Commissioner Of Income Tax, Tiruchirapalli v. M/S.micromax Systems (P) Ltd., Tiruchirapalli

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 06.07.2005 CORAM THE HON’BLE MR.MARKANDEY KATJU, CHIEF JUSTICEandTHE HON’BLE MR.JUSTICE F.M.IBRAHIM KALIFULLA T.C.No.157 of 2003 --------- Commissioner of Income Tax,Tiruchirapalli. ..Appellant. Vs. M/s.Micromax Systems (P) Ltd.,Tiruchirapalli. ..Respondent. PRAYER: Appeal preferred against the order of the Income-taxAppellate Tribunal Madras ‘C’ Bench dated 19.03.2003 passed in ITANo.513/Mds/1999. Assessment year 1997 - 98 and PAN/GI.No.M-60order dated 30.7.98 on the file of Asst Commissioner of Income TaxCampany Circle, Tiruchi and IT/WT/GT/ Appeal No.152/98-99 orderdated 31.12.98 on the file of Commissioner of Income Tax (Appeals)XIII (I/C), 121 Mahatma Gandhi Road, Chennai 34. For Appellant :: Mrs.Pushya Sitaraman Senior Counsel for ITFor Respondent :: Mr.V.S.Jayakumar ------- JUDGMENT THE HON'BLE THE CHIEF JUSTICE This appeal under Section 260(A) of the Income-tax Act hasbeen filed by the department challenging the order of the Income-tax Appellate Tribunal dated 19.03.2003 by which the appeal of therevenue has been dismissed by the Tribunal. 2. The appeal was admitted by the Court on the followingsubstantial questions of law:- https://hcservices.ecourts.gov.in/hcservices/ " 1. Whether in the facts and circumstances of thecase, the Tribunal was right in allowing the assessee’sclaim for a bad debt, when the bad debt had not actuallybeen written off in the books of account? 2. Whether in the facts and circumstances of thecase, the Tribunal was right in allowing the claim forbad debt on the ground that the provision had been shownunder the head expenditure in the annual report of theassessee company? 3. Whether in the facts and circumstances of thecase, and in view of the provisions of Section 36(vii),an assessee other than a banking company can be alloweda claim for a bad debt on the basis of a mereprovision?” 3. We have heard learned counsel for the parties and perusedthe record. The relevant assessment year is 1997-98. For this yearthe assessee claimed bad debt of Rs.3 lakhs. The Assessing Officerdisallowed it on the ground that it was shown as a provision forbad and doubtful debts in the books of the assessee, but theassessee had not actually written off the bad debt of Rs.3 lakhs asirrecoverable in its books of account. 4. The assessee is a limited liability company, manufacturingcontrol systems and equipments. It received three orders from M/s.Ignifluid Boilers India Limited for Rs.15 lakhs, Rs.16,17,000/- andRs.1,50,000/- respectively. The orders were completed on 03.02.1996and invoices were raised. The customer thereafter made part-paymentand confirmed the balance of Rs.9,93,350/- as on 29.07.1996. 5. The assessee tried to realise the balance from the customerby follow-up letters, fax messages and telephone calls on severaloccasions, but despite its efforts the entire balance could not becollected. Thus, though the assessee was able to collect someamounts there was a balance sum of Rs.5,43,350/- of which Rs.3lakhs was written off in the previous year relevant to theassessment year 1997-98 and the balance of Rs.2,43,250/- in thenext previous year relevant to the subsequent assessment year.Though the amount of Rs.3 lakhs was debited with the noting“provision for bad debts” it was alleged by the assessee that thedebt had in fact become bad. 6. The assessee appealed to the Commissioner of Income-tax(Appeals), who by his order dated 31.12.1998 allowed the appeal anddecided in favour of the assessee. Aggrieved against that order thedepartment preferred an appeal before the Tribunal which has beendismissed by the impugned order. 7. The Tribunal has observed in paragraph – 4 of its order asfollows:- 6. The assessee appealed to the Commissioner of Income-tax(Appeals), who by his order dated 31.12.1998 allowed the appeal anddecided in favour of the assessee. Aggrieved against that order thedepartment preferred an appeal before the Tribunal which has beendismissed by the impugned order. 