (Guj.) (f) Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166 (Guj.).
In respect of the provision instead of actually squaring of the balance in the debtors account it was submitted that crediting the provision account satisfied the necessary condition and the position has been accepted by the CBDT.4.3 The learned Departmental Representative supported the orders passed by the authorities below and placed reliance on the cases of Chettinad Co. (P.) Ltd. v. CIT [1984] 147 ITR 724 (Mad.) and CIT v. Mathuralal Kapoorchand & Co. [1983] 141 ITR 297 (MP).
5. We have considered the submissions and materials to which our attention was drawn. We have also considered the relevant judicial pronouncements with regard to the merits of the claim.
5.1 To advert briefly on system and checks we find that the bank, being responsible for the safety of advances, prescribes various steps and measures to be followed like post-disbursement inspection to ensure end use of funds, submission of stock statements by the borrowers having cash credit limits and periodical inspection of the units etc. These steps are to be undertaken by the operating staff at the branches and wherever the quantum of advances warrants, field officers are appointed by the bank, specially to look after the advances. The follow up measures are reviewed by the bank at various levels, by calling for requisite data / particulars from the branches by their respective controlling offices. In spite of close monitoring and follow-up of advances, inevitably some of the advances tend to become bad for various reasons beyond the control of the bank. When the conduct of the borrowal accounts is not satisfactory or the repayment of the dues is not as per the schedule prescribed by the bank, more vigorous steps / checks are undertaken.
5.2 When all steps for recovery and nursing become futile and / or when there is no recovery / movement in the accounts for a long period of time and the extreme step of filing suit against the borrowing unit for recovery of dues becomes necessary, the outstanding in these accounts are transferred to Protested Bills Account, according to the internal procedure of the bank. The branches submit quarterly statement of the protested Bills Account for review at the Controllers level and a thorough and exhaustive annual review of the advances transferred to Protested Bills Account is done every year, at various management levels, to ascertain the position of good and recoverable portion of the advanced and simultaneously to quantify the bad and irrecoverable portion thereof. The various management levels include the Regional Managers and Zonal Managers as Controllers and at the Head Office, the Banking Operations Department under the control of General manager (Operations). The final review is done at the highest level of authority in the bank, viz. the Board of Directors which includes the nominee Directors of State Bank of India, Reserve Bank of India and Government of India. The amount considered good based on the evaluation of (i) the available primary and collateral securities, and (ii) the guarantees available from third parties, it any, and / or (iii) guarantee cover of Deposit Insurance and Credit Guarantee Corporation (D. I. C. G. C.), is ascertained and the amount which is considered bad and irrecoverable is quantified and written off by making appropriate provision therefore by debit to the banks revenue accounts viz. either Interest or Commission account and by crediting corresponding amount to provision for Bad and Doubtful debts Account (Identified Accounts). The amount of Provision for Bad and Doubtful Debts Account is reduced from the total advances on the assets side of the balance sheet and correspondingly from the amount of provisions on the Liabilities Side of the balance sheet.
5.3 Such of the accounts (other than the bad and irrecoverable debts referred to above) which are potentially bad and show all signs of irregularities / sickness are termed as sticky accounts but are retained in the live ledgers and efforts to recover the money owed to the bank by the concerned borrowers are undertaken. Consistent with the policy of prudent banking, these sticky accounts are also reviewed annually and the portion of the outstanding which is considered doubtful of recovery is quantified and provided for, besides a Floating Provision to take care of possible bad debts in priority sector advances. This provision which is not linked to any particular identified accounts is considered as a free reserve and the amount of the provision is not claimed as a deduction in computing the taxable income of the bank.
5.4 While different provisions for bad and doubtful debts are made as per the banking norms in vogue, only the provision covering the Bad and irrecoverable portion of Protested Bills Account corresponding to identified bad debts is claimed as a deduction as Bad debts written off in the income-tax assessment of the bank.
5.5 In respect of the amounts involved in frauds and embezzlement of funds, the actual practice uniformly followed by the bank-in fact for that matter, by the State Bank of India and all its subsidiary banks like the State Bank of Saurashtra is to transfer the amounts to Protested Bills Account pending recovery proceedings, if any, wherever possible. These accounts are also reviewed and the loss on account of these frauds/embezzlement of funds is quantified and written off as bad debts and claimed accordingly. Details of such cases are given to the assessing authorities along with the details of bad debts and such practice is known to the Department and also accepted by it.
