Commissioner Of Income Tax v. H.p. Financial Corporation

IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA ITA No.1 of 2003 Judgment reserved on: 25.7.2008. Date of decision: August 4, 2008 Commissioner of Income Tax ..Appellant Versus H.P. Financial Corporation ..Respondent Coram The Hon’ble Mr. Justice Deepak Gupta, Judge. The Hon’ble Mr. Justice V.K.Ahuja, Judge. Whether approved for reporting?[1] No For the Appellant.: Mr.Vinay Kuthiala, Advocate. For the Respondent: M/s.Pankaj Jain & Alok Ranjan, Advocates. Deepak Gupta, J. This appeal has been admitted on the following questions of law: “1.Whether on the facts and in the circumstances of the case the ITAT was right in law holding that the bad debts were written off on 30.3.1993 whereas the Board has passed the resolution on 15.7.1993? 2.Whether on the facts and in the circumstances of the case the ITAT was right in law in not considering the amended provision of section 36 (vii) (a) (c) effective from 1.4.1992 vide which claim for deduction of bad debt has to be restricted to 5%?” The brief facts giving rise to the present appeal are that admittedly the assessee M/s.Himachal Pradesh Financial Corporation (HPFC) is a financial 1Whether the reporters of the local papers may be allowed to see the Judgment? institution. In this case we are concerned with the assessment year 1993-94. The assessee claimed deduction of Rs.1,50,94,273/- on account of bad debts and written off debts. The Assessing Officer dis-allowed the deduction holding that the amounts were not written off during the previous year i.e. 1991-92 but were actually written off in the Resolution of the meeting of the Board of Directors on 15.7.2003 after the close of the accounting year on 31.3.1993. However, before the learned CIT Appeals it was admitted that out of the 17 debts sought to be written off, 11 had become bad during the previous year and had admittedly been written off prior to 30.3.1993. The dispute is with regard to the remaining 6 debts only. In respect of these six debts the facts are that the Board of Directors of the HPFC had constituted a Committee consisting of the Managing Director, General Managers and other senior officials of the Corporation. The criteria and strategy with regard to writing off the bad and doubtful debts had already been laid down in a meeting of the Directors of the Corporation held on 14.7.1992. The Committee constituted by the Board held a meeting on 30.3.1993 to consider the merits of writing off the debts in respect of these six cases and recommended that the loan amounts in respect of these six debts be written off/written back and thereafter fresh books of accounts be prepared. It is not disputed that the Board of Directors approved this action of the Committee in its meeting held on 15.7.1993. Sh.Vinay Kuthiala, learned counsel for the revenue urges that the debts were actually written off on 15.7.1993 when the recommendations of the Committee were accepted and therefore the learned Tribunal as well as the CIT were wrong in holding that the debts were written off on 30.3.1993. We are unable to accept this contention. True it may be, that the formal decision of the Board has been taken on 15.7.1993. However, the fact remains that the Committee duly appointed by the Board had taken a decision prior to 31.3.1993 that the said loans are to be written off. The Board has only puts its seal of approval on the said decision of the Committee and therefore this approval will relate back to the date when the Committee took its decision. It is also clear that the Committee only followed the procedure already approved by the Board in its meeting on 27.4.1992 laying down the criteria for writing off the bad debts. Therefore, we cannot accept the contention of the appellant that the debts had not been written off in the previous year. With regard to the second question, Section 36(vii-a)(c) of the Income Tax Act at the relevant time reads as follows: “36(vii-a) in respect of provision for bad and doubtful debts made by – With regard to the second question, Section 36(vii-a)(c) of the Income Tax Act at the relevant time reads as follows: “36(vii-a) in respect of provision for bad and doubtful debts made by – c) a public financial institution of a State Financial Corporation or a State Industrial Investment Corporation, an amount not exceeding 5% of the total income (computed before making any deduction under this clause and chapter VI-A)” This section was inserted by the Financial Act No.2 of 1991w.e.f. 1.4.1992 and therefore applies to the assessment year in question. This section clearly provides that a financial corporation cannot make a provision for a bad debt exceeding 5% of its total income computed before making any deduction under Section 36(vii-a) and Chapter VI-A. Admittedly this section was not taken into consideration by any of the authorities i.e. the Assessing Officer, CITA or the learned Tribunal. It appears that since this section had just then been introduced the income tax authorities were not aware of the same. Even if the Financial Corporation had written off its debts in the previous year itself, as held by us above, it could only be claim deduction in terms of the aforesaid section. Therefore, the authorities were bound to take note of this section while considering the case of the assessee. Since this has not been done we have no other option but to set-aside the assessment orders passed by the authorities and remand the case to the Assessing Officer who shall decide the same in the light of the observations made hereinabove and after taking into consideration the provisions of Section 36(vii-a) of the Act. Question No.1 is answered in favour of the assessee and against the revenue, Question No.2 is answered in favour of the Revenue and the case is remanded to the Assessing Officer. ( Deepak Gupta ), J. August 4, 2008 PV ( V. K. Ahuja ), J.