The appeals being 48/Pn/1995 and 1035/Pn/1995 are directed by the assessee against the orders dated 7-10-1994 and 22-8-1995, of Commissioner (Appeals)-II, Pune, relating to assessment years 1991-92 and 1992-93, respectively. Since common issues are involved in these appeals and were heard together, we find it convenient to dispose off the same by a consolidated order.
First we shall take up the ITA No. 48/Pn/1995, the appeal by the assessee for the assessment year 1991-92.
1. The learned Commissioner (Appeals) erred in confirming disallowance of the claim of bad debt of Rs. 12,36,412 due from M/s New Sahyadri Industries by taking a narrow and technical view that unless debtors deny, the debt cannot be considered to be bad. He also failed to appreciate that the remission allowed by the appellant was entirely for business consideration and it could be allowed under section 28 or 37 if it could not be allowed as bad debt under section 36(1)(vii). The deduction of Rs. 12,36,412 being properly allowable either as bad debt or as remission may kindly be allowed.
2. The learned Commissioner (Appeals) erred in confirming disallowance of the claim of bad debt of Rs. 75,000 due from Vignahar Sahakari Pani Puravatha Sanstha which was written off more as a sort of remission in the interest of keeping cordial relations and with the hopes of future business. The deduction of Rs. 75,000 being properly allowable at least as remission may kindly be allowed.
3. The learned -Commissioner (Appeals) erred in confirming disallowance of the claim of bad debt of Rs. 85,488 due from Jalvahinin Krishi Udyog. For the same reasons as in Ground No. 2, the claim may kindly be allowed.
4. In considering the claim of bad debt, the Commissioner (Appeals) ought to have appreciated legislative changes in section 36(1)(vii) read with section 36(2). He also should have considered well-settled position in law that in considering such claim, the businessman's point of view should be considered and the matter should not be decided by applying subjective standards.
The assessee had claimed bad debts at Rs. 26,36,854. The assessing officer called upon the assessee to justify the claim of bad debts.
According to the assessee, since the amount was written off in the books of account as per the amended provision of section 36(1)(vii) of the Act, the same has to be allowed automatically in view of the amended provisions of law with effect from, 1-4-1989. The assessing officer was of the view that even as per the amended provisions of section 36(1)(vil) ought to have become bad debt before it is written off as irrecoverable in the books of accounts of the assessee for the previous year. He therefore called upon the assessee to prove that the debt had in fact become bad. The break of the amounts claimed by the assessee which were disallowed by the assessing officer are as follows: The assessing officer disallowed the claim of the assessee by giving elaborate reasons as set out in page Nos. 3 to 12 of the order of the assessment. On appeal by the assessee, the Commissioner (Appeals) substantially confirmed the order of the assessing officer by allowing only part relief to the assessee.
In the present appeal we are concerned with the claim of the assessee and the disallowance made by the assessing officer and confirmed by the Commissioner (Appeals) out of the claim for deduction on account of bad debts which were as follows : (a) Amounts due from M/s New Sahyadri Industries (hereinafter called as NSI) Rs. 12,36,412 (b) Amount due from M/s Vignahar Sahakari Pani Puravatha Sanstha Rs. 75,000 We shall now deal with the facts and circumstances and the basis on which the disallowance was made by the assessing officer and confirmed by the Commissioner (Appeals) in each case of the debtors named above : (a) Amounts due from M/s. New Sahyadri Industries (hereinafter called as NSI) Rs. 12,36,412 M/s. NSI were carrying on business of laying and jointing of pipes on behalf of the various co-operative societies. M/s NSI purchased pipes from the assessee for the purpose of carrying out its obligations to various co-operative societies. The societies to which the NSI had supplied pipes had claimed that the pipes were of inferior quality and there were some breakages. In view of this, M/s NSI did not pay dues for supplies effected by the assessee to M/s NSI. The NSI on the other hand made counterclaim against the assessee for damages. In such circumstances, M/s NSI and the assessee referred the dispute to M/s Parag Patwa Associates, chartered accountants who on scrutiny of the rival claims expressed their opinion that the assessee should give up its claim for amounts due and supplies effected by it and NSI will not make any counterclaim for compensation for damages. Pursuant to this opinion of the mediators, the assessee had written off the debt due by NSI in its books of accounts. According to the assessee the debt had really become bad and all the conditions under section 36(1)(vii) were fulfilled. The assessing officer however was of the view that some of the partners of the NSI were relatives of the directors of the assessee and therefore the claim for deduction on account of bad debits was not genuine.
