Commissioner Of Income Tax, Faridabad v. M/S. Septu India (P) Ltd., Begumpur, Khatola,Gurgaon

IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH I.T.A.No. 607 of 2007 DATE OF DECISION: FEBRUARY 06, 2008 Commissioner of Income Tax, Faridabad .....APPELLANT Versus M/s. Septu India (P) Ltd., Begumpur, Khatola,Gurgaon ....RESPONDENT CORAM:HON'BLE MR.JUSTICE SATISH KUMAR MITTALHON'BLE MR.JUSTICE RAKESH KUMAR GARG--- Present:Mr.Yogesh Putney, Advocate,for the appellant... SATISH KUMAR MITTAL, J. The instant appeal filed by the revenue is directed against theorder dated 22.12.2006 passed by the Income Tax Appellate Tribunal,Delhi Bench “D” New Delhi (hereinafter referred to as `the ITAT') in ITANo.2133/DEL/03 in case of the respondent for the Assessment Year 1997-98. In the present case, the Assessing Officer disallowedRs.20,41,541/- on account of bad debts written-off as the assessee did notfurnish even the names of the parties whose debts became bad and alsofailed to produce any documentary evidence that these debts becamereally bad. On appeal filed by the assessee, the Commissioner of Income I.T.A.No. 607 of 2007 -2- Tax (Appeals) deleted the said addition by holding that after amendmentto Section 36(1)(vii) of the Income Tax Act (hereinafter referred to as `theAct'), it was not obligatory on the part of the assessee to prove that thedebts written-off were indeed bad debts. Feeling aggrieved against thesaid order, the revenue filed an appeal before the ITAT. The ITATdismissed the said appeal and confirmed the order of Commissioner ofIncome Tax (Appeals) by following the judgment of Special Bench ofITAT, Mumbai in case of DCITVersus Oman International Bank,(2006)100 ITD 285 (Mum) (SB) while observing as under:- “We have heard the parties and perused the record of thecase. There is no dispute about the actual writing off of thebad debts in the books of account of the assessee. The claimof the Revenue is that irrespective of the amendment in theprovision of Section 36(1)(vii) of the Act, the assessee has toestablish that the debt has become bad. However, this has notbeen established by the assessee. Therefore, CIT(A) was notjustified to delete the same merely on the basis of entry ofwriting off in the books of account. A reliance has beenplaced on the decision of the Madras High Court in the caseof South India Surgical Co. Ltd. vs. ACIT reported in (2006)201 CTR (Mad) 289 wherein it has been held as under:- “Held : It is not sufficient for the assessee to say that hehas become pessimistic about the prospect of recoveryof debt in question. He must feel honestly convincedthat the financial position of the debtor was soprecarious and shaky that it would be impossible tocollect any money from him. The question is really oneof fact depending upon the various facts and diversecircumstances bearing on the debtor's pecuniaryposition, his commitments and obligations. Thejudgement of the assessee in regarding the debt as bad I.T.A.No. 607 of 2007 -3- debt must be a honest judgement and not a convenientjudgement. The judgment of the assessee must beestablished to have been taken on relevant facts andcircumstances, which should show that the debt is notrealizable for some fault on the part of the debtor orsome supervening impossibility on the part of thedebtor to pay but not possible difficulties or hurdles theassessee may have to incur to compel the recalcitrantdebtor to pay. The assessee for his convenience maydecide that the debt is too small and it is notworthwhile to pursue the debtor but that judgmentwould not be a honest judgement, which wouldestablish that the debt has become a bad debt. A timebarred debt can be assumed to be bad, but is notnecessarily bad because of expiry of limitation forrecovery of the same – Devi Films Ltd. Vs. CIT(1963) 49 ITR 874 (Mad) and T.S.P.L.P. ChidambaramChettiar Vs. CIT (1967) 64 ITR 181 (Mad) relied on.” 29. However, we find that the Gujarat High Court in thecase of CIT Vs. Girish Bhagwan Prasad 256 ITR 772 hasheld that under the provisions of Section 36(1)(vii) of theAct, deduction had to be allowed in computing the incomereferred to in Section 28 of the Act of the amount of any baddebt or part thereof which is written off as irrecoverable inthe accounts of the assessee for the previous year subject theprovisions of sub-section (2). Prior to amendments fromApril 1, 1989, the allowance under this clause was confinedto the debts and loans which had become irrecoverable forthe accounting year. Thus, under the provisions of Section 36(1)(vii) as enforced from April 1, 1989 all that the assesseehad to show was that the bad debt was written off asirrecoverable. Further the Special Bench of ITAT, Mumbaiin the case of DCIT VS. Oman International Bank (2006)100 ITD 285 (Mum) (SB) has held that as per the existing I.T.A.No. 607 of 2007 -4- provisions of Section 36(vii), after its amendment w.e.f.1.4.89, it is not obligatory on the part of the assessee to provethat the debt written off by the assessee is indeed a bad debtfor the purpose of allowance u/s 36(1)(ii) of the Act. It maybe mentioned that there is no decision available of thejurisdictional High Court on this issue. Thus, there are twoviews available on this issue. Therefore, in view of thedecision of the Hon'ble Supreme Court in the case ofVegetable Products reported in 88 ITR 192, the Hon'bleSupreme Court held that the view which is favourable to theassessee is required to be accepted. We, therefore, upholdthe order passed by the CIT(A) in this regard.” Against the said order, the present appeal has been filed. Counsel for the appellant submitted that the decision takenby the assessee regarding the debt as bad debt must be an honest decisionand the said decision must be established to have been taken on relevantfacts and circumstances which should show that the debt is not realizablefor some fault on the part of the debtor or some supervening impossibilityon the part of the debtor to pay but not possible difficulties or hurdles theassessee may have to incur to compel the recalcitrant debtor to pay. After hearing the counsel for the appellant and going throughthe impugned order, we are of the opinion that in the facts andcircumstances of the present case the debts with regard to certain personshad actually been written-off as bad debts in the books of accounts of theassessee. There is no material on the record that the decision taken by theassessee by writing-off the debt as bad debt is not an honest decision.Therefore, in our view, the ITAT while following the judgment of theGujarat High Court in the case of CITv. Girish Bhagwan Prasad, 256 ITR772 and the Supreme Court in the case of Vegetable Products, 88 ITR I.T.A.No. 607 of 2007 -5- 192, has rightly held that the view which is favourable to the assessee isrequired to be accepted. Therefore, we are of the opinion that nosubstantial question of law is arising in this appeal. Dismissed. (SATISH KUMAR MITTAL) JUDGE February 06, 2008vkg (RAKESH KUMAR GARG) JUDGE