1. This appeal by the revenue is directed against the deletion of disallowance made in respect of bad debt of Rs. 1,75,932.
2. The Assessing Officer has discussed this point in para 3 and 4 of the assessment order. The bad debt in question relates to debit balance in the account of M/s Jagnnath Pankaj kumar from whom the assessee made certain purchaseSection It was explained before the Assessing Officer that in A.Y. 1982-83 the assessee purchased goods from this party of the value aggregating to Rs. 10,73,274. However, the assessee made payments aggregating to Rs. 12,49,206 to the said party in that year which resulted in excess payment made in advance to the extent of Rs. 1,75,932. The assessee submitted that the said amount could not be recovered from the said party nor goods could be received from that party after A.Y. 1982-83. After waiting for some years, the assessee decided to write off the said amount in A.Y. 1989-90 which is under consideration before us The Assessing Officer observed that Section 36(2)(i)(a) provides that no deduction shall be allowed as bad debt unless such debt has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year. The payment made in excess of the purchase price as an advance to the supplier of goods was not at all taken into account in computation of assessee's income in the year under consideration or in any of the earlier yeaRs. The excess amount so given by the assessee also cannot be considered as money lent in the ordinary course of business of banking or money lending, as the assessee is not carrying on any such business He, therefore, came to the conclusion that the conditions prescribed in Section 36(2) is not satisfied in the present case and therefore, the claim of bad debt cannot be allowed.
3. The learned first appellate authority observed that the assessee had written several letters to the seller party. From the correspondence made between the assessee and the seller party, it appears that the seller party's position has deteriorated and the seller party was not in a position to pay the amount. The assessee did not adopt legal course, because, he did not want to spend good money for bad money, as recovery thereof had a remote chance and was not possible in this case.
He also placed reliance on the conditions mentioned in Section 36(2) as amended by the Finance Act 1987 which, inter alia, provides that the year in which the assessee has written off the debt as bad debt in the books of accounts should be considered as satisfying the claim for grant of deduction as bad debt. He deleted the said disallowance and directed the ITO to grant deduction in respect of the said amount of bad debt of Rs. 1,75,932.
4. The learned Sr. departmental representative vehemently argued that no efforts were made by the assessee to recover such a substantial amount from the supplier. Moreover, it cannot be regarded as bad debt contem- plated in Section 36 r.w.s. 36(2) because it never formed part of income of the assessee in any of the years. He relied on the elaborate reasons mentioned in the assessment order.
5. The learned counsel for the assessee submitted that the amount in question has rightly been allowed as a deduction by way of bad debt, as the payment in question made to the supplier was of a revenue nature.
Such advances to the supplier of goods for purchase of sugar etc., in which the assessee was trading, is clearly covered by the provisions of Section 36. He placed reliance on decisions reported in CIT v. Visnagar Taluka Mazdoor Sahakari Mandali Ltd. [1987] 163 ITR 224 (Guj.), Amrish Navinchandra & Co. v. ITO [1989] 46 Taxman 254 (Ahd.) (Tax - Mag.), ITO v. Bombay Film Lab. (P.) Ltd. [1982] 14 TTJ 478 (Bom.) and CIT v.Rohtas Industries Ltd. [1979] 120 ITR 110 (Cal.). On the strength of these decision, he supported the order of the Dy. CWT(A).
6.1 We have carefully considered the rival submissions made by the learned representatives of both the sides and have also given our thoughtful consideration to the various decisions cited by the learned Lawyer of the assessee.