Before the Commissioner (Appeals), it was contended by the assessee apart from reiterating his submissions as made before the assessing officer, that if the assessee had not accepted settlement with M/s.
NSI, it would have faced legal proceedings for damages and this would not only disturb the business relationship but would also affect the goodwill and trade name in the market. Considering all these aspects the debt was written off as bad debts and the action of the revenue authorities refusing to allow this claim was not proper. The Commissioner (Appeals) held that the voluntary remission of such debts even through mutual compromise would not make a debt as bad debt. He held that the assessee need not prove the steps taken by him for recovery of debts but he must show that it was in the nature of bad debts. Considering the facts and circumstances of the case, he was of the view that the debt had not become bad debt and the assessing officer was justified in making the disallowance.
Before us, the learned counsel for the assessee reiterated his submissions as made before the assessing officer and submitted that even on merits the debt had become bad and merely because the assessee had remitted the debt it cannot be said that the debt had not become bad. He relied on the decision of Patna High Court in the case of the Sitalpore Sugar Works Ltd. v. CIT (1954) 25 ITR 548 (Pat) and on the decision of Madras High Courts in the case of R.K. Kamakshi Chettiar v.CIT (1960) 39 ITR 104 (Mad). He submitted that the remission of debt and writing off the debt as bad are one and the same as laid by the decisions referred to above. His further submission was that with effect from 1-4-1989, the conditions for allowing bad debts were as follows (iii) Which has been written off as irrecoverable in the account of the assessee for the previous year.
(iv) (a) which has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year or (b) which represents money lent in the ordinary course of the business of banking or money/ending which is carried on by the assessee.
The prime condition which was required to be fulfilled to claim a debt as bad debt upto and including assessment year 1988-89 i.e. debt should have been established to have become a bad debt in the previous year' is deleted from assessment year 1989-90 after the Taxation Laws Amendment Act, 1987 and hence now after the amendment when the debt is written off in the books of account as bad debts, the same has to be allowed. If at all something is recovered out of the same, the same is to be taxed in the year of recovery as provided in section 41(4) of the Income Tax Act.
In this regard the assessee relied on the decision of the Calcutta Bench of the Tribunal in the case of Jayanti Commerce Ltd. v. Asstt.
Commissioner and the decision of the Hon'ble Gujarat High Court in the case of CIT v. Girish Bhagwat Prasad (2002) 256 ITR 772 (Guj) wherein it has been held that after the amendment, to section 36(1)(vii) by the Finance Act with effect from 1-4-1989, the assessee is not required to establish that a debt had become bad debt in the previous year and mere writing off of amount in books of accounts as bad debt is sufficient.
The learned Departmental Representative relied on the orders of the revenue and in particular she relied on the decision of Delhi Bench of Tribunal in the case of Dy. CIT v. India Thermit Corpn. Ltd. (1996) 56 ITD 307 (Del).
We have considered the rival submissions. It is not in dispute that the debt in question had been written off as bad debt in the books of the account of the assessee. The conditions for claiming deduction under section 36(1)(vii) laid down above are fulfilled in the present case.
The revenue authorities were more concerned with the fact that M/s NSI did not deny the payments but it was only the assessee who remitted the liability of M/s NSI by writing it off as bad debt. We are of the view that there are enough facts which justified the assessee to take a decision to remit the liability due from M/s NSI. The fact that some of the relatives of the directors of the assessee were partners in NSI, in our view, will not make any difference. As laid down by the Hon'ble Gujarat High Court in the case of CIT v. Girish Bhagwat Prasad (supra), mere writing off of amount as bad debt is sufficient and it is not a further condition that the assessee should establish that the debt had become bad. In view of the above decision of the Honble Gujarat High Court and the amended provisions of section 36(1)vii), we are of the view that the revenue authorities were not justified in making the disallowance on this count and the addition of Rs. 12,36,412 is therefore directed to be deleted.
(b) Amount due from M/s Vignahar Sahakari Pani Puravatha Sanstha Rs. 75,000.
