1. The above appeal has been filed by the assessee having been aggrieved by the order of the CIT(A) dt. 16th June, 1998 for asst. yr.
1993-94 relating to the assessee.
2. The sole issue raised by the assessee in this appeal pertains to the addition of a sum of Rs. 10,99,552 being provision for bad and doubtful debts claimed by the assessee and allowed under Section 143(3) proceedings by the AO, by invoking the powers under Section 154 of the IT Act, 1961.
3. On careful consideration of the material available with the Tribunal and analysing the same in the light of the arguments advanced on behalf of both the parties, we find that the original assessment for the asst.
yr. 1993-94 was completed by the AO under Section 143(3) by order dt.29th March, 1996. Later on, AO issued notice to rectify the said order to disallow a sum of Rs. 10,99,552 on account of provision for bad and doubtful debts and loans and advances which was claimed by the assessee while filing the return and allowed by the AO in the proceedings under Section 143(3) by its order dt. 29th March, 1996. For this notice, the assessee gave a reply inter alia contending that the provision for doubtful debts claimed by the assessee is allowable deduction and accordingly it was allowed and the attempt of the AO to disallow the same by invoking powers under Section 154 of the Act, is not sustainable in as much as the scope of Section 154 does not comprehend such an action proposed by the AO. But, the learned AO after hearing the assessee and considering the material on record, passed the order rectifying the assessment by making an addition of Rs. 10,99,552, which was allowed as deduction claimed by the assessee.
4. Aggrieved by this order, the assessee went in appeal before the CIT(A) and the learned CIT(A) after hearing the assessee has passed the impugned order wherein it was held that the provision for bad and doubtful debts is not allowable deduction and it is a mistake apparent on record and thereby it falls within the scope of Section 154 of the IT Act, thereby, upheld the order of the AO by dismissing the appeal of the assessee. Hence, this appeal by the assessee before the Tribunal.
5. Both parties have argued vehemently as they have contended before the lower authorities. On careful consideration of both the Departmental orders, it was found that mere observation of this present issue falls within the purview of 'apparent mistake' under Section 154 of the IT Act, as envisaged, there is no reason given as to how it has come within the purview of Section 154 of the Act under "mistake apparent on record". The scope of Section 154 was examined comprehensively by the Hon'ble apex Court in the case of T.S. Baliam, ITO v. Volkart Brothers and Ors. . The scope of the term "mistake apparent on the record" was interpreted by the Hon'ble Supreme Court as obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. Now, analysing the facts available in the present case, we find that the assessee has claimed provision for bad and doubtful debts/loans and advances in the original return filed by it, that was accepted by the AO while making the assessment under Section 143(3) the scope of which, is more than the scope that was envisaged under Section 154 of the IT Act. On careful consideration of both the provisions that is Section 143(3) and Section 154 of the IT act, it is undisputed that the scope under Section 143(3), is more than the scope under Section 154 of the IT Act. As can be seen from the ratio laid down by the Hon'ble apex Court in the above referred case, the decision on a debatable point of law is not a mistake apparent from the record. Mere provision for bad and doubtful debts is to be considered depending upon the facts and circumstances of each and every case perceived. It may not be real, mere provision is not allowable under the Act. Whether such claim is allowable or not is to be adjudicated by long drawn process of hearing and reasoning. It was also held by the Hon'ble apex Court in the above said decision that a decision on debatable point of law is not mistake apparent from the record. The same proposition was laid down by the jurisdictional High Court of Bombay also rendered in the case of Sidhramappa Andannappa Manvi v. CIT wherein it was held that the power of the officers mentioned under Section 154 of the IT Act, 1961 is only to correct "any mistake apparent from the record". Similarly, the Hon'ble Madras High Court in the case of CIT v. O.Rm.M.Sm.Sv. Sevugan (1948) 16 ITR 59 (Mad) has considered the scope of Section 35 under 1922 IT Act, which is nothing, but Section 154 in IT Act, 1961, wherein it was observed by the Hon'ble Madras High Court that the powers of the authorities under the said section does not enable an order to be reversed, revised or reviewed, but, permits only such an error which is on the face of the record to be corrected. This position of the law was held by the Hon'ble jurisdictional High Court of Bombay as undisputable. In the said decision, the Hon'ble jurisdictional High Court of Bombay, stated supra, has considered the facts that a date was stated to have been taken as falling within the period under consideration by the authorities, whereas it was not actually so. Such a correction is allowable to be within the purview of Section 154 as it was Section 35 of the old Act. Whereas in the same case, that was admitted to be made, even the scope of the same section, the effect of a document made available on record which was held by the High Court that such an adjudication will not fall within the scope of Section 154 of the IT Act as it was Section 35 under the old IT Act, 1922. The Hon'ble High Court of Bombay has held in the said decision that the power is undoubtedly a limited power under Section 154. It is not a power of revision or review, but, it is limited to correcting only those mistakes which are apparent on the record. A mistake must be patent on the record; it must not be a mistake which can be discovered by a process of elucidation, or argument or debate. The mistake being patent on the record, rectification must be limited in correcting that mistake only without any further argument or debate. The rectification must follow as a necessary logical consequence of the mistake being found on the record. In the case that was considered by the Hon'ble apex Court, the Department has attempted to apply provisions of Section 17(1) of the IT Act, 1922 which can be interpreted in two diagonally opposite ways while considering such issue, the Hon'ble apex Court has held that such adjudication is not permissible within the scope of Section 154 of the IT Act.
6. From the facts of the present case on hand, it is, clear that the provision for bad and doubtful debts/loans and advances is allowable or not is to be decided basing upon the facts and circumstances available on each and every case in the light of the law available on the date of filing of return. It cannot per se made not allowable.
7. Apart from that, it is held by the Hon'ble jurisdictional High Court Bombay, in the case of CIT v. Sudhir S. Mehta that validity of order passed under Section 154 has to be judged in the light of law as is existed in the statute book on the date of order passed under Section 154. In the present case, the order under Section 154 was passed on 17th June, 1996. The Department's contention that the Explanation to Section 36, Sub-section 1, Clause (vii) of the IT Act, clearly speaks of disallowability of provisions of bad and doubtful debts but it is pertinent to note that this Explanation is inserted by the Finance Act, 2001 though with retrospective effect from 1st April, 1989. Thus, it is evident that this Explanation is not available for the period under consideration as well as on the date of passing of order under Section 154. It was held by the Hon'ble Supreme Court that the assessment is to be completed in accordance with the law available on the date of filing of the return. This proposition was laid down by the Hon'ble apex Court in the case of CIT v. Hindustan Electro Graphites Ltd. . Applying these two principles of the Hon'ble jurisdictional High Court as well as Hon'ble Supreme Court, we find that the original assessment order passed by the AO on 29th March, 1996 allowing the claim of provision for bad and doubtful debt made by the assessee is not in accordance with the law available on the date of filing of the return. However, the order dt. 17th June, 1996 of the AO passed under Section 154 basing on the Explanation attached to Section 36, Sub-section 1, Clause (vii) of the IT Act is not in accordance with the principle laid down by the Hon'ble High Court and Hon'ble Supreme Court stated supra, inasmuch as the Explanation is inserted by Finance Act, 2001, which is long after the date of order passed under Section 154. It is further held by the Hon'ble Supreme Court in the case of T.S. Balaiam, ITO v. Volkait Brothers and Ors. (supra) that a mistake must be obvious and patent and apparent on record and it must be obvious mistake and patent mistake and not something which can be established by long drawn process of reasoning on the points on which there may conceivably be two opinions. In the present case as stated supra, the scope of original assessment being done under Section 143(3) is wider than the scope under Section 154 of the IT Act. In that view of the matter also, the present order passed by the AO under Section 154 is not sustainable for legal scrutiny in the light of the propositions stated supra.
8. Hence, we are of the considered view that the Department has no authority to adjudicate such debatable issue while invoking the powers under Section 154 of the Act that too when the same relief was allowed to the assessee in a comprehensive enquiry that was conducted under Section 143(3) of the IT Act. Apart from that, as can be noticed from the orders of both the Departmental authorities, it required more reasoned order to be passed by them on this issue. That itself implies that the issue is not a mistake apparent on the record comprehending within the purview of Section 154 of the IT Act. In that view of the matter also, invoking the power under Section 154 of the IT Act, by the Departmental authorities is not at all sustainable for legal scrutiny, more so in the light of the Hon'ble apex Court view given in the above case stated supra. Thus, we find the issue raised by the assessee as meritorious and hereby allow the same by setting aside the order passed by the AO under Section 154 of the IT Act, which was confirmed by the CIT(A). Accordingly, the appeal of the assessee is hereby allowed.
1. I have carefully perused the order proposed by my learned Brother i.e. the Hon'ble JM. However, I have not been able to persuade myself to concur with the findings recorded, observations made, and conclusions arrived at by, my learned Brother. I therefore proceed to humbly place on record my views in the matter.