7. The Tribunal has observed in paragraph – 4 of its order asfollows:- “From the facts, it is seen that the assessee hadtaken lot of efforts to collect the debt. While debitinga sum of Rs.3 lakhs the assessee had claimed entire baddebt during this year and the next year. Though thenomenclature used is ‘provision’, it is seen that theclaim of bad debt had to be allowed. At the time ofhearing, the learned counsel for the assessee filedSixth Annual Report (1997-98) wherein at page No.9, theprovision for bad debts had been clearly stated underthe head ‘Expenditure’. Therefore, I do not find anyinfirmity in the order of the learned CIT(A) directingthe A.O. to allow the bad debts as claimed by theassessee. The order of the learned CIT(A) is confirmed.It is ordered accordingly”. 8. The relevant portions of Section 36 of the Income-Tax Actafter the amendment w.e.f. 01.04.1989 reads as follows:- “Sec-36(1): The Deductions provided for in thefollowing clauses shall be allowed in respect of mattersdealt with therein, in computing the income referred toin Section 28 – (vii) subject to the provisions of sub Section (2)the amount of any bad debt or part thereof which iswritten off as irrecoverable in the accounts of theassessee for the previous year (viia) in respect of any provision for bad anddoubtful debts may be – (a)a scheduled bank… (b)a bank being a bank incorporated by or under thelaws of a country outside India….laws of a country outside India…. (c)a public financial institution….. 36(2) – In making any deduction for a bad debt orpart thereof, the following provisions shall apply –(iv) where any such debt or part of debt is writtenoff as irrecoverable in the accounts of the previousyear, being a previous year relevant to theassessment year commencing on the 1[st] day of April,1988 or any earlier assessment year, and theAssessing Officer is satisfied that such debt orpart became a bad debt in any earlier previous yearnot falling beyond a period of four previous yearsimmediately preceding the previous year in whichsuch debt or part is written off, the provisions ofsub Section (6) of Section 155 shall apply”. 9. The learned counsel for the department submitted that amere provision of bad debt is not sufficient to get the benefit ofthe above provision and it is only when the debt is actuallywritten off as irrecoverable in the books of account that a claimfor bad debt can be allowed as a deduction. 10. On the other hand, the submission of the learned counselfor the assessee is that it was only by an inadvertent mistakecommitted by the assessee that a narration was made in the profitand loss account as “provision for bad debt”. 11.On the facts of the case, we are of the opinion that thisappeal has to be allowed. 12.In this case, the provisions of Section 36(vii a) of theAct are not attracted, since the assessee is admittedly not a bankor a public financial institution. It is only a companymanufacturing control systems and equipments. Hence only Section 36(vii) of the Act would apply and not Section 36(vii a) of the Act. 13.The difference between clause (vii) and clause (vii a) ofSection 36(1) of the Act (after the amendment with effect from01.04.89) is significant. Clause (vii) clearly mentions that thebad debt or part thereof can be allowed only if it is written offas irrecoverable in the accounts of the assessee for the previousyear. 11.On the facts of the case, we are of the opinion that thisappeal has to be allowed. 12.In this case, the provisions of Section 36(vii a) of theAct are not attracted, since the assessee is admittedly not a bankor a public financial institution. It is only a companymanufacturing control systems and equipments. Hence only Section 36(vii) of the Act would apply and not Section 36(vii a) of the Act. 13.The difference between clause (vii) and clause (vii a) ofSection 36(1) of the Act (after the amendment with effect from01.04.89) is significant. Clause (vii) clearly mentions that thebad debt or part thereof can be allowed only if it is written offas irrecoverable in the accounts of the assessee for the previousyear. 14. No doubt prior to 01.04.89, even if the debt had not beenwritten off, it could be allowed as a “bad debt” if the assesseecould establish that the debt had in fact become bad. However,after the amendment with effect from 01.04.89, there is anadditional requirement in Section 36(1)(vii) namely that the “baddebt” should be written off as irrecoverable in the accounts of theassessee for the previous year. Hence unless it is written off asirrecoverable in the accounts, it cannot be allowed as a “baddebt”. 