The facts with regard to this debtor are that the assessee had supplied goods worth Rs. 13,44,943 during the accounting year 1989-90. A payment of Rs. 12.70 lakhs was received by the assessee in respect of this supply made to the debtor. There were complaints from the members of the scheme that the pipes supplied to them by the assessee were of inferior quality and though the pipeline was showing satisfactory results, in future there may be leakages and bursting of pipes. In view of the cordial relations and future prosperous business with the members of the scheme, the assessee thought it fit to write off Rs. 75,000 and the necessary resolution in this regard had been passed by the company. The assessing officer was of the view that the assessee did not produce any evidence to show that the parties refused payments and therefore he rejected the claim of the assessee in this regard. On appeal, the Commissioner (Appeals) confirmed the order of the assessing officer for similar reasons.
We have already discussed a similar issue while deleting the addition made in respect of M/s NSI that the basis adopted by the revenue authorities for making disallowance was not proper. For the reasons stated therein, we direct the assessing officer to delete the addition of Rs. 75,000.
(c) The claim of bad debt of Rs. 85,488 in respect of Jalvahini Krishi Udyog: 5.8. The facts regarding this debtor are that the debtor was a contractor and the assessee had supplied goods worth Rs. 5.5 lakhs. The debtors paid a sum of Rs. 4.55 lakhs and the remaining amount could not be recovered in view of the fact that the pipes sold to him broke while they were installing the same. The debtor had made a counterclaim for damages and hence the assessee thought it fit not to make claim for the balance amount for fear of counterclaim being made against them. The assessee therefore decided to write off in its books of account this debt as bad debt and the necessary resolution of the Board was also passed to this effect. The assessing officer however was of the view that no evidence was adduced by the assessee to prove this fact and nothing was shown to substantiate the fact that the debtor refused payments. On appeal, the Commissioner (Appeals) confirmed the order of the assessing officer for similar reasons.
We have already discussed a similar issue while deleting the addition made in respect of M/s NSI that the basis adopted by the revenue authorities for making disallowance was not proper. For the reason stated therein, we direct the assessing officer to delete the addition of Rs. 85,488.
We are of the view that the additions made by the assessing officer and confirmed by the Commissioner (Appeals) which are challenged before us in grounds No. 1 to 3 are allowed and ground No. 4 is general in nature and is supportive to the grounds Nos. 1 to 3 referred and does not require any adjudication. Suffice it to say that it is the businessman's point of view that a debt has become bad and needs to be written off that is relevant while making the disallowance and the revenue cannot apply any subjective standards in this regard.
The learned Commissioner (Appeals) erred in confirming the restriction of deduction under section 80M at Rs. 1,74,217 as against deduction of Rs. 2,45,898 claimed on the ground that interest of Rs. 71,681 was attributable and deductible from the dividend income. The learned Commissioner (Appeals) failed to appreciate that the appellant had been depositing all its receipts inclusive of its profit element in its cash credit account and interest-bearing and non-interest bearing funds being mixed, it was erroneous to attribute portion of interest against the dividend income. Full deduction of Rs. 2,45,898 as claimed may kindly be allowed.
We have considered the orders of the revenue authorities in this regard. We are of the view that the claim of the assessee is not sustainable in view of the decision of the Hon'ble Bombay High Court in the case of CIT v. Maganlal Chhaganlal (P) Ltd. (1999) 236 ITR 456 (Bom) wherein it has been held as follows 'The deduction under section 80M of the Income Tax Act, 1961, has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the GTI, i.e., after deducting interest on monies borrowed for earning such income, and not with reference to the full amount of dividend received by the assessee." In view of the above decision of the Hon'ble Bombay High Court, this ground of appeal of the assessee is dismissed and the orders of the revenue authorities are confirmed.
The appellant may kindly be permitted to urge in view of recent decision of Supreme Court in J.K. Synthetics Ltd. v. CTO (1994) 119 CTR (SC) 222 that interest of Rs. 7,95,042 under section 234B in so far as it is levied on disputed addition was not leviable and that the same may kindly be deleted.
It is not in dispute that the issue raised in this ground of appeal has already been decided by this Bench in the case of Deshmukh Consultants v. Dy. CIT in ITA Nos. 46 to 50 and 155 to 157/Pune/1998. This Bench has held that following the decision of the Apex Court in the case of CIT v. Anjum M.H. Ghaswala & Ors. (2001) 252 ITR 1 (SC), that charging of interest was mandatory and consequential. In view of the above decision of this Bench, we dismiss this ground of the appeal of the assessee.
