Ita/687/2009 Of The Commissioner Of Income Tax v. O.e.n. India Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON FRIDAY, THE 01ST DAY OF FEBRUARY 2019 / 12TH MAGHA, 1940 ITA.No.687 of 2009 AGAINST THE ORDER IN ITA 118/COCH/2001 DATED 03/03/2005OF I.T.A.TRIBUNAL, COCHIN BENCH APPELLANT/RESPONDENT: THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADVS. SRI.P.K.R.MENON, SENIOR COUNSEL, GOI (TAXES)SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/APPELLANT: O.E.N. INDIA LTD.,O.E.N.HOUSE, P.B.NO.1952, VYTTILA, KOCHI-19. BY ADVS. SRI.E.K.NANDAKUMAR (SR.)SRI.P.BENNY THOMAS THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 01.02.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Vinod Chandran,J. JUDGMENT The appeal by the Revenue relates to the year1994-95 and is with respect to two dis-allowances made, oneunder Section 36(1)(vii) and the other under Section 37 ofthe Income Tax Act, 1961 [for brevity “the Act”]. 2. The questions of law framed in the appeal are re-framed as under: (i)Whether under Section 36(1)(vii) of the Actthe Tribunal could have reversed the dis-allowancemade of bad debts especially when the assessee hadnot taken any steps to recover the said debts andhad merely stated it to be bad debts which wereagain receivable from a subsidiary company? (ii) Whether the Tribunal was correct in havingdeleted the dis-allowance of Rs.17,37,048/- underSection 37 of the Act? 3. The assessee; with respect to the transactionwith the subsidiary company, by name “O/E/N Micro SystemsLtd.”, had claimed a deduction of Rs.57,95,975/-. Out ofthis, an amount of Rs.40,58,927/- related to transactionswith the subsidiary company on a principal to principalbasis for supply of materials and the balanceRs.17,37,048/- were stated to be amounts advanced by the assessee for job works entrusted to the subsidiarycompany. The Assessing Officer [for brevity “AO”] foundthat there was no business expediency in declaring the debtto be bad debt. It is also found that the assessee hadmerely attempted financial support by writing off the baddebts, which cannot be permitted. It was also found thatthe assessee having continuous relationship with thesubsidiary company; there cannot be any bad debt betweenthemselves. 4. The denial of the claim under Section 37 with respect to Rs.17,37,048/- was on the ground that theassessee was not carrying on money lending business andthere was no ground for any advance. The first appellateauthority affirmed both the dis-allowances. However, theTribunal reversed such disallowance. 5. The learned Senior Counsel for Government ofIndia (Taxes) would argue that on established accountingprinciples, the assessee had a duty to take proceedings forrecovery and only then could there be a declaration of baddebts. The assessee had, without any steps being taken,declared it to be bad debts, which cannot be countenanced;nor can the tax liability be absolved from on such a merecontention taken. The advance given by the assessee also cannot be allowed as a claim under Section 37. respect to Rs.17,37,048/- was on the ground that theassessee was not carrying on money lending business andthere was no ground for any advance. The first appellateauthority affirmed both the dis-allowances. However, theTribunal reversed such disallowance. 5. The learned Senior Counsel for Government ofIndia (Taxes) would argue that on established accountingprinciples, the assessee had a duty to take proceedings forrecovery and only then could there be a declaration of baddebts. The assessee had, without any steps being taken,declared it to be bad debts, which cannot be countenanced;nor can the tax liability be absolved from on such a merecontention taken. The advance given by the assessee also cannot be allowed as a claim under Section 37. 6. The learned Counsel for the assessee, however,would contend that there was ample evidence before all theauthorities showing that the subsidiary company was infinancial doldrums and the debt was mainly due to theassessee having issued a corporate guarantee against theloan availed by the subsidiary company from KSIDC. Onrecovery proceedings taken, the assessee was forced to payup the amounts and it was in such circumstance that theassessee had declared the amounts due form the subsidiarycompany to be bad debts. There was absolutely nopossibility of recovery of the said amounts from thesubsidiary company which was in absolute financialstringency. The advances were not towards any financialassistance; but, however, to specific job works agreed uponby the subsidiary company to be executed for theassessee-Company. 7. We see that the Tribunal had considered theissue of the allowance under Section 36(1)(vii) especiallywith reference to the amendments made by Finance Act witheffect from 01.04.1989. As the words existing prior to01.04.1989, there as an obligation on the assessee toestablish the bad debt claimed for the previous year, whereas by the amendment any bad debt or part thereof,which is written off as irrecoverable in the accounts ofthe assessee for the previous year is eligible fordeduction. Hence, the legislature has cautiously left it tothe prudence of the assessee to determine whether the debtis bad or not. Further, we see that the Tribunal has lookedat the financial figures as available in the previous yearof the assessee-company as also the subsidiary company. Thesubsidiary company was in absolute financial stringency andthere was no possibility of any recovery from that company.We do not see any question of law arising from theaforesaid issue, since the Tribunal had looked into thefacts and found that the claim of bad debts cannot be saidto be one which is made merely for absolving the taxliability. The financial figures on the subject year of theassessee-company and the subsidiary company commend suchdeclaration of bad debts. 8. We also do not agree with the AO's finding thatthe advance amounts was in pursuance of a financialtransaction. The assessee had made the advance to thesubsidiary company for execution of job works, which ispermissible under Section 37. We, in the light of the above findings, refuse tointerfere with the orders of the Tribunal and reject theappeal of the Revenue, answering the questions framedagainst the revenue and in favour of the assessee; leavingthe parties to suffer their respective costs. Sd/-K.VINOD CHANDRANJUDGESd/-ASHOK MENONJUDGE APPENDIX APPELLANT'S ANNEXURES: ANNEXURE A COPY OF ORDER DATED 12.3.1997 U/S.143(3) OFTHE INCOME TAX ACT FOR THE ASSESSMENT YEAR 1994-95. ANNEXURE B COPY OF THE ORDER DATED 12.1.2001 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE C COPY OF THE ORDER DATED 3.3.2005 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN IN ITA NO.118/COCH/2001 FOR THE ASST.YEAR 1994-95. Vku/- [true copy]