Commissioner Of Income Tax, Chandigarh-Ii v. M/S. Steel Strips Ltd., Sco 49-50, Sector 26, Chandigarh

ITA No. 647 of 2005. IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 647 of 2005.Date of Decision : 14.1.2009. Commissioner of Income Tax, Chandigarh-II. Versus ....Appellant M/s. Steel Strips Ltd., SCO 49-50, Sector 26, Chandigarh. ....Respondent CORAM:Hon'ble Mr. Justice J.S. KheharHon'ble Mr. Justice Nawab Singh Present :Ms. Urvashi Dhugga, Advocate,for the appellant. Mr. Akshay Bhan, Advocate,for the respondent-assessee. J.S. Khehar. J. (Oral) The instant controversy relates to the assessment year1997-98 more particularly, the same is focussed on interest component ofRs.26,09,621/- reflected by the respondent-assessee in his books of account.The respondent-assessee asserted that the aforesaid component of interestwas not assessable towards tax on account of the fact that it had merely beenreflected in the books of account to pressurize the loanees to make thepayment. The Assessing Officer did not accept the plea advanced by therespondent-assessee and accordingly, included the interest component ofRs. 26,09,621/ to the returned income of the assessee. Not satisfied with the determination rendered by theAssessing Officer, the respondent-assessee preferred an appeal before theCommissioner of Income Tax (Appeals). The appeal preferred by the respondent-assessee was disposed of by an order dated 27.9.2000. TheCommissioner of Income Tax (Appeals) accepted the appeal preferred bythe respondent-assessee and in determining the issue under reference arrivedat the conclusion that during the course of the previous assessment yearsimilar income reflected as interest by the assessee in his books of accountwas not taken into consideration while determining the quantum of taxpayable by the respondent-assessee. The Commissioner of Income Tax(Appeals) accordingly adjudicated upon the controversy on the rule of res-judicata. An appeal was preferred by the Revenue against theorder dated 29.9.2000 passed by the Commissioner of Income Tax(Appeals). The Income Tax Appellate Tribunal dismissed the appealpreferred by the Revenue vide its order dated 15.7.2005. Through the instant appeal, the Revenue has impugnedthe orders passed by the Commissioner of Income Tax (Appeals) dated29.9.2000, as well as, the order passed by the Income Tax AppellateTribunal dated 15.7.2005. The first and the foremost contention of the learnedcounsel for the appellant is that, the issue under reference cannot beadjudicated upon under the principle of res-judicata. According to thelearned counsel for the appellant, every loan extended by a party has to beanalysed/deciphered on the basis of the terms and conditions recordedtherein, and that, a determination rendered during an earlier assessment inrespect of a particular loan (which forms a part of a differentcontract/transaction) cannot be the basis of a finding, on an issue ofdeduction, in a subsequent assessment year unless it is the conceded position between the rival parties, that the interest arises out of the sametransaction, or that, interest arises out of a contract the terms and conditionswhereof are the same as the ones which are the subject of consideration atthe present juncture. The second contention advanced on behalf of the learned counsel for the appellant directly flows from Section 36 of theIncome Tax Act, 1961 (hereinafter referred to as the Act) under which thepresent deduction has been sought by the respondent-assessee. So far thepresent controversy is concerned, only sub-clause (vii) of Section 36(1) ofthe Act is relevant. Accordingly, Section 36(1)(vii) of the Act is beingextracted hereunder:- “S.36(1) The deductions provided for in the followingclauses shall be allowed in respect of the matters dealtwith therein, in computing the income referred to insection 28- (i) to (vi) xxx The second contention advanced on behalf of the learned counsel for the appellant directly flows from Section 36 of theIncome Tax Act, 1961 (hereinafter referred to as the Act) under which thepresent deduction has been sought by the respondent-assessee. So far thepresent controversy is concerned, only sub-clause (vii) of Section 36(1) ofthe Act is relevant. Accordingly, Section 36(1)(vii) of the Act is beingextracted hereunder:- “S.36(1) The deductions provided for in the followingclauses shall be allowed in respect of the matters dealtwith therein, in computing the income referred to insection 28- (i) to (vi) xxx (vii) Subject to the provisions of sub-section (2), theamount of any bad debt or part thereof which is writtenoff as irrecoverable in the accounts of the assessee forthe previous year: Provided that in the case of an assessee to which clause(viia) applies, the amount of the deduction relating toany such debt or part thereof shall be limited to theamount by which such debt or part thereof exceeds thecredit balance in the provision for bad and doubtfuldebts account made under that clause. Explanation- For the purposes of this clause, any baddebt or part thereof written off as irrecoverable in theaccounts of the assessee shall not include any provisionfor bad and doubtful debts made in the accounts of theassessee. (viia) to (xvi) xxx” On the basis of the statutory provision extracted hereinabove it is theconclusion of the learned counsel for the petitioner that the deductionclaimed by the respondent-assessee can be allowed only if the respondent-assessee satisfies all the ingredients stipulated in the aforesaid provision. Itis submitted that the assessee must satisfy the concerned authority that thededuction claimed is