1. The learned Commissioner (Appeals) erred in confirming disallowance of the claim of bad debt of Rs. 9,73,064 due from M/s New Sahyadri Industries by taking a narrow and technical view unless debtors deny, the debt cannot be considered to be bad. He also failed to appreciate that the remission allowed by the appellant was entirely for business consideration and it could be allowed under section 28 or 37 if it could not be allowed as bad debt under section 36(1)(a). The deduction of Rs. 9,73,064 being properly allowable either as bad debt or as remission may kindly be allowed.
2. In considering the claim of bad debt, the Commissioner (Appeals) ought to have appreciated legislative changes in section 36(1)(vii) read with section 36(2). He also should have considered well-settled position in law that in considering such claim, the businessman's point of view should be considered and the matter should not be decided by applying subjective standards.
This ground of appeal of the assessee arises under identical facts and circumstances under which the ground No. 1 was decided for assessment year 1991-92. The facts and circumstances under which this disallowance was made by the revenue authorities are identical as in assessment year 1991-92. For the reason stated in the orders for assessment year 1991-92, we allow this ground of appeal of the assessee and accordingly, the assessing officer is directed to delete the addition of Rs. 9,73,064 made on this count.
The learned CIT is also erred in law & on facts in confirming the disallowance of a sum of Rs. 91,577 claimed by your appellant, as provision of laying and jointing expenses on the ground that the same is a provision and not a liability. Your appellant submits that the said sum is an accrued and ascertained liability for laying and jointing pipes and hence the same has been rightly claimed and should have been allowed while computing the income of your appellant.
The facts and the circumstances under which this ground has arisen is as follows: In the details of creditors furnished by the assessee, the assessing officer noticed that a sum of Rs. 91,577 was shown as payable as provision for laying and jointing expenses. The assessing officer noticed that there were no bills received which could justify in making the provision. He therefore concluded that the liability was not ascertained by the assessee towards the end of the accounting year. He also held that the amount was kept merely as a provision and not towards any ascertained liability and therefore he disallowed the claim for deduction made by the assessee. On appeal, it was submitted before the Commissioner (Appeals) that the assessee had entrusted the work of laying and jointing of the pipeline to M/s. Mallikarjun Jal Sinchar Co-operative Ltd. who in turn gave sub-contract to M/s. Minar Constructions. The payments made on behalf of the sub-contractor was debited to his account and since a final bill was not received a provision was made in the books of accounts against the debit balance of sub-contractor. Thus it was claimed that the liability had accrued and was ascertained liability incurred in the normal course of business. The Commissioner (Appeals) however did not accept the claim of the assessee. He found that the amount as reflected against the outstanding creditors without the name of the party to whom the amount was payable and since the bills were not received, he concluded that the liability was unascertained. He therefore confirmed the order of the assessing officer. Aggrieved by the order of the Commissioner (Appeals), the assessee is in appeal before us.
At the time of hearing before us, it was fairly accepted by the learned counsel for the assessee that the necessary evidence with regard to the contention made by the assessee before the Commissioner (Appeals) had not been produced by the assessee. He however prayed that the issue may be set aside and the assessee be afforded an opportunity to put forth his claim. The learned Departmental Representative relied on the orders of the revenue authorities and submitted that the request made by the assessee in this regard is belated request and should not be entertained.
We have considered the rival submissions. We are of the view that in the interest of justice it will be fair if the orders of the revenue are set aside and the matter is remanded to the assessing officer for fresh consideration. The assessee shall be at liberty to let in evidence to prove the fact that payments to sub-contractors were made on behalf of the main contractor and a provision was made in the books of account against debit balance with the sub-contractor. In other words, the assessee shall let in evidence to show that the liability was ascertained and incurred in the normal course of business.
Accordingly, this ground of appeal of the assessee is treated as partly allowed for statistical purpose.
The appellant may kindly be permitted to urge in view of recent decision of Supreme Court in J.K. Synthetics Ltd. v. CTO (supra) that interest of Rs. 7,95,042 under section 234B in so far as it is levied on disputed addition was not leviable and that the same may kindly be deleted.
We have already decided similar issue while deciding ground No. 6 for assessment year 1991-92 in ITA No. 48/Pn/1995 that charging of interest was mandatory and consequential and for the reasons stated therein, we dismiss this ground of appeal of the assessee.