6.2 Before giving our findings in relation to the point in issue, we would like to briefly discuss the facts of the various decisions relied upon by the learned counsel for the assessee. In the case of Visnagar Taluka Mazdoor Sahakari Mandali Ltd. (supra) the Hon'ble Gujarat High Court was dealing with a claim for deduction in respect of the payments made to transport contractors by way of advance against anticipated carting bills It was held by the Hon'ble High Court that since the whereabouts of the contractors were unknown over a period, the assessee wrote off the debt and claimed deduction thereof as bad debt. The Hon'ble High Court dismissed the revenue's application under Section 256 on the ground that the genuineness of the transaction was accepted and that was essentially a question of fact. Further more, it is not clear from the said decision as to whether the assessee's claim was allowed under Section 28 or under Section 37 or whether the question relating to its being covered by the ambit of Section 36 was subject matter of discussion in the said case before the Tribunal. The decision of ITAT Ahmedabad Bench in the case of Amrish Navinchandra & Co.
(supra) relied upon by the learned counsel for the assessee is clearly distinguishable, as the deduction in that case represented a trading loss and was allowed as such under Section 28 of Income-tax Act, 1961.
6.3 The next decision in the case of Bombay Film Lab (P.) Ltd. (supra) decided by the Bombay Tribunal related to advances made by the assessee to the customers in the course of its business The Tribunal held that where assessee advances money to the party for purchase of a film, it cannot be said that the advance is something dehors the business of the assessee. Such advance is made in the course of business and its loss is allowable as bad debts The matter was remitted back to the CIT(A) to consider the case of each debtor and to allow the claim of bad debt, if the amount was found to be irrecoverable. In this decision also, subtle and important distinction between a trading loss and bad debt was not a subject matter of consideration as in those earlier years prior to amendment of Section 36(2) deduction of bad debt and trading loss had to be allowed in the year in which the amount became bad and irrecoverable. The last case relied upon by the learned counsel is of Hon'ble Calcutta High Court in the case of Rohtas Industries Ltd. (supra). In that decision, the point related to allowability of bad debt in respect of advances made for purposes of securing raw material.
Amounts written off are allowable as bad debts under the provisions of Section 10(2)(xi) of Income-tax Act, 1922. It would be worthwhile to observe that under the 1922 Act, a deduction for bad and doubtful debts was available in the year when it was found to be irrecoverable.
However, the Income-tax Act, 1961 has modified the language of this part of the provision which requires that the debt should have been taken into account in computing the income of the assessee in the accounting year or the earlier accounting year. Such a specific and express provision requiring that a debt can be written off as bad debt only if it has gone into swell the profits of the business of the year under consideration or earlier year did not exist in the old law.
Moreover, the distinction between the nature of the claim of deduction as to whether it is a trading loss or it is a bad debt contemplated in Section 36(2) has assumed significance in view of the amendment of Section 36(2) made by the Finance Act, 1987 effective from assessment year 1989-90. The said decision also therefore does not in any manner help the assessee.
6.4 A plain reading of the provisions of Section 36(2) r.w.s.
36(1)(vii) clearly indicates that one of the conditions for grant of deduction in respect of bad debt is that what is sought to be written off as bad debt should have earlier gone into swell the profits of the business Such expression clearly indicates that debt should be of such a revenue character which has either already gone into the profits earlier or which when realised would become the profitSection In the present case the assessee has given advance for purchase of goods from the said party. The excess amount of advance so given, when realised would not have increased the profits of assessee's business, but the same would have only been a repayment made by the supplier to the assessee. We are, therefore, of the considered opinion that the amount in question could not be allowed as bad debt under Section 36(1)(vii) r.w.s. 36(2). The aforesaid view taken by us is clearly fortified by the judgment of the Hon'ble Gujarat High Court in the case of CIT v.Equitorial (P.) Ltd. 37 Taxation Section III 82. The Hon'ble Gujarat High Court after taking into consideration several judgments arrived at the following conclusion :- Applying these tests it is clear to us that the case of the assessee in the instant case regarding the said amount of Rs. 1,78,523 cannot be said to be a bad debt within the meaning of Section 36(1)(vii).