2. At the outset, I shall first point out certain observations, both factual and legal, made by my learned Brother with which I am not in agreement. These observations go to the root of the matter and hence they deserve to be highlighted for proper appreciation of the case.
They are as under: (i) The learned JM has proceeded (para 3 of his order) on the assumption that the notice under Section 154 was issued by the AO to rectify the assessment order by disallowing "...a sum of Rs. 10,99,552 on account of provision for bad and doubtful debts and loans and advances...." (emphasis, italicized in print, supplied).
The learned JM has carried that assumption further and observed in para 4 of his order that the "...learned CIT(A) after hearing the assessee passed the impugned order wherein it was held that the provision for bad and doubtful debts is not allowable deduction...." (emphasis, italicized in print, supplied). In para 6 of his order, the learned JM has further observed: "...it is clear that the provision for bad and doubtful debts/loans and advances is allowable or not is to be decided...." (emphasis, italicized in print, supplied). It was not even submitted by the assessee at any stage of the proceedings either before us or before the Departmental authorities that it was claiming allowance in respect of 'provision for bad and doubtful debts', as assumed in the order proposed by the learned Brother. Thus the learned JM has proceeded to decide the matter on the assumption that it was a claim amounting to Rs. 10,99,552 for 'bad and doubtful debts' which was disallowed by the AO and confirmed by the learned CIT(A). Perusal of the order passed by the AO under Section 154 and the appellate order passed by the learned CIT(A) confirming the order of the AO shows that it was not the claim for 'bad and doubtful debts' that was disallowed by the AO and confirmed by the learned CIT(A). The correct factual position, as explained in succeeding paragraphs of this order, is that the assessee had claimed not only bad debts written off as irrecoverable but also, in addition to the aforesaid, a further sum of Rs. 10,99,552 as 'provision for doubtful debts'. Claim of the assessee for bad debts written off was neither disallowed by the AO nor was the same a subject-matter of rectification under Section 154 nor was there any question of any appeal being filed against the same before the CIT(A). The subject-matter of rectification under Section 154 was the 'provision for doubtful debts' not written off as irrecoverable in the accounts of the assessee for the relevant previous year and not the 'provision for bad and doubtful debts' as assumed by the learned JM in his order.
(ii) While allowance for bad debts written off as irrecoverable in the accounts for the relevant previous year was available under Section 36(1)(vii), as it stood then, to any assessee, the allowance in respect of 'any provision for bad and doubtful debts' was not made available to all the assessees but only to a scheduled bank, a bank and a public financial institution under Section 36(1)(viia) as it stood then. The law itself, as it stood then, made a distinction between the classes of assessees in that it extended allowance for 'the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year1 to all the assessees but denied the allowance 'in respect of any provision for bad and doubtful debts made' to an assessee unless the assessee was a scheduled bank, a bank or a public financial institution. The learned CIT(A) has made a pointed reference to this aspect in para 6 of his order. He has observed: "....Provision for bad and doubtful debts are admissible only in the case of banking companies as per Section 36(1)(viia). It is true that the appellant-company is not a banking company. Since as per the claim made in the P&L a/c the amount has been shown as 'provision for doubtful debts' the question of considering it as 'bad debts' does not arise...." The aforesaid distinction made by law and pointedly referred to by the learned CIT(A), which was not even controverted by the assessee at the time of hearing before us, has somehow gone unnoticed in the order proposed by the learned JM. (iii) The learned Brother has proceeded on the assumption that the issue under consideration was not a mistake apparent from record within the meaning of Section 154 and hence was not amenable to the certificatory jurisdiction of the AO under Section 154 without due evaluation of the facts available on record and the provisions of Section 36(1)(vii) as amended from 1st April, 1989. This is amply evident from his observations in para 6 of his order that "...it is clear that the provision for bad and doubtful debts/loans and advances is allowable or not is to be decided basing upon the facts and circumstances available on each and every case in the light of the law available on the date of filing of return...."(emphasis, italicized m print, supplied). Underlined (italicised) portions of his observations do not reflect the correct factual and legal aspect of the case. In the appeal under consideration, it is not the allowability of the provision for bad and doubtful debts that is under consideration but only the dis-allowability of the provision for doubtful debts which is under consideration. As regards the next underlined portion of his observations that it is the law applicable on the date of filing of original return that, according to him, is applicable on the facts of the case, it should be sufficient to say that the aforesaid proposition holds good in penalty proceedings and not in other proceedings under the IT Act. In assessment and other proceedings, it is the law in force as on the first day of the assessment year that is required to be applied and not the law as in force on the date of filing the original return.
(iv) The learned JM has also taken note of the Explanation to Section 36(1)(vii) inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1989 and observed that the said Explanation could not be pressed into service as it was not available on the statute book at the relevant time and hence, to quote from his proposed order, "...this Explanation is not available for the period under consideration as well as on the date of passing of order under Section 154...." While making the aforesaid observations in para 7 of his order, the learned JM has relied upon the decision of the Hon'ble Supreme Court in CIT v. Hindustan Electro Graphites Ltd. without appreciating that the observations made by the Hon'ble Supreme Court in that case were in the context of levy of additional tax under Section 143(1A) which, according to the Hon'ble Supreme Court, bore the imprint of a penalty. It is well-settled that the legal principles governing levy of penalty are different from those governing taxability of income in assessment/rectificatory proceedings. Secondly, the learned JM has not. perhaps noticed that the correctness of the observations made in Hindustan Electro Graphite has since been doubted by a larger Bench of the Supreme Court in Asstt. CIT v. J.K. Synthetics Ltd. . Thus, the order proposed by the learned JM proceeds on the basis of a few observations made in Hindustan Electio Graphite without considering the context in which they were made as also the fact that the correctness of those observations has since been doubted by a larger Bench of the Hon'ble Supreme Court.
He has also ignored the binding decisions of the larger Benches of the Supreme Court.
(v) Reference to Explanation inserted in Clause (vii) of Sub-section (1) of Section 36 by the Finance Act, 2001 with retrospective effect from 1st April, 1989 has been made in the order proposed by the learned JM for the proposition that the said Explanation was not available at the relevant point of time as also on the date of passing the order under Section 154 (para 7 of his order) and hence the Revenue could not press the same to provide validity to the rectification order. In other words, the exercise of jurisdiction under Section 154 by the AO cannot be considered, according to the learned JM, in the light of the retrospective legislation notwithstanding the fact that it was specifically made retrospectively operative from 1st April, 1989. My difference with the aforesaid observations made by the learned JM is on two counts.
First, the said Explanation was not taken into account by the Departmental authorities as not been enacted till then. The case of the Revenue was that Clause (vii) of Sub-section (1) of Section 36, as it stood then, permitted allowance for bad debt or any part thereof written off as irrecoverable in the accounts for the previous year and that the case of the assessee was hit by the aforesaid clause itself as the assessee after having claimed allowance for bad debts written off as irrecoverable in the accounts for the previous year was seeking further allowance for the provision for doubtful debts without writing off the same as irrecoverable which was clearly outside the scope of Clause (vii).
The short issue is whether the assessee is eligible to claim allowance not only for bad debts written off as irrecoverable in the accounts but also for the provision for doubtful debts not written off as irrecoverable in the accounts of the previous year. Section 36(1)(vii) permitted allowance for bad debts written off as irrecoverable in the accounts for the previous year but it did not permit allowance in respect of provision for doubtful debts which was specifically covered by Sub-Clause (viia) of Sub-section (1) of Section 36. There is no dispute that Section 36(1)(viia) has no application to the case of the assessee. The learned JM has not considered this aspect. Second, which is independent of and without prejudice to the aforesaid, the Explanation has now been inserted in Clause (vii) of Sub-section (1) of Section 36 by the Finance Act, 2001 with retrospective effect from 1st April, 1989. The learned JM holds the view that the retrospective legislation was not in existence at the time of passing the order under Section 154 and hence the Tribunal should ignore the same. The settled proposition emerging from a catena of decisions is that a retrospective legislation once enacted is, by fiction, deemed to be in force at the relevant time and hence cannot be ignored. The irresistible conclusion is that when the law is amended with retrospective effect, the fiction is that all actions must be judged on the basis of retrospective legislation as if it was in existence otherwise the underlying purpose of enacting retrospective legislation would be completely frustrated.