on account of a bad debt. The aforesaid bad debtshould be irrecoverable. As a result of its being irrecoverable it should havebeen written off. And that, the said debt should have been written off in theprevious year. Although, clause (vii) refers to Sub-section 2 of Section 36, we find no justification to make any reference thereto as the issue in thepresent appeal can be determined on the basis of a plain reading of sub-clause (vii) of Section 36(1) of the Act itself. When confronted with the first submission advanced bylearned counsel for the appellant, it is the case of the learned counsel for therespondent-assessee, that the entire material was placed by the respondent-assessee before the Assessing Officer, as well as, before the Commissionerof Income Tax (Appeals), and that, the response of the respondent-assesseeto the Courts' query would remain the same. The stance adopted by therespondent-assessee before the authorities below has been noticed in the order passed by the Commissioner of Income Tax (Appeals). Learnedcounsel for the respondent-assessee also invited our attention to the same.We are accordingly extracting the same hereunder, as the stance of therespondent-assessee to our query:- “It was submitted before me that the appellant companyhas to receive huge money from its debtors who are notpaying the dues in time. The financial position of thesedebtors was not good, therefore, to pressurize theseparties, the appellant issued debit note ofRs.26,09,621.50 to these parties against interest whichwas never accepted by these parties. It was pleaded thatit was merely a claim and not an income which hasaccrued to the appellant. A list of 24 such parties wasfiled before me and it was stated that, out of the saidparties, the appellant has been able to recover principalamount only from seven parties and in respect of otherparties, the appellant could not effect recovery ofprincipal amount. It was stated that the appellant haspassed the entries in its accounts for interest income,however, since it was merely a claim, the same has beenreduced from the taxable income.” Inspite of the aforesaid stance adopted on behalf of the respondent-assessee, Inspite of the aforesaid stance adopted on behalf of the respondent-assessee, the issue was not adjudicated on its merits by the Commissioner of IncomeTax (Appeals). The matter came to be decided only on account of the factthat in a similar situation had been decided in an earlier assessment year, ina particular manner, and as such, the present case should also be decided in the same manner. During he course of hearing, learned counsel for therespondent-assessee handed over to us in Court the order passed by theCommissioner of Income Tax (Appeals) dated 30.9.1997, the same is takenon record and marked as Annexure A. A perusal of Annexure A reveals thatthe matter which had come up for consideration was for the assessment year1992-93. Paragraph 2.1 of the aforesaid order reveals that the respondent-assessee during the course of the proceedings of the assessment year 1991-92, had made a claim of deduction to the Assessing Officer in respect of asum of Rs.27 lacs, and that, the aforesaid claim for deduction was acceptedby the Assessing Officer. That being so, the deduction referred to by theCommissioner of Income Tax (Appeals) in his order dated 29.9.2000 hasnot been shown to have been made under the same contract (under whichthe loan was earlier extended). It has also not been shown to have beenmade in respect of a contract, the terms and conditions whereof, wereidentical to the contract (under which the present loan has been extended)presently in question. In either of the two situations referred to above, theclaim of the respondent-assessee could have been upheld under the rule ofres-judicata. Whether or not the same situation is prevalent for the presentassessment year namely 1997-98 cannot be deciphered from the ordersplaced on the record of the instant appeal or the pleadings of the instantappeal. Since the issue relates to a determination on the basis of a finding offact in each loan case, will revolve on its own facts. In so far as the claim ofa deduction under section 36 of the Act at the hands of the respondent-assessee is concerned, it would be just and appropriate to remand the instantissue (limited to the deduction sought by the respondent-assessee on the ITA No. 647 of 2005. disallowed deduction of interest of Rs.26,09,621/-) back to the AssessingOfficer, requiring him to re-consider the same within the parameters ofSection 36(1)(vii) of the Act. We hereby set-aside the orders dated30.3.1999, 29.9.2000 and 15.7.2005 passed by the Assessing Officer, theCommissioner of Income Tax (Appeals), and the Income Tax AppellateTribunal respectively only to the extent of their determination on the issueof deduction of Rs. 26,09,621/- claimed by the respondent-assessee underSection 36(1)(vii) of the Act. Parties are accordingly directed to appear before theAssessing Officer on 2.2.2009. In so far as the second contention advanced by thelearned counsel for the appellant is concerned, we find no ambiguity thereinwhatsoever. In case the deduction is sought by the respondent-assesseeunder Section 36(1)(vii) of the Act, it would obviously be imperative forhim first to demonstrate that the deduction he desires to seek is on accountof a bad debt, secondly, that the aforesaid debt was written off asirrecoverable, and thirdly, it should have been written off as anirrecoverable debt in the previous year. The instant appeal is disposed ofwith the aforesaid observations. (J.S. Khehar) Judge (Nawab Singh) Judge