15.It may be mentioned that prior to the amendment ofSection 36(1)(vii) with effect from 01.04.89, clause (vii) ofSection 36(1) reads as follows:- “ subject to the provisions of sub-section(2),the amount of any debt or part thereof which isestablished to have become a bad debt in theprevious year.” 16.Thus prior to 01.04.89, even if the debt has not beenwritten off as irrecoverable in the accounts of the assessee, itcould still be allowed as a bad debt if the assessee couldestablish that in fact it had become a debt in the previous year.After the amendment by Act 4 of 88 with effect from 01.04.89, theessential requirement for a claim of ‘bad debt’ to be allowed isthat it should have been written off as irrecoverable in theaccounts of the assessee for the previous year. Thus for and fromthe assessment year 1989-90, the requirement as to the writing offof the debt as irrecoverable has become essential for a claim of‘bad debt’ to be allowed. 17.Thus, it is now a mandatory condition that deductions canbe allowed as bad debts only when it is actually written off asirrecoverable in the accounts and not on the basis of a mereprovision. 18.Learned counsel for the assessee has relied on thedecision of the Supreme Court reported in C.I.T v. ASEA Ltd, 258ITR 407 where deduction of a bad debt was allowed on the basis of aprovision. However, the above decision was rendered in the contextof Section 36(1)(vii) as it stood prior to 1989. Hence the saiddecision is clearly distinguishable. 19.Learned counsel for the assessee then contended that therevenue never objected to the fact of the debt becoming bad in theyear of account, but only objected to the fact that it has not beenwritten off as irrecoverable in the assessee’s accounts. 20.In our opinion, the principle of plain or literalinterpretation has to be applied in interpreting a taxing statute.As observed by Lord Cairns in Partington v. Attorney General,(1869) LR 4HL 100 : - “ If the person sought to be taxed comes withinthe letter of the law he must be taxed, howevergreat the hardship may appear to the judicialmind. On the other hand if the Court seeking torecover the tax cannot bring the subject withinthe letter of the law, the subject is free,however apparently within the spirit of the lawthe case might otherwise appear to be. 20.In our opinion, the principle of plain or literalinterpretation has to be applied in interpreting a taxing statute.As observed by Lord Cairns in Partington v. Attorney General,(1869) LR 4HL 100 : - “ If the person sought to be taxed comes withinthe letter of the law he must be taxed, howevergreat the hardship may appear to the judicialmind. On the other hand if the Court seeking torecover the tax cannot bring the subject withinthe letter of the law, the subject is free,however apparently within the spirit of the lawthe case might otherwise appear to be. 21.Thus, in interpreting a taxing statute one cannot go bythe notion as to what is just and expedient vide CIT v. ShahzadaNand, AIR 1966 SC 1342). In IRC v. Hinchy, (1960) AC 748 the Houseof Lords held that a provision in the Income Tax Act, 1952 for astatutory penalty (for making an incorrect return of income) of 20pounds and trebling ‘the tax which he ought to be charged underthis Act’ referred not to the tax on the amount which the taxpayerhad failed to declare, but to the whole tax which he ought to becharged for the relevant year, notwithstanding the extravagantconsequences which flowed from giving the words their naturalmeaning. 22.The Supreme Court of India has held that equity is out ofplace in tax laws (vide CIT v. Firm Muar , AIR 1965 SC 1216). InCIT v. Madho Prasad Jatia, (1976) 4 SCC 92, it held that therecould be no consideration of equity if the language of theprovision was plain and clear, but where it was not, and twointerpretations were possible, the one in consonance with equityand fairness should be preferred.” 23.The principle of strict interpretation of taxing statuteswas best enunciated by Rowlatt, J in his classic statement (videCape Brady Syndicate v. IRC, (1921) 1 KB 64 cited with approval inAIR 1968 SC 623): -“In a taxing statute one has to look merely atwhat is clearly said. There is no room for anyintendment. There is no equity about a tax. Thereis no presumption as to a tax. Nothing is to beread in, nothing is to be implied. One can lookfairly at the language used.” 24.In AV Fernandez v. State of Kerala, AIR 1957 SC 657 theSupreme Court of India stated the principle as follows: -“ If the Revenue satisfies the Court thatthe case falls strictly within theprovisions of the law, the subject can betaxed. If, on the other hand, the case isnot covered within the four corners of thetaxing statute no tax can be imposed byinference or by analogy or by trying toprobe into the intentions of the legislatureand by considering what was the substance ofthe matter.” 