3. It is because of non-consideration of the relevant factual and legal aspects of the case in the order proposed by the learned JM that I now proceed to record my views. Starting with a positive note, I am in complete agreement with my learned Brother that the jurisdiction of the AO under Section 154 is restricted to rectifying the mistakes which are apparent from the record. In other words, the AO has no jurisdiction to rectify the mistakes which are of debatable nature or which require to be established by a long drawn process of reasoning or which require investigation into facts. Contentious or debatable issues are thus plainly outside the scope of Section 154 of the IT Act. What is however required to be seen, on the facts and in the circumstances of the case before us, is whether there is any genuine debate or controversy either with regard to the facts or with regard to law being applied to those facts. A matter does not become debatable or open to two views unless it is shown to be so and a finding is recorded to that effect on objective consideration and evaluation of all the relevant facts and the law applicable thereto. At the same time, mere omission on the part of the AO to allow a claim without applying the relevant statutory provisions about which there is no debate to a set of clear and undisputed facts has been held to be a mistake apparent from record capable of being rectified under Section 154 of the IT Act, 1961. It may therefore not be appropriate to term each and every mistake being rectified under Section 154 as debatable or non-debatable without objectively considering the relevant facts on record and the provisions of law applicable thereto.
4. Facts of the case are in a narrow compass and are as follows: The appeal filed by the assessee relates to the asst. yr. 1993-94 and is directed against the order of the learned CIT(A) confirming the action of the Assessing Officer ('AO' in short) in disallowing the 'provision for doubtful debts, loans and advances' by order under Section 154 of the IT Act claimed by the assessee in addition to the amount of bad debt written off as irrecoverable in the accounts. Assessment was completed under Section 143(3) on a total income of Rs. 16,67,37,170 after which the AO noticed that the assessee had debited a sum of Rs. 10,99,552 to the P&L a/c under the head "provisions for doubtful debts, loans and advances" which was not allowable under Section 36(1)(vii) of the IT Act, 1961 ('Clause (vii)' in short) as the assessee had separately claimed allowance for bad debt written off as irrecoverable in its accounts. The AO, therefore, issued a notice under Section 154 seeking to rectify what he considered to be a mistake apparent from record in overlooking the provisions of Section 36(1)(vii) of the IT Act, 1961 ('Clause (vii)' in short) and thereby allowing a sum of Rs. 10,99,552 being 'provision for doubtful debts/loans and advances' over and above the allowance for bad debt written off as irrecoverable in the accounts, at the time of assessment, which was clearly, according to the AO, not permissible. The assessee objected to the rectification proposed by the AO in the following words: No rectification order under Section 154 of the IT Act 1961 can be passed to disallow the provision for doubtful debts amounting to Rs. 10,99,552 for asst. yr. 1993-94 because there is no apparent mistake which can be rectified and hence Section 154 has no application.
This issue is controversial in the sense that the matter has gone to the High Courts in other cases and three High Courts have decided in favour of the assessee in the following cases: (iii) Sarangpur Cotton Manufacturing Co. Ltd. v. CIT (1982) 31 CTR (Guj) 247 : (1983) 143 TTR 166 (Guj) Since our client-company has debited an amount of Rs. 10,99,552 as provision for doubtful debts in the P&L a/c, it constitutes write off of debt and this satisfies the requirements laid down in Section 36(2). The Courts have taken the view in the above cases that the debt can be said to be written off if the amount thereof is debited to P&L a/c and credited to provision for doubtful debts account.
Since the jurisdictional High Court has held in favour of the assessee, it is binding on you and you cannot resort to Section 154 as there is no mistake apparent from records in this matter.
5. After considering the objections filed by the assessee, the AO carried out the proposed rectification by which he disallowed the aforesaid sum being provision for doubtful debts/loans and advances.
The AO has recorded following facts in the order passed by him under Section 154: ...The assessee-company had given the break-up of the provisions of bad debts as follows:____________________________________________________________________________________________________________________________________________________________________Opening balance 1.4.1993 288245.12 7004858.96 7293104.08Addition during 1992-93 (+) 601167.69 520583.67 1121751.36Written off during 1992-93 (-) 22200.00 22200.00As per balance sheet as on 31.3.1993 867212.81 7525442.63 8392655.44__________________________________________________________________________________ It is evident from aforesaid accounting procedure that the assessee itself distinguishes between a debt actually written off and provision for doubtful debts.
(Certain grammatical mistakes in last two lines of the order have been corrected) 6. Facts as stated in the order passed by the AO including the aforesaid table given therein were not disputed by the assessee at the time of hearing before us.
7. Following facts clearly emerge on perusal of the order passed by the AO under Section 154.
(i) The assessee was seeking allowance of Rs. 10,99,552 under Section 36(1)(vii), being provision for doubtful debts, over and above the allowance for bad debt which it had written off as irrecoverable in its accounts for the relevant previous year. During the year, the assessee showed addition of Rs. 11,21,751 to doubtful debts/advances out of which the amount actually written off as irrecoverable was shown at Rs. 22,200 only. It is quite apparent from the assessee's own details that a sum of Rs. 22,200 alone was written off as irrecoverable in the accounts of the assessee. Thus, the assessee itself treated the amount of bad debts written off as irrecoverable as separate and distinct from the provision for doubtful/debts advances amounting to Rs. 10,99,552.
(ii) The objection raised by the assessee before the AO to the rectification proposed by him was with reference to the pre-amended provisions of Section 36(2) and not with reference to the amended provisions of Section 36(1)(vii) which required the AO to grant allowance only if a bad debt was actually written off as irrecoverable in the accounts of the assessee for the relevant previous year.
(iii) It was not even the case of the assessee before the AO that the provision for doubtful debts was irrecoverable. The objection filed by the assessee before the AO and reproduced above was silent on this crucial point.
(iv) Perusal of the assessment order shows that the AO overlooked the statutory provisions of Section 36(1)(vii) while completing the assessment under Section 143(3) and thereby allowed the claim of the assessee under Section 36(1)(vii) amounting to Rs. 10,99,552 (provision for doubtful debts, loans and advances) over and above the amount of bad debt actually written off as irrecoverable in the accounts of the assessee.
8. On appeal, the learned CIT(A) has confirmed the order passed by the AO under Section 154 of the IT Act. It is against this order that the assessee is in appeal before the Tribunal.
9. On this factual matrix, the short issue for consideration is whether the allowance, being provision for doubtful debts/advances, claimed by the assessee and granted by the AO under Section 36(1)(vii) in addition to the allowance for bad debt actually written off by the assessee as irrecoverable in its accounts while completing the assessment under Section 143(3), constituted a mistake apparent from the record within the meaning of Section 154 authorising the AO to pass the order under Section 154 so as to amend the assessment order and rectify the said mistake by restricting the allowance to bad debt written off as irrecoverable in the accounts of the assessee, or, in other words, by withdrawing the allowance in respect of the provision for doubtful debts granted by him in addition to the allowance for bad debt written off as irrecoverable in the accounts. The matter revolves around the issue as to whether the assessee is entitled to one allowance i.e.
allowance for bad debt written off as irrecoverable in its accounts for the previous year or two distinct allowances i.e. allowance for bad debt actually written off as irrecoverable in its accounts as also the allowance in respect of provision for doubtful debts not written off as irrecoverable, in addition to the aforesaid bad debt.
10. Section 36(1)(vii) as it originally stood at the relevant point of time, i.e., asst. yr. 1993-94 reads as under: 36. Other deductions. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing with the income referred to in Section 28 (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; Explanation was inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1989.
11. At the time of hearing, the learned Counsel for the assessee pointed out that the order under Section 143(3) was passed by the AO on 29th March, 1996. The order of rectification, according to the learned Counsel for the assessee, was passed by the AO on 17th June, 1996.
According to him, Explanation to Clause (vii) of Sub-section (1) of Section 36 was inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1989 to the effect that any debt or part thereof written off as irrecoverable in the accounts of the assessee, shall not include any provision for bad and doubtful debts in the accounts of the assessee. He pointed out that the said Explanation was not available on the statute book either on the day when the assessment order was passed or on the day when the order under Section 154 was passed by the AO.According to him, the issue as to whether the provision for doubtful debts was allowable under Section 36(1)(vii) was debatable on the day on which rectification was carried out and hence the AO was not competent to carry out the impugned rectification on 17th June, 1996.
He relied upon the judicial authorities cited by the assessee before the AO to prove his point that the subject-matter of rectification was of debatable nature and hence urged that the order of rectification passed by the AO and confirmed by the CIT(A) should be quashed and the appeal allowed. He also relied upon an unreported decision of the Bangalore Bench of the Tribunal in Wipro Information Technology Ltd. v.Dy. CJT, ITA No. 651/Bang/1994 [reported at (2004) 88 TTJ (Bang) 778Ed.
He has also filed a short note containing submissions as above.
12. The learned Departmental Representative, on the other hand, supported the orders of the Departmental authorities.
13. Rival submissions have been carefully considered. Departmental authorities have examined the matter with reference to the provisions of Section 36(1)(vii) as they existed at the relevant time without Explanation as the Explanation had not been enacted till then. The legality of their orders has therefore to be first examined with reference to the aforesaid provisions without applying the Explanation.
