R.mani v. The Income Tax Officerward-Ii(1), Madurai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 11.9.2014 CORAM THE HON'BLE MR.JUSTICE R.SUDHAKARAND THE HON'BLE MR.JUSTICE G.M.AKBAR ALI T.C.(A).Nos.1244 and 1245 of 2007 R.Mani...Appellant in both appeals Vs. The Income Tax OfficerWard-II(1), Madurai....Respondents in both appeals PRAYER: Appeals under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal 'C' Bench,Chennai, dated 25.8.2006 made in I.T.(S.S.) A. Nos.154/Mds/2004 and04/Mds/2005 for the Block Assessment Year 1989-1990 to 1999-2000against the order of the Commissioner of Income Tax (Appeals) -II,Madurai, dated 08.10.2004 and made in PAN/GIR No.M-11487, ITA No.165/2002-2003 against the order of the Assistant Commissioner ofIncome Tax Investigation Circle III, Madurai, dated 29.09.2000 andmade in PAN/GIR 3512/M/INV III/MDU for the Assessment year 1989-90 to1999 - 2000 (24.09.1998). For Appellant :Mr.R.SrinivasanFor Respondent :Mr.M.SwaminathanStanding Counsel J U D G M E N T(Delivered by R.SUDHAKAR, J.) The assessee is the appellant. It is a case of block assessment.These appeals are filed challenging the order of the Income TaxAppellate Tribunal 'C' Bench, Chennai, dated 25.8.2006 made in I.T.(S.S.) A.Nos.154/Mds/2004 and 04/Mds/2005 for the Block AssessmentYear 1989-1990 to 1999-2000. https://hcservices.ecourts.gov.in/hcservices/ case, the Tribunal is right in rejecting the claimfor availability of the opening cash balance merelybased on surmise sans any material?(ii)Whether, on the facts and circumstances of thecase, the Tribunal is right in assessing giftsreceived from friends as casual and non-recurringincome? 3. T.C.(A) No.1245 of 2007 was admitted on the followingsubstantial question of law: “Whether, on the facts and circumstances of the case,the Tribunal is right in holding that in a blockassessment under Section 158BC of the Income Tax Actirrecoverable advances made in the course of moneylending business cannot be allowed as a deduction incomputing the assessable income?” 4.1. The facts in a nutshell are as under: A search wasconducted under Section 132 of the Income Tax Act (for brevity, “theAct”) on 24.9.1998 and certain incriminating documents were seizedand heavy investments were noticed. Based on the materials, a noticeunder Section 158BC of the Act was issued and in response to thesame, the assessee filed a return of income. 4.2. The rival claims of the assessee and the department and thefindings rendered by the Original Authority, First AppellateAuthority and the Tribunal on each of the issues raised is as under: OPENING CASH BALANCE – (C.M.A.No.1244 of 2007) 4.3.1. The assessee claimed Rs.5,00,000/- as opening balance forthe assessment year 1989-1990 in the cash flow statement filed alongwith the return of income and stated that he received cash as giftfrom friends and relatives as under: (i)On the occasion of his daughter's ear-boringceremony, which was held on 14.4.1979, he receivedRs.2,60,000/-; and(ii)On the occasion of his son's ear-boring ceremony,which was held on 13.5.1985, he receivedRs.1,90,000/-; The said amount was received by the assessee in common parlance as“Moi”. That apart, the assessee claimed that a sum of Rs.50,000/-given by his wife out of her savings. 4.3.2. The Assessing Officer disbelieved the same and held thatthe functions were held in the years 1979 and 1985 and the assesseecould not hold the money received as “moi” for such a long period,namely, till 1.4.1988, in its entirety. Thereafter, based on thedirection given by the Joint Commissioner of Income Tax, Madurai, asum of Rs.2,50,000/- was taken as opening balance and the balanceamount of Rs.2,50,000/- was treated as undisclosed income. https://hcservices.ecourts.gov.in/hcservices/ The said amount was received by the assessee in common parlance as“Moi”. That apart, the assessee claimed that a sum of Rs.50,000/-given by his wife out of her savings. 4.3.2. The Assessing Officer disbelieved the same and held thatthe functions were held in the years 1979 and 1985 and the assesseecould not hold the money received as “moi” for such a long period,namely, till 1.4.1988, in its entirety. Thereafter, based on thedirection given by the Joint Commissioner of Income Tax, Madurai, asum of Rs.2,50,000/- was taken as opening balance and the balanceamount of Rs.2,50,000/- was treated as undisclosed income. https://hcservices.ecourts.gov.in/hcservices/ 4.3.3. Aggrieved by the same, the assessee went on appeal beforethe Commissioner of Income Tax (Appeals), who gave a further reliefof Rs.50,000/- and treated the opening balance as Rs.3,00,000/-,thereby restricting the undisclosed income to Rs.2,00,000/-. 4.3.4. Not being satisfied with the said order, the assesseepreferred an appeal to the Tribunal. The Tribunal confirmed theorder passed by the Commissioner of Income Tax (Appeals) holding thathe has taken a liberal view and the same warrants no interference. REMODELING OF HOUSE AT No.15-B, GOKALAY ROAD – (C.M.A.No.1244 of 2007) 4.4.1. In the course of search proceedings, it was found thatthe assessee claimed that the house was remodeled at a cost ofRs.3,50,000/-. But, as per the seized material, the departmentestimated the value at Rs.7,00,000/-. The assessee explained thatthe value of timber, asbestos and other construction materials isnot Rs.3,50,000/-, but only Rs.90,000/-, and the same was received bythe assessee on account of certain arbitration task undertaken by himin a dispute between the family friends and hence, it is a capitalreceipt and not undisclosed income. 