25.In CIT v. G.Hyatt, AIR 1971 SC 725 the question waswhether under Section 17(3) of the Income Tax Act, 1961, theinterest on the assessee’s own contribution to an unrecognizedprovident fund could be treated as salary. The Supreme Court ofIndia held that the language of Section 17(3) was plain andunambiguous, and hence the said amount was not salary but incomefrom other sources and taxable under Section 56. 26. In Polester & Co. Ltd v. Addl.Comm. of Sales Tax, AIR1978 SC 897 the question was whether sales outside Delhi wouldalso be included in taxable income. The Supreme Court held that thesection used the word ‘resale’ simpliciter, and hence it referredto all resales and could not be limited to resales within Delhialone. Thus the Supreme Court went by the plain language of thestatute, and did not speculate on the intention of the legislature. 26. In Polester & Co. Ltd v. Addl.Comm. of Sales Tax, AIR1978 SC 897 the question was whether sales outside Delhi wouldalso be included in taxable income. The Supreme Court held that thesection used the word ‘resale’ simpliciter, and hence it referredto all resales and could not be limited to resales within Delhialone. Thus the Supreme Court went by the plain language of thestatute, and did not speculate on the intention of the legislature. 27.In Hemraj Gordhandas v. HH Dave, Asst.Collector, (1978) 2ELT 350, the Supreme Court of India considered the language of anotification under the Central Excise Tariff and held that all thatwas required for claiming an exemption was that the cotton fabricmust be produced on power looms owned by the co-operative society.There was no further requirement in the language of thenotification that the cotton fabric must be produced by the societyfor itself. The Supreme Court refused to go into the question ofthe intention behind the exemption since the language of thenotification was clear. 28.In Assessing Authority v. East India Cotton Mfg Co Ltd.,(1981) 48 STC 239 the concessional rate under the Punjab Sales Taxwas payable if certain raw materials were used in the manufactureof goods for sale. The contention of the assessee was that the wordused in the Act was ‘ for sale’ and not ‘for sale by him’ and hencethe goods sold by a third party were also covered by the provision. This contention was accepted by the Supreme Court which followedthe literal rule of interpretation. 29.In CWT v. Ellis Bridge Gymkhana, AIR 1988 SC 120 theSupreme Court held that the word ‘individual’ in the chargingsection could not be stretched to include an association ofpersons. The Court held that the charging section had to beconstrued strictly, and if a person could not be brought within theambit of the charging section by clear words, he could not be taxedat all. 30.In the present case, it can be seen that the assessee didnot write off the debt in question as irrecoverable in his accountsfor the previous year. Hence on the plain language of Section 36(1)(vii) of the Act the debt cannot be allowed as a ‘bad debt’. It maybe that the assessee committed an inadvertent mistake, but wecannot go by notions of equity in tax matters. Making a provisionis not the same thing as writing off a debt as irrecoverable. 31.For the reasons given above, the impugned judgment of theIncome Tax Tribunal, and of the CIT (Appeals) with respect to theclaim of the assessee regarding bad debts are set aside, and theorder of the Assessing Officer is restored. The appeal is allowed.Sm/pvSd/Asst.Registrar/true copy/Sub Asst.Registrar Copy to: 1. The Commissioner of Income Tax,Tiruchirapalli. 2. The Asst Registrar,Income Tax Appellate Tribunal,Rajaji Bhavan, 3rd Floor,Besant Nagar, Chennai 90. 3. The Asst Commissioner of Income Tax,Company Circle, Tiruchy. 4. The Commissioner of Income Tax,Appeals XIII (I/C), 121, Mahatma Gandhi Road,Chennai 34. + 1 cc to M/s Pushya Sitaraman, Advocate SR No.28346+ 1 cc to Mr.V.S. Jayakumar, Advocate SR 28370 Pre-delivery Judgmentin T.C.(A) No.157 of 2003 JE(CO)SR/18.7.2005