5.6 The quantification of bad and doubtful debts and provision thereof is a necessary process and in the process of drawing up of the Profit and Loss Account and balance sheet of the bank as per the provisions of the Banking Regulation Act, 1949 (Section 29 and Third Schedule of the Act), the provision for bad and doubtful debts has to be to the satisfaction of the statutory auditors of the bank is essential. In the audited accounts, presented in the forms prescribed under the Banking Regulation Act, 1949, the income of the bank in the Profit and Loss Account is shown "after provision made during the year for bad and doubtful debts and other usual and necessary provisions", and in the balance sheet, the advances shown as "other than bad and doubtful debts for which provision has been made to the satisfaction of the auditors".
Thus, as required by law and in actual practice also, the provision for bad and doubtful debts requires and invariably undergoes a close scrutiny by the statutory auditors before the finalisation of accounts besides being subjected to a critical scrutiny by the banks own internal auditors and auditors of the Reserve Bank of India and State Bank of India.
5.7 The authorities below have not at all gone through properly each and every account in the Protested Bills Account, the details of which had been placed together with the returns filed by the bank.
Considering the nature of the business of the bank and also considering the system prevailing in the banks regarding write off of advances, normally it has to be accepted that the onus regarding establishing the debts as bad debts is fully discharged. Though of course, in this case, even after considering the position of the various advances, we are satisfied that the claim made by the bank is required to be accepted.
To disbelieve any portion of the bad debt claim as premature requires clear and cogent evidence on the basis of which it can reasonably be said that the decision in respect of write off of the debt is erroneous. Again, what is required is an honest judgment with regard to the bad debt claim and it becomes too difficult for an Income-tax Officer to sit over judgment taken by various expert authorities specialised in banking. That is why the Finance Ministry has in various circulars hinted at sympathetic approach while evaluating the claim in respect of the bad debt made by the banks. Besides, the matter has to be judged in the light of present environment concerning the lending policies of the Government. Perhaps a time has come when a part of the total advances becoming irrecoverable has to be accepted as normal incident of the banking business and that is why probably a beginning was made in the Income-tax Act by the finance Act, 1979 having inserted clause (vii) to sub-sec. (1) of sec. 36 whereby certain percentage of the aggregate average of the advances made at least by the rural branches of the bank is made allowable as ad hoc deduction without there being proof regarding the bad debt and that again is over and above the amount actually proved to have been bad. This amendment is made with effect from 1-4-1980. Of course, we do not find claim on the basis of this sub-clause in any of the years concerned, probably because there did not exist any rural advance. Even if any of the debts is assumed to be premature for the purpose of allowance, yet we do not find any adjustment or rectification in the assessment of the concerned year where the deduction actually lie because it is now incumbent on the part of the Income-tax Officer to make such allowance on certain conditions and under certain circumstances by resorting to the provisions of sub-sec. (6) of sec. 155 as provided in sec. 36(2) (iv) of the Act. It appears, therefore, that in the present Act of 1961 the practical significance of allowance in particular year only in respect of bad debt has lost importance where the rates of tax are uniform. On going through the assessment order, we finding that there is also a disallowance of Rs. 7,50,000 in respect of provision for bad and doubtful debts created by debiting the interest account. therefore, the claim in respect of Rs. 26,00,000 plus is on account of the debts written off. Therefore, the claim cannot be rejected merely on the basis that the assessee has made a provision. It appears that the Income-tax Officer has lost sight of the separate provision for bad and doubtful debts which is already disallowed by him while computing the income and for which there is no appeal. We, therefore, hold that the claim in respect of bad debt is required to be accepted without any adjustment.
6. the last ground is in respect of charge of interest u/s 139(8) of the Act.
6.1 It was contended on behalf of the assessee that the Income-tax Officer did not pass speaking orders for the charge of interest and the assessee could never anticipate huge additions and disallowances sought to be made by the revenue and, therefore, there was no liability to pay interest.
6.2 In our view, we need not deal with the aspect regarding liability to and the denial thereof since the other grounds having been decided in favour of the assessee, there should be substantial deduction in the amount of interest under section 139(8) of the Act.
7. To the extent as above, the orders passed by the first appellate authority are modified and the Income-tax Officer is directed to pass appropriate orders in accordance with law.