Section 36(1)(vii) as it stood at the material point of time granted allowance to an assessee for a bad debt written off as irrecoverable in his accounts. There is nothing in the said provisions to indicate that an assessee could claim and get allowance for any other debt or doubtful debt in addition to the bad debt written off as irrecoverable in his accounts. The assessee itself has made a distinction between a bad debt which it had actually written off as irrecoverable in its accounts and the provision for doubtful debts which it had not written off as irrecoverable in its accounts. In such a situation, the assessee is not entitled to claim allowance under Section 36(1)(vii) for any other amount in addition to the amount of bad debt which it has written off as irrecoverable in its accounts. Since the assessee has separately written off bad debt amounting to Rs. 22,200 as irrecoverable in its accounts for the relevant previous year, the allowance under Section 36(1)(vii) is required to be restricted to that amount alone. The assessee cannot seek allowance of two distinct amounts, one for bad debt actually written off as irrecoverable in the accounts of the previous year and the other for the 'provision for doubtful debts' which it has not written off as irrecoverable in its accounts. On the face of it, Clause (vii) does not extend the allowance both for the bad debts actually written off as irrecoverable in the accounts for the previous year as also for the provision for doubtful debts. Since the allowance under Section 36(1)(vii) is restricted to the amount of bad debt written off as irrecoverable in the accounts of the assessee, hence, the AO is justified in restricting the allowance to that amount only. The AO has no discretion or jurisdiction to enlarge the scope of allowance available under Section 36(1)(vii).
14. Perusal and comparison of the provisions of Sub-Clause (vii) and (viia) of Sub-section (1) of Section 36 shows that while Clause (vii) deals with the allowance for bad debt written off as irrecoverable in the accounts of the assessee for the previous year, Clause (viia) deals with the allowance in respect of 'provision for bad and doubtful debts'. These two heads of allowances have been distinctly treated by law. They are mutually exclusive and. do not overlap. If an assessee wants to claim 'provision for bad and doubtful debts' as allowance, he has to satisfy the statutory conditions laid down in Clause (viia). If he wants to claim allowance for bad debt, he has to satisfy the conditions laid down in Clause (vii). With this sharp distinction created by law and pointedly referred to by the learned CIT(A) in his order, it is no longer possible to allow both the items i.e. bad debt written off as irrecoverable in the accounts of the assessee for the previous year as also the allowance in respect of 'provision for bad and doubtful debts' under Section 36(1)(vii). With the insertion of Clause (viia), allowance in respect of provision for bad and doubtful debts is no longer available to any assessee other than the one fulfilling the statutory conditions of Clause (viia). There is no dispute or debate in this behalf after the amendment of law w.e.f. 1st April, 1989, i.e., for and from asst. yr. 1989-90.
15. The assessee has cited a few judicial authorities (citations given above) in support of its submission that mere provision for doubtful debts is sufficient enough to constitute write off of the debt. Perusal of the decisions cited by the assessee shows that, in none of the aforesaid decisions, it has been held that an assessee would be entitled to claim allowance under Section 36(1)(vii) for any amount in addition to the bad debt actually written off as irrecoverable in his accounts. Here is a case where the assessee has already claimed and the AO has allowed allowance for bad debt shown by the assessee to have been written off as irrecoverable in its accounts. Having availed the allowance for bad debt written off as irrecoverable in the accounts, the assessee cannot seek additional allowance in respect of 'provision for doubtful debts' over and above the one for bad debt written off as irrecoverable in the accounts. The decisions cited by the assessee are clearly distinguishable on facts.
16. Section 36(1)(vii) requires the bad debt to be written off as irrecoverable in the accounts of the assessee. It is the irrecoverability of the debt that is decisive as Section 36(1)(vii) grants allowance for a bad debt written off as 'irrecoverable' in the accounts of the assessee. The mere fact that a provision has been made does not by itself mean that the provision so made has been written off as irrecoverable. What is required by Section 36(1)(vii) is not a provision or mere write off of a debt. It requires the assessee to satisfy that what is being claimed is nothing but a bad debt which has been written off as irrecoverable in the accounts. Thus, mere provision or write off is not sufficient for claiming allowance under Section 36(1)(vii). In ITO v. Ashok Kumar Laht Kumai (1995) 52 ITJ (Ahd) 173 : (1995) 53 ITD 326 (Ahd), cited with approval in ITO v. Anil H. Rastogi (2003) 80 ITJ (Mumbai)(TM) 696 : (2003) 86 ITD 193 (Mumbai)(TM), the position has been explained as under: "....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(1)(vii) and Section 36(2) made by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989 which is applicable from asst. yr. 1989-90. The old provision as it existed prior to 1st April, 1989 provided that the debt must be established to have become bad in the previous year. This led to 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." Mere provision or writing off of a debt is not by itself sufficient as the provisions of Section 36(1)(vii) require the bad debt to be written off as irrecoverable in the accounts. Perusal of the reply/explanation given by the assessee before the AO shows that it was not the case of the assessee before him or even before the CIT(A) or before us that the allowance in respect of 'provision for doubtful debts' claimed under Section 36(1)(vii), over and above the amount of bad debt written off as irrecoverable in the accounts, was also irrecoverable.
17. It is quite apparent that the claim of the assessee for allowance under Section 36(1)(vii) was tenable to the extent of Rs. 22,200 being bad debt which was also written off as irrecoverable in its accounts.
This position emerges on bare perusal of the details submitted by the assessee before the AO at the time of assessment. This position is self-evident on perusal of assessee's own details. No further enquiry is needed to establish that position. Assessee is bound by its own facts. However, the AO simply overlooked the matter at the assessment stage without taking note of the aforesaid facts available on his record and the mandatory statutory provisions of Section 36(1)(vii).
The issue now is whether the said mistake in wrongly allowing the provision for doubtful debts without noticing the relevant statutory provisions, as they originally stood, is capable of being rectified under Section 154. It is now settled by the decision of the Hon'ble Supreme Court in Kaiamchand Piemchand (P) Ltd. v. CIT and several other decisions that a decision rendered without taking note of a statutory provision can supply a ground for rectification.
Decisions in CIT v. Quilon Marine Produce Co. and CIT v. Kesaria Tea Co. Ltd. are also quite apposite. The Kerala High Court has held in Quilon Marine Produce Co. (supra), following the decisions of the Supreme Court as referred to in Quilon Marine Produce, that overlooking of a mandatory provision of law which allows no discretion to the taxing authorities is a mistake apparent from the record. In the present case, there is no doubt that the provisions of Section 36(1)(vii) gave no discretion to the AO to allow 'provision for doubtful debts' in addition to the bad debts written off as irrecoverable in the accounts of the assessee. The mistake in allowing the said claim at the assessment stage was self-evident on the facts submitted by the assessee and on the plain language of Section 36(1)(vii), as it stood then, and was therefore, in my humble view, rectifiable under Section 154. On this ground alone, the appeal filed by the assessee is liable to be dismissed. I order accordingly.
18. Having held that the case of the assessee was squarely hit by the plain words of Clause (vii), as it stood then, even in the absence of the Explanation, it may be relevant to mention that the Explanation inserted in Clause (vii) has simply clarified/explained what was already inherent in Clause (vii). Explanation in Clause (vii) has now highlighted the position with clarity. It has not amended the law on the subject. The learned Counsel for the assessee was forthright in admitting that the case of the assessee was squarely hit by the said Explanation. His submission, however, was that the said Explanation was neither in existence nor in contemplation when the rectification was carried out and hence the said Explanation could not be pressed into service to show that the mistake was apparent on the day on which the rectification was carried out. The case of the Department, on the other hand, was that the Explanation being retrospective in nature was fictionally part of Section 36(1)(vii) right from the date from which the Explanation was made retrospectively operative. My learned Brother has, while accepting the aforesaid submissions of the assessee and rejecting the aforesaid submissions of the Department, has observed in para 7 of the order proposed by him as follows: "Thus, it is evident that this Explanation is not available for the period under consideration as well as on the date of passing of order under Section 154." While coming to the aforesaid conclusion, the learned JM has relied upon the decision of the Hon'ble Supreme Court in CIT v.Hindustan Electro Graphites Ltd. (supra) and the decision of the Hon'ble Bombay High Court in CIT v. Sudhir S. Mehta to which a reference shall be made a little later in this order. Though it is agreed that the said Explanation hits the case of the assessee, the objection is that the Explanation cannot be pressed into service as it was not available on the statute book at the relevant time when rectification was carried out. To this limited extent, the issue is open for examination.
19. The purpose which the Explanations in the statutes serve is well known and hence needs no reiteration. This is more so when the Explanation is inserted with retrospective effect. The Explanation has simply clarified what the law was even before the Explanation was inserted. Before the insertion of Explanation also, the assessee was entitled to only one allowance under Clause (vii) i.e. allowance for bad debt written off as irrecoverable in the accounts of the previous year of the assessee and not to two allowances i.e. allowance for bad debt as also allowance in respect of provision for doubtful debt. The aforesaid legal position has not been altered by the Explanation. The Explanation has simply clarified and confirmed the aforesaid legal position and not that it has altered the statutory basis or conditions for allowance under Section 36(1)(vii). The case of the assessee was hit by Section 36(1)(vii) as it existed at the material point of time when rectification was carried out. And it is now hit by the Explanation also which has since been inserted in Section 36(1)(vii).