Applying the test of Rowlatt J., mentioned above, it cannot be said to be a debt that it would have come into the balance-sheet as a trading debt in the trade nor can it be said that if this debt had been paid back by the Dundas to the assessee company, it would have come in to swell the profits of this particular businesSection This is the test which appealed to the Supreme Court in CIT v. Abdullabhai Abdulkadar (supra) and A.V. Thomas & Co. Ltd. v. CIT (supra). This amount of Rs. 1,78,523 if recovered could never have resulted in the swelling of the profits but would have mean repayment of the moneys advanced by the assessee Company to DundaSection Therefore, in our opinion, the Tribunal was not right in holding that the amount of Rs. 1,78,523 could be treated as a bad debt covered by Section 36(1)(vii) of the Act of 1961. We may point out that the decisions which were relied upon by Mr. Kaji, namely, in Essen (P.) Ltd. v. CIT [1967] 65 ITR 625 and CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 do not lay down any tests different from the tests which we have culled out from the decisions already referred to. The other two decisions of the Bombay High Court which were also relied upon by Mr. Kaji, namely, the decision in CIT v. F.M. Chlnoy &. Co. (P.) Ltd. [1969] 74 ITR 780 and T.J. Lalvani v. CIT [1970] 78 ITR 176 are not of much use to us in deciding the questions before us in the light of the tests which we have culled out from the different decisions of the Supreme Court as set out in the earlier part of this judgment.
After arriving at the aforesaid findings that the amount in question cannot be regarded bad debt contemplated in Section 36(1)(vii) r.w.s.
36(2), the question then arises as to whether the said amount can be said to be a trading loss within the meaning of Section 28(1) and/or is allowable deduction under Section 37. In the aforecited judgment of the Hon'ble Gujarat High Court in the case of Equitorial (P.) Ltd. (supra) the amount in question was allowed as a trading loss under Section 28(1) by holding that the loss sprang directly from the business of the assessee and was incidental to the business of the assessee. While arriving at the said conclusion the Hon'ble Gujarat High Court considered the applicability of various tests laid down by the Hon'ble Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 and CIT v. Abdullabhai Abdulkadar [1961] 41 ITR 545.
6.5 In the instant case the allowability of the amount in question as a trading loss under Section 28(1) and/or under Section 37 of Income-tax Act, 1961 has not been taken into consideration by the lower authorities The conditions relating to grant of deduction as a bad debt and a trading loss has undergone a significant change by an amendment of Section 36(l)(vii) and Section 36(2) made by the Direct Tax Law (Amendment) Act, 1989 with effect from 1-4-1989 which is applicable from assessment year 1989-90. The old provision as it existed prior to 1-4-1989 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. We are, therefore, of the considered opinion that orders passed by the learned departmental authorities in relation to this point will have to be set-aside and the matter should be restored back to the Assessing Officer for deciding the question of allowability of the said amount as a deduction by way of trading loss under Section 28(1) and/or under Section 37 after conducting necessary examination of all the relevant facts and material. In this regard, it will also be worthwhile to state that,the burden lies on the assessee to prove that a particular amount is allowable as a trading loss or as an expenditure under Section 28 and/or under Section 37(1). The assessee has to prove that such a deduction claimed by him satisfies all the ingredients of the aforesaid provisions of law. The assessee will, therefore, have to prove and submit all the required material to support the allowability of the said amount as a deduction under Section 28 and/or under Section 37(1). The Assessing Officer should ask the assessee to produce the copies of accounts of the assessee as appearing in the books of said party from assessment year 1982-83 till current year so as to ascertain as to what treatment has been given by the said party in respect of the amount outstanding against them. Whether the said party has credited it. as income by way of remission of the credit balance in the account of the assessee as appearing in their books or the same is still lying outstanding in their books The Assessing Officer may also examine all the correspondence exchanged between the said party and the assessee and may examine the reality of the losSection The Assessing Officer would not only examine the reality of the loss in question but will also examine the entire material with a view to find out the appropriate year of allowability of the said loss The assessee will be at liberty to produce all such material before the Assessing Officer as may be considered proper by him. The issue will be decided afresh by the Assessing Officer in accordance with the provisions of Law and after providing reasonable opportunity to the assessee.