20. However, the learned JM is of the view that the Explanation should not be considered by the Tribunal at this stage as it was not originally available when the assessment was made or rectification order was passed. It may be clarified that the absence of Explanation in Section 36(1)(vii) as it then stood will really not save the case of the assessee, for the reasons given above, from being hit by Section 36(1)(vii) as it stood then. However, without prejudice to the aforesaid, it is difficult to accept the submission of the learned Counsel that the Explanation inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1989 should not be considered at this stage only on the ground that it was enacted later. It has been authoritatively held by a three-Judge Bench of the Hon'ble Supreme Court in M.K. Venkatachalam v. Bombay Dyeing & Mfg. Co. Ltd. that if you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. While rejecting a similar view, the Hon'ble Supreme Court held: ...The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs". Thus, there can be no doubt that the effect of the retrospective operation of the Amendment Act is that the proviso inserted by the said section in Section 18A(5) of the Act would, for all legal purposes, have to be deemed to have been included in the Act as from 1st April, 1952.
21. In my humble view, the issue is squarely covered by the law laid down by a three-Judges Bench of the Hon'ble Supreme Court in Asstt. CIT v. J.K. Synthetics Ltd. (supra). In J.K. Synthetics, the facts of the case were that the assessee had returned net loss. After making prima facie adjustments under Section 143(1)(a), the amount of loss stood reduced. The AO levied additional tax on the assessee under Section 143(1A). On a writ petition challenging the levy of additional tax, the High Court held that reduction in loss which did not result in converting the loss returned into profit did not attract additional tax. The Department carried the matter in appeal to the Hon'ble Supreme Court, and in the meantime, the provisions of Section 143(1A) were retrospectively amended with effect from the date when the said provisions had come into force. On these facts, the Hon'ble Supreme Court held: The substituted Sub-section (1A), therefore, made it clear that even where the loss declared by an assessee had been reduced by reason of adjustments made under Sub-section (1)(a), the provisions of Sub-section (1A) would apply. This being a retrospective amendment, it covers the controversy in this appeal and, therefore, the appeal would have to be decided in favour of the Revenue.
22. The facts of the case in the present appeal are quite comparable with those in J.K. Synthetics (supra). In J.K. Synthetics (supra), additional tax was charged under the provisions which were not as specific as the retrospective amendment of Sub-section (1A) of Section 143 made them to be. The retrospective legislation was not available when the order was passed levying the additional tax. Retrospective legislation was inserted when the matter had already been decided by the High Court in favour of the assessee and had reached the Supreme Court. Nevertheless, the Hon'ble Supreme Court took note of the retrospective legislation and held the levy of additional tax as valid.
It needs to be remembered that the issue in the case of J.K. Synthetics (supra) related to levy of additional tax whereas, in the case of the present assessee, the issue is simply of disallowing the claim for bad debts in the light of the Explanation to Clause (vii) of Sub-section (1) of Section 36 and thus the case of the assessee stands, on a factual spectrum, on a better footing than those in J.K. Synthetics (supra). Respectfully following the same, I have no hesitation to hold that the said Explanation would always be deemed to have been on the statute book right from the date from which it has been made operative i.e., w.e.f. 1st April, 1989 and, in this view of the matter, I am unable to accept the proposition that the said Explanation was not available during the assessment year under appeal or as on the date of rectification carried out by the AO.23. The learned JM has, however, relied upon the decision of a two-Judges Bench of the Hon'ble Supreme Court in CIT v. Hindustan Electro Graphites Ltd. (supra) for the proposition, to quote from his order, that "...the assessment is to be completed in accordance with the law available on the date of filing of the return." With utmost respect, I do not find any such proposition having been laid down in the said judgment that an income-tax assessment is to be completed in accordance with the law applicable on the date of filing of the return.
I quote from what the Hon'ble Supreme Court has, while citing a passage from its own judgment in CIT v. Onkar Saran & Sons , observed in Hindustan Electro Graphites: "....This Court said that even in a case where a return is filed in response to a notice under Section 148 involving an element of concealment, the law applicable would be the law as it stood at the time when the original return was filed for the assessment year in question and not the law as it stood on the date on which the return was filed in response to notice under Section 148." Thus, the applicability of law as prevailing on the date of filing original return is relevant, as held in the aforesaid judgment itself, for the purposes of levy of penalty for concealment. It is fairly well-settled by a catena of decisions, which are too well-known to warrant any reference to them here, that the law applicable to income-tax assessments is the law in force on the first day of the assessment year and not on the date of filing the original return. Be whatever it may, the present appeal does not relate to the levy of penalty or additional tax under Section 143(1A) as was the case in Hindustan Electro Graphites (supra). It has, however, not been held by the Hon'ble Supreme Court in Hindustan Electro Graphites (supra) that retrospective legislation would not be applicable to the assessment year to which it is expressly made retrospectively applicable merely by reason of its being enacted later. It is difficult to read any such proposition in the said judgment. No such proposition of law as is attributed to the said judgment emerges on its careful perusal.
24. In order too properly appreciate the judgment' of the Hon'ble Supreme Court in Hindustan Electro Graphites (supra), a brief reference to the facts involved in that case would be useful. In Hindustan Electro Graphites, the assessee had filed its return of income for asst. yr. 1989-90 on 29th Dec, 1989. Clause (iiib) was inserted in Section 28 of the IT Act by the Finance Bill of 1990 which became the Finance Act on receiving the assent of the President of India on 31st May, 1989 (sic-1990). Clause (iiib) was given retrospective operation w.e.f. 1st April, 1967. Clause (iiib) brought to tax "cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India." The Hon'ble Court observed that, before the insertion of Clause (iiib), cash assistance received by any person on exports under any scheme of the Government of India could not be charged to income-tax under the head "profits and gains of business or profession". The assessee did not disclose the cash assistance received by it for asst. yr. 1989-90 in the return of income filed on 29th Dec, 1989 as the retrospective legislation was inserted much after the filing of return. The AO however brought the cash assistance received to tax and also charged additional tax under Section 143(1A) on the prima facie adjustments so made as a result of retrospective legislation. Dismissing the appeal filed by the Revenue, the Hon'ble Supreme Court held: ...It is true that income by way of cash compensatory support became taxable retrospectively w.e.f. 1st April, 1967, but that was by amendment of Section 28 by the Finance Act of 1990 which amendment could not have been known before the Finance Act came into force.
Levy of additional tax bears all the characteristics of penalty.
Additional tax was levied as the assessee did not in his return show the income by way of cash compensatory support. The AO on that account levied additional income-tax. No additional tax would have been leviable on the cash compensatory support if the Finance Act, 1990, had not so provided even though retrospectively. The assessee could not have suffered additional tax but for the Finance Act of 1990. After he had filed his return of income, which was correct as per law on the date of filing of the return, it was thereafter that the cash compensatory support also came within the sway of Section 28. When additional tax has the imprint of penalty, the Revenue cannot be heard to say that the levy of additional tax is automatic under Section 143(1A) of the Act.
25. It is clear from the aforesaid passage that the observations made therein relate to two distinct matters. One, the Hon'ble Court noted that cash assistance became taxable as a result of retrospective legislation though cash assistance was not taxable when the return of income was filed. Retrospective legislation in the said case was also enacted much after the return of income had been filed but full effect to the retrospective legislation was given from the date from which it was made operative and not from the date it was enacted. The aforesaid position is quite clear on perusal of the aforesaid position. There is nothing in the decision in Hindustan Electro Graphites (supra) to suggest that retrospective legislation should not be given effect from the date from which it is made operative. Thus the decision in the said case, instead of assisting the assessee in the case before us, supports the case of the Revenue that retrospective legislation operates from the date from which it is made operative and not from the date on which it is enacted. Two, as regards levy of additional tax, the Hon'ble Court observed that additional tax had the imprint of penalty and hence the Revenue could not be heard to say that the levy of additional tax was automatic under Section 143(1A). It is in this background that the Hon'ble Supreme Court held that the return was correct on the date on which the return was filed and hence additional tax was not leviable.
It may, however, be relevant to mention that the correctness of the decision in Hindustan Electro Graphites has been doubted by a larger Bench of the Supreme Court in J.K. Synthetics (supra) with the following observations: Learned Counsel for the assessee, however, relied upon the judgment of a Bench of two learned Judges of this Court in CIT v. Hindustan Electro Graphites Ltd. . This was a case in which the return that the assessee had filed was correct by reason of the law as it stood when the return was filed. A retrospective amendment of Section 28 of the Act rendered that return incorrect. An adjustment in the return was made under Sub-section (1) of Section 143 and, therefore, the provisions of Sub-section (1A) were sought to be invoked. This was challenged and the High Court upheld the challenge, as did this Court. It took the view that the additional penalty under Sub-section (1A) bore the imprint of a penalty and no penalty could be levied because the return filed by the assessee was correct when it was filed. This judgment has no application to the facts of the present case for the reason that it is nobody's case that a retrospective amendment has rendered a correct return filed by the assessee incorrect. The question here is only whether a loss which is reduced by reason of the application of the provisions of Sub-section (1)(a) falls within the ambit of Sub-section (1A).
We should add that we have reservations about the correctness of the judgment in Hindustan Electro Graphites Ltd. 's case (supra) principally because the assessee in that case had not challenged the provisions of Sub-section (1A).
26. In view of the above, it is the law declared in J.K. Synthetics (supra) that has binding effect on us and not the law, and that too with regard to levy of additional tax which bore the imprint of penalty, declared in Hindustan Electro Graphites (supra).
27. The learned JM has strongly relied upon the decision in CIT v.Sudhir S. Mehta (supra) for the proposition that "validity of order passed under Section 154 has to be judged in the light of the law as it existed in the statute book on the date of order passed under Section 154". Facts of the case in Sudhir S. Mehta (supra) deserve to be noted first. In that case, notice dt. 7th Nov., 1990 under Section 148, as it stood at the material point of time, was given by the AO to the assessee asking the assessee to file a return of his income within thirty days. It was submitted before the Tribunal that initiation of reassessment proceedings was bad in law and void as the notice dt. 7th Nov., 1990 issued by the AO was contrary to Section 148 as it stood at the relevant time. The Tribunal accepted the aforesaid plea and passed order accordingly on 26th June, 1996. After the Tribunal had passed the order the law was amended retrospectively w.e.f. 1st April, 1989 by which the term "not being less than thirty days" in Section 148 stood deleted. The Department moved an application under Section 254(2) seeking amendment of the order passed by the Tribunal on 26th June, 1996 on the ground that with the change in law retrospectively from 1st April, 1989, the order dt. 26th June, 1989 needed rectification.
Application filed by the Department was dismissed by the Tribunal on the ground that there was no apparent error on record as the Amending Act received the assent of the President nearly three months after the Tribunal had passed the order. Appeal against the order of the Tribunal was dismissed by the Hon'ble High Court. The said decision, in my view, does not assist the assessee in the case before us because of the substantial difference in the factual spectrum of the two cases. In the case before us, the short issue is whether the omission on the part of the AO in overlooking the provisions of Section 36(1)(vii) and thereby wrongly allowing the claim of the assessee which was not admissible in law as existing then is rectifiable. In the case before us, Section 36(1)(vii) was very much in existence on the statute book when the assessment was made. The admitted facts on record did not make the assessee eligible for allowance of "provision for doubtful debts" as the allowance under Section 36(1)(vii) was restricted to only "bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year." Thus it is Section 36(1)(vii) as existing on the statute book which debarred the assessee from getting allowance in respect of provision for doubtful debts in addition to allowance for bad debt written off as irrecoverable in its accounts. It was only the Explanation, and not the main provisions, which was inserted after the assessment had been completed. The Explanation simply explained, by way of clarification, what was provided in Section 36(1)(vii) so as to reduce litigation. It is a case which the Departmental authorities did not build on the said Explanation. Now that the Explanation has come into existence with retrospective effect and hence the question is whether the Tribunal should ignore or give full effect to the same. 'Hon'ble Supreme Court has not ignored retrospective legislation in J.K. Synthetics (supra) though it was enacted much after the passing of the order by the Departmental authorities, the Tribunal and the High Court. We cannot obviously ignore the Explanation. In CIT v. Straw Products Ltd. , the Hon'ble Supreme Court cited the following passage from its judgment in CST v. Bijlee Cotton Mills (1964) 15 STC 656, 664-65 (SC), with approval: ...If the law which the Tribunal seeks to apply to the dispute is amended, so as to make the law applicable to the transaction in dispute, it would be bound to decide the question in the light of the law so amended. Similarly, when the question has been referred to the High Court and in the meanwhile the law has been amended with retrospective operation, it would be the duty of the High Court to apply the law so amended if it applies. By taking notice of the law which has been substituted for the original provision, the High Court is giving effect to legislative intent and does no more than what must be deemed to be necessarily implicit in the question referred by the Tribunal....
Court has held: "....At a time when the appeals came up before the Tribunal, Section 80J of the Act has been amended, according to the Tribunal, in support of the view taken by the Revenue. The Tribunal was duty bound to give effect to the law as amended. By failing to do it, it abdicated its duty...." (i) On the factual side of the case, the position admitted by the assessee was that the assessee was seeking allowance for "provision of doubtful debts, loans and advances" without any evidence on record to show that it was irrecoverable and hence written off as such in the accounts of the assessee for the relevant previous year.
It was not even argued by the assessee that the provision in question had become irrecoverable and therefore written off in the accounts of the assessee for the previous year. On the contrary, the AO has recorded a categorical finding that bad debt has been separately shown and written off as irrecoverable in the accounts of the assessee and hence he has held that the amount in question was simple provision for doubtful debts which was outside the purview of Section 36(1)(vii). The finding of the AO as upheld by the learned CIT(A) that the provision for doubtful debts was neither a bad debt nor was it shown to be irrecoverable nor written off as irrecoverable in the accounts of the assessee, is, therefore, confirmed. The learned JM has not recorded any finding contrary to the aforesaid in his draft order.
(ii) The claim of the assessee for allowance of 'provision for doubtful debts, loans and advances' in addition to allowance for bad debt written off as irrecoverable in the accounts was clearly outside the scope of Section 36(1)(vii), as it existed at the time when the assessment order was passed by the AO. The said claim was also not admissible under Clause (viia) of Sub-section (1) of Section 36 as the requisite conditions prescribed therein were not fulfilled by the assessee.
(iii) Under the post amended law (w.e.f. 1st April, 1989) contained in Section 36(1)(vii), there is no dispute or debate that it is only a bad debt written off as irrecoverable in the accounts of the assessee for the relevant previous year, which alone qualifies for allowance. No judgment or authority has been cited before us to suggest that there was any genuine controversy or debate even after the amendment of law that a mere provision for doubtful debts made in the accounts for the previous year would still qualify for allowance under Section 36(1)(vii) for and from asst. yr. 1989-90 in addition to the bad debt written off as irrecoverable in the accounts. It is fairly settled that the assessee is entitled to one allowance under Section 36(1)(vii) and that is for bad debt written off as irrecoverable in the accounts of the assessee for the relevant previous year and not for any allowance over and above the aforesaid.
(iv) In the absence of any controversy either with regard to the factual or legal aspects of the claim, the AO had no discretion except to disallow the claim being outside the scope of Section 36(1)(vii). However, he overlooked the provisions of Section 36(1)(vii) and thus wrongly allowed the claim which was plainly inadmissible. There was thus a mistake on the par of the AO in overlooking the provisions of Section 36(1)(vii) as they existed at the relevant time and thereby wrongly allowing the claim to the assessee. In my view, the aforesaid mistake on the part of the assessee was a mistake apparent from record and hence capable of being rectified under Section 154. The order of the AO as upheld by the CIT(A) does not suffer from any infirmity.
(v) In view of the insertion of Explanation by the Finance Act, 2001 with retrospective effect from 1st April, 2001, the 'provision for doubtful debts' is not admissible for allowance w.e.f. 1st April, 1989. The Tribunal is obliged to give full effect to the aforesaid retrospective legislation on the ground that it was always the law right from the date it was made retrospectively effective. I therefore hold the action of the AO to be valid in view of the said Explanation also.
30. Having considered the matter in its entirety from all possible angles, the view is clear in that there is no debate or controversy either with regard to the factual aspects of the case or with regard to the statutory provisions of Section 36(1)(vii). The claim of the assessee for allowance in respect of provision for doubtful debts does not fall under Section 36(1)(vii), as it stood at the relevant point of time. Omission to apply the statutory provisions about which there is no debate, and there is none after the amendment of Clause (vii) w.e.f.
1st April, 1989, to a clear set of undisputed facts, as in the present case, is surely a mistake apparent from the record capable of being rectified under Section 154. The action of the AO in making the impugned disallowance and the order of the learned CIT(A) confirming the said disallowance is therefore in order. The orders passed by the Departmental authorities are valid even without Explanation to Clause (vii) as it originally existed. However, Explanation inserted in Clause (vii) with retrospective effect can also not be ignored by us for the simple reason that a retrospective legislation is deemed, by fiction, to have always been a part of the law right from the date from which it is made effective. Holding any other view will frustrate the very object of retrospective legislation. The case of the assessee is covered both by the provisions of Clause (vii) as it stood then as also by the Explanation inserted therein with retrospective effect. On the facts and circumstances of the case, the issue does not become debatable only because it is possible to create a doubt. In the context of interpretation of statutes, Lord Cave, LC observed "...no term of words has yet been framed with regard to which some ingenious counsel could not suggest a difficulty. It is not for the Courts to invent fancied ambiguities and stretch or pervert the language of the enactment in favour of the taxpayer...." Extracted from the judgment in CIT v. Boots Co. (India) Ltd. . In any case, similar issue has been considered and decided by a co-ordinate Bench of the Tribunal on 28th June, 2004 in Jt. CIT v. National Agriculture Cooperative Marketing Federation of India ITA Nos. 6648 to 6656/Del/1996, since reported at (2005) 94 TTJ (Del) 475 : (2005) 92 ITD 35 (Del). The view taken by me in this order has also been taken by the Division Bench in the aforesaid case. I am bound to follow the said order of the co-ordinate Bench of the Tribunal.
31. In view of the above, the appeal filed by the assessee is dismissed.
Since there is a difference of opinion between the learned JM and the learned AM on the ground of appeal raised by the assessee, we hereby frame the point of difference under Section 255(4) of the IT Act, 1961, asunder, for resolving the controversy by a Third Member to be nominated by the Hon'ble President: Whether, under the facts and circumstances of the case, the provision for bad and doubtful debt of Rs. 10,99,552 claimed by the assessee and allowed under Section 143(3) proceedings by the AO, can be disallowed by invoking the provisions contained under Section 154 of the IT Act, 1961, and basing on the amendment made to Section 36(1) Clause (vii) which was amended by Finance Act, 2001? 1. There being a difference of opinion between the Members constituting the Division Bench, the Hon'ble President has referred, under Section 255(4) of the IT Act, 1961, the following point of difference to me as a Third Member to resolve the controversy: Whether, under the facts and circumstances of the case, the provision for bad and doubtful debts of Rs. 10,99,552 claimed by the assessee and allowed under Section 143(3) proceedings by the AO, can be disallowed by invoking the provisions contained under Section 154 of the IT Act, 1961, and basing on the amendment made to Section 36(1), Clause (vii), which was amended by Finance Act, 2001? 2. The assessee is a limited company and for the asst. yr. 1993-94 it had debited its P&L a/c with a sum of Rs. 10,99,552 on account of provision for doubtful debts, loans and advances. In the assessment order passed on 29th March, 1996, under Section 143(3) of the Act, the AO has allowed this amount as a deduction. On 8th May, 1996, the AO issued a notice to the assessee under Section 154 of the Act seeking to rectify the original assessment order on the ground that the above provision was not an admissible deduction, as according to him, the making of a provision would not be regarded as "write off". In response to the same the assessee submitted that (a) it was judicially recognized, inter alia, by the Bombay High Court, that the making of a provision was tantamount to a "write off" and (b) without prejudice to the above the issue was, in any event, debatable and, therefore, would not be the subject of Section 157 proceedings.
3. The AO rejected the assessee's submissions and proceeded to rectify the original assessment order disallowing the aforesaid claim. The assessee was unsuccessful before the CIT(A) and came up in appeal before the Tribunal. The learned Counsel for the assessee contended before the Division Bench, which heard the matter originally, that the rectification made by the AO was erroneous and without necessary jurisdiction under the Act and, therefore, deserves to be cancelled.
Several contentions were urged before the Division Bench, amongst others, mainly the following: (i) The validity of the AO's order under Section 154 of the Act has to be judged in the light of law as it existed on the statute book as on the date of the order viz. 17th June, 1996. As on 17th June, 1996, Explanation to Clause (vii) of Sub-section (1) of Section 36 of the Act was not physically there on the statute book. The amendment bought out in the year 2001 by way of insertion of the Explanation in the said section w.e.f. 1st April, 1989 cannot be looked at to support the earlier order passed under Section 154 of the Act. This, according to the learned Counsel for the assessee is the view expressed by the jurisdictional High Court in CIT v. Sudhir S. Mehta .
(ii) As on 17th June, 1996 i.e. the date of the order of the AO passed under Section 154 of the Act, the legal position as laid down by several High Courts including the junsdictional High Court, was that the debiting of the P&L a/c and the crediting of the reserve for bad debts/provision for bad debts account, constituted sufficient compliance with the requirements of Section 36(1)(vii) of the Act. According to the learned Counsel for the assessee the following decisions support the above contention.
(iii) Sarangpur Cotton Manufacturing Co. Ltd. v. CYT (1982) 31 CTR (Guj) 247 : (1983) 143 ITR 166 (Guj) In the light of the above, it was claimed that the AO's order under Section 154 of the Act was invalid and without jurisdiction.
(iii) The issue is highly debatable and two opinions are possible in the matter and, therefore, the order passed by the AO under Section 154 of the Act was invalid and without jurisdiction as laid down by the Hon'ble Supreme Court in the case of T.S. Baham v. Volkart Bros.
and Ors. .
The learned JM accepted the above submissions of the assessee.
According to him the order passed under Section 154 of the Act is not sustainable in law and accordingly set aside the same. The learned AM however, was of the view that the claim of the assessee for allowance of provision for doubtful debts, loans and advances, in addition to allowance for bad debts written off as irrecoverable in the accounts, was clearly outside the scope of Section 36(1)(vii) as it existed at the time when the assessment order was passed by the AO. The said claim, according to him, was not admissible under Clause (viia) of Sub-section (1) of Section 36 as according to him the requisite conditions prescribed thereunder were not fulfilled by the assessee. Under the post-amended law contained in Section 36(1)(vii) there is no dispute or debate that it is only the bad debt written off as irrecoverable in the accounts of the assessee for the relevant assessment year, which alone qualifies for allowance. According to him, the claim of the assessee falls outside the scope of Section 36(1)(vii) and was plainly inadmissible.
According to the learned AM, the action on the part of the AO in allowing the said deduction was a mistake apparent from record and the same is capable of being rectified under Section 154 of the Act.
According to him, insertion of the Explanation by the Finance Act, 2001 is with retrospective effect from 1st April, 1989 and, therefore, the Tribunal is obliged to give full effect to the aforesaid retrospective legislation on the ground that by the retrospective amendment it was always the law right from the date on which it was made so retrospective. According to him, the action of the AO was valid in the light of the Explanation.
The difference between the Members in the appreciation of the exact scope of Section 154 of the Act, in the facts and circumstances of this case, has brought the issue before me.
4. The learned Counsel for the assessee vehemently supported the proposed order of the learned JM in the light of the discussions therein. He submitted that the order under Section 143(3) of the Act was passed on 29th March, 1996 and the impugned order under Section 154 was passed on 17th June, 1996. On both these dates, there was no Explanation to Section 36(1)(vii) of the Act in the statute. The Finance Act, 2001 has inserted an Explanation to Section 36(1)(vii) with retrospective effect from 1st April, 1989. The action of the AO under Section 154 has to be judged in the light of the law as it existed in the statute book on the date of the impugned order. As on 17th June,. 1996, the Explanation itself was not physically present in the statute book and, therefore, the order of the AO passed on that date is clearly beyond his powers conferred under Section 154 of the Act. This has been laid down by the jurisdictional High Court in CIT v.Sudhir S. Mehta (supra). He pointed out that several orders in favour of the assessee were available on 29th March, 1996 and on 17th June, 1996 to the effect that debiting the P&L a/c and crediting the reserve for bad debts/provision for bad debts account, constitute a sufficient compliance with the requirement of Section 36(1)(vii) of the Act. Apart from the decisions discussed in the proposed order of the learned JM, specific reference was made to the decision of the Bombay High Court in CIT v. General Insurance Corporation of India . In the latter case the assessment year involved was 1989-90 to which the Explanation directly applies and the decision of the Bombay High Court is dt. 28th Sept., 2000. The Hon'ble High Court has held that when the assessee had posted entries in the P&L a/c and had made corresponding entries in the bad debts reserve account there was sufficient compliance with the requirement of Section 36(1)(vii) and the assessee is entitled for deduction under the aforesaid provisions. The learned Departmental Representative, on the other hand, strongly drew support from the order proposed by the learned AM. According to him, the retrospective amendment brought into the Section 36(1)(vii) will have to be given effect to, as held by the Hon'ble Supreme Court in CIT v.J.K. Synthetics Ltd. . My attention was further invited to the discussions in the decision of the Bombay High Court in CIT v. Sudhir S. Mehta (supra) at p. 551. My attention was further drawn to the decision of the Bombay High Court in CIT v. Mrs. Kamla S.Asrani . According to the learned Departmental Representative, in the light of these authorities and in the light of the discussions in the proposed order of the learned AM, the action of the AO deserves to the supported.
5. I have carefully considered the rival submissions and have gone through the ratio of the decisions relied upon by both the sides. The amended provisions of Section 36(1)(vii) have been extracted by the learned AM in para 10 of his proposed order and the facts discussed reveal that the assessee has written off certain bad debts as irrecoverable in its account for the relevant previous year and the Department has accepted the same for allowance under Section 36(1)(vii) of the Act. The assessee sought deduction of another amount which was in the nature of provision for doubtful debts, which debt was not written off as irrecoverable in its accounts. Now the short question before me is what is the exact impact of the retrospective amendment of this provision. The Hon'ble Bombay High Court in CIT v. Mis. Kamala S.Asrani (supra) held that when the law is amended with retrospective effect, when it decides any proceeding, has to apply such retrospectively amended law as if it were in force at all material times. In that case the question related to exemption of capital gain arising out of transfer of land situated within the municipal limit.
The Tribunal in that case relying upon the decision of the Bombay High Court in the case of Manubhai A. Sheth v. N.D. Nngudkai ITO that capital gains were not taxable under the IT Act as they constituted agricultural income. There were amendments to Section 2(14) clarifying that revenue derived from land shall not include and shall be deemed never to have included any income from the transfer of any land referred to item (a) or item (b) of Sub-Clause (iii) of Clause (14) of Section 2. The amendment was made by the Finance Act, 1989 with retrospective effect from 1st April, 1970 when the provisions of Section 2(14) themselves were introduced in the statute book. The amendment was not in existence at the time when the Tribunal decided not to refer the question under Section 256(1) of the Act. However, at the stage of 256(2) proceedings before the High Court, the law was retrospectively amended. It was contended by the assessee that no referable question of law arises as the Tribunal applied the law that was existing when it decided the appeal. The question of law sought for reference by the Revenue was resisted before the High Court.
The Hon'ble High Court at pp. 364 and 365 of the report held as under: It is an accepted position that, when the law is amended with retrospective effect, the Court, when it decides any proceeding, has to apply such retrospectively amended law as if it were in force at all material times. Therefore, for example, when a reference under Section 256(1) is being decided, the High Court has to take into account any retrospective amendment of the law which may have taken place after the Tribunal's decision and during the pendency of the reference. On this aspect, there is no dispute. Even the Andhra Pradesh judgment Addl. CIT v. M.J. Devda clearly states that, while deciding a reference under Section 256(1), the Court must take into account such retrospective legislation. In the case of CST v. Satyanarain Singh (1974) 33 STC 187, the Allahabad High Court considered this question in respect of a reference made under the UP Sales-tax Act, Section 11. It said that when a question has been referred to the High Court and, in the meanwhile, the law is amended with retrospective operation, it would be the duty of the High Court to apply the law so amended. The application of the relevant law to the problem raised in the reference before the High Court normally is not excluded merely because at the date when the Tribunal decided the question, the relevant law was not or could not be brought to its notice. There is nothing so peculiar in the nature of a reference under the Sales-tax Act that in deciding it the High Court is compelled to apply the law which, since the date of the reference made by the Tribunal, has been superseded by the legislature. There are similar observations of the Calcutta High Court in Union of India v. Addl. Member, Board of Revenue (1975) 36 STC 61 and of the Punjab and Haryana High Court in Sheo Karan Dass Bhoj Raj v. State of Haryana (1974) 34 STC 94 (FB).State of U.P v. Modi Industries Ltd. (1977) 40 STC 73 (SC), was required to consider a case where, after the reference was decided by the High Court and before the Tribunal could act upon it, the law was amended retrospectively. The Tribunal, thereupon, did not act on the basis of the decision of the High Court under the reference. On the assessee moving the High Court under Article 226 of the Constitution of India, the High Court took the view that the revising authority was not free to take a different view from the one expressed by the High Court on any ground whatsoever, including any subsequent amendment in the law, and that it was bound to decide the case in conformity with the judgment of the High Court. The Supreme Court set aside the decision of the High Court, holding that the retrospective amendment clearly indicated the intention of the legislature of restoring the assessments and orders made earlier and hence the Tribunal was entitled to take such retrospective amendment into account. The Supreme Court observed that, under the amending Act, assessments at the enhanced rate were invalid notwithstanding any judgment or order of any Court. Hence the Tribunal was entitled to ignore the High Court's decision in the reference. The decision, therefore, turns on the special provisions of the amending Act.
Nevertheless, it is clear that a Court cannot ignore the retrospective operation of a law which is in existence when it decides a matter.
The Hon'ble Bombay High Court went, on to call for the reference having regard to the amended law.
6. The above decision was not brought to the notice of the Bombay High Court while dealing with the case of CIT v. Sudhir S. Mehta (supra).
The assessee remained absent and nobody has brought to the notice of the Bombay High Court the case of Mrs. Kamala S. Asrani (supra), and also the decision of the Supreme Court in the case of J.K. Synthetics Ltd. (supra). The Hon'ble apex Court in the case of J.K. Synthetics Ltd. (supra), was also concerned with the retrospective amendment to the provisions of Section 143(1A) of the Act by the Finance Act, 1993 w.e.f. 1st April, 1989 which was the date upon which Sub-section (1A) itself was introduced in the Act. The apex Court applied the substituted provision for an assessment year earlier to its actual amendment. In fact, in this case their Lordships distinguished and doubted its own decision in CIT v. Hindustan Electro Graphites Ltd. (supra). The apex Court held that the effect of the retrospective amendment is clear. The law must be deemed to have been in existence from the date from which it is operative. An order which is inconsistent with the provisions of retrospective amendment suffers from a mistake rectifiable under Section 154 of the Act. Reference may be made to the decision of the Andhra Pradesh High Court in the case of CIT v. R.M. & Co. . The Hon'ble High Court was concerned with the provisions of Section 271(1) of the Act. The Department filed a petition before the Tribunal to rectify its order dt. 30th July, 1974 in the light of the amendment which was retrospectively brought on 18th Aug., 1974. The Tribunal dismissed the petition holding that there was no rectifiable mistake in its order.
The Andhra Pradesh High Court held that the Tribunal was in error in rejecting the petition. It should have rectified its order on the basis of the retrospectively amended provision of Section 271(1) of the Act.
Again the Madhya Pradesh High Court in CIT v. Madhya Pradesh Electricity Board held that when the law is amended with retrospective effect the fiction is that all must proceed on the basis that the law at the relevant time was the law as amended subsequently. That being so, the legal fiction is apparently capable of being carried forward to hold that when the earlier order was passed, it was passed in contravention of the amended law which by fiction is deemed to be in force at that time. The Hon'ble Madhya Pradesh High Court held that it is clearly an error apparent on the face of the record.
The Gauhati High Court in CIT v. Smt. Eva Raha opined that the resultant effect of the amendment giving a particular provision a retrospective operation is to authorize or to make it obligatory on the authorities to revise their orders in the light of the retrospective amendment.
Again the Hon'ble Supreme Court in M.K. Venkatachalam, ITO v. Bombay Dyeing & Manufacturing Co. Ltd. held that for finding out whether there is a mistake apparent on the record, the authority has to look at the amended law and not the law that existed at the time of making the original record. If an order is plainly or obviously inconsistent with the specific and clear provision, as retrospectively amended, there is a mistake apparent from record, which would be rectifiable under Section 154 of the Act.S.A.L. Narayan Row v.Ishwarlal Bhagwandas held that rectification is not possible if the order becomes in consonance with the retrospectively amended provisions. To the same effect is the decision of the Bombay High Court in Shantilal Rawji v. M.C. Nair, ITO .
Again in CWT v. Kamala Ganapathy Subramaniam and also in CWT v. S.A.P. Annamalai the Madras High Court held that when the statute itself gives explicitly retrospective effect to a particular provision, there can be no debatable question as to the retrospectivity of the amendment.
7. In the light of the above discussion I am in complete agreement with the view expressed by the learned AM on the disputed issue. The matter will now be placed before the regular Bench to dispose of the appeal in conformity with the majority opinion.
1. On a difference of opinion between the Members constituting this Bench, following point of difference was referred under Section 255(4) of the IT Act, 1961: Whether, under the facts and circumstances of the case, the provision for bad and doubtful debt of Rs. 10,99,552 claimed by the assessee and allowed under Section 143(3) proceedings by the AO, can be disallowed by invoking the provisions contained under Section 154 of the IT Act, 1961, and basing on the amendment made to Section 36(1), Clause (vii), which was amended by Finance Act, 2001? 2. The Hon'ble Third Member, nominated by the Hon'ble President, Tribunal, vide his order dt. 30th May, 2005 has concurred with the view taken by the AM on the question referred to him. In conformity with the majority view, we hold that the provision made for doubtful debts is not an allowable deduction in view of the amendment to Section 36(1)(vii). Accordingly, the AO was justified in invoking the provisions of Section 154 of the Act in withdrawing the allowance of deduction granted in the original assessment.
3. In the result, the appeal filed by the assessee is treated as dismissed.