4.4.2. The Assessing Officer held that the assessee could notgive proof for the same and as per the direction of the JointCommissioner of Income Tax, Madurai, the cost of remodeling was takenas Rs.4,40,000/- and the sum of Rs.90,000/- was treated asundisclosed income, stating that it cannot be treated as capitalreceipt. 4.4.3. Aggrieved by the same, the assessee went on appeal to theCommissioner of Income Tax (Appeals), who held that the amountreceived by the assessee as honorarium from friends and family onresolution of disputes could be termed as casual and non-recurringtype. Thus, he deducted a sum of Rs.5,000/- under Section 10(3) ofthe Act and the balance amount of Rs.85,000/- was brought to tax. 4.4.4. The assessee appealed to the Tribunal, which confirmedthe order passed by the Commissioner of Income Tax (Appeals). BAD DEBTS – (C.M.A.No.1245 of 2007) 4.5.1. In the course of the search, it was found that there werecertain entries showing that the assessee had given a sum ofRs.3,50,000/- to one Pothiraj and it was stated by the assessee thathe could not recover the said amount despite lodging of a complaintwith the police. Thereafter, the said Pothiraj passed away and as acomplete settlement towards the loan taken by Pothiraj, he took over58 Cents of land at Kannanendal Village. https://hcservices.ecourts.gov.in/hcservices/ 4.5.2. The Assessing Officer held that even though the assesseeclaims to have lent money to Pothiraj, the source of the same is notexplained and, therefore, treated it as undisclosed income of theassessee. Thus, the Assessing Officer brought to tax Rs.3,50,000/-being the loan given to said Pothiraj and Rs.64,000/- being the valueof the land. 4.5.3. The Commissioner of Income Tax (Appeals) held that evenif Rs.3,50,000/- is brought to tax, the same should be allowed asdeduction towards bad debts in the year of recovery, because theAssessing officer has already brought to tax Rs.64,600/- separatelytowards the value of land purchased and accordingly, allowed theappeal of the assessee by directing the Assessing Officer to deletethe addition of Rs.3,50,000/-. 4.5.2. The Assessing Officer held that even though the assesseeclaims to have lent money to Pothiraj, the source of the same is notexplained and, therefore, treated it as undisclosed income of theassessee. Thus, the Assessing Officer brought to tax Rs.3,50,000/-being the loan given to said Pothiraj and Rs.64,000/- being the valueof the land. 4.5.3. The Commissioner of Income Tax (Appeals) held that evenif Rs.3,50,000/- is brought to tax, the same should be allowed asdeduction towards bad debts in the year of recovery, because theAssessing officer has already brought to tax Rs.64,600/- separatelytowards the value of land purchased and accordingly, allowed theappeal of the assessee by directing the Assessing Officer to deletethe addition of Rs.3,50,000/-. 4.5.4. The department preferred an appeal before the Tribunaland the Tribunal finding that there were no books of accountmaintained by the assessee and there was no material to show that thedebt has become bad, held that in block assessment, undisclosedincome has to be computed in accordance with the provisions of theAct on the basis of evidence found as a result of search. It wasfurther observed that the assessee had not complied with therequirement of Section 36(2) of the Act, which mandates that forwriting off a debt, it should be shown as income in the previousyear. Since there was no such disclosure and claim for the previousyear, it was held that the claim of bad debt cannot be countenanced.Thus, the Tribunal reversed the order passed by the Commissioner ofIncome Tax (Appeals). 4.6. Impugning the order passed by the Tribunal, the presentappeals are filed on the substantial questions of law, referred supra. 5. We have heard the erudite arguments of Mr.R.Srinivasan,learned counsel for the appellant and Mr.M.Swaminathan, learnedStanding Counsel appearing for the respondent.6. The issues raised in these appeals are dealt with on thetrot. OPENING CASH BALANCE – (C.M.A.No.1244 of 2007) 7.1. Before adverting to the merits of this plea, it isapposite to refer to Section 158BB(1) of the Act, which reads asunder: “Section 158BB. Computation of undisclosed income of theblock period.--(1) The undisclosed income of the blockperiod shall be the aggregate of the total income of theprevious years falling within the block period computed,**[in accordance with the provisions of this Act, on thebasis of evidence found as a result of search or https://hcservices.ecourts.gov.in/hcservices/ requisition of books of account or other documents andsuch other materials or information as are availablewith the Assessing Officer and relatable to suchevidence], as reduced by the aggregate of the totalincome, or, as the case may be, as increased by theaggregate of the losses of such previous years,determined. ... ** Substituted for 'in accordance with the provisions ofChapter IV, on the basis of evidence found as a resultof search or requisition of books of account ordocuments and such other materials or information as areavailable with the Assessing Officer' by the FinanceAct, 2002, w.r.e.f. 1.7.1995.'” https://hcservices.ecourts.gov.in/hcservices/ requisition of books of account or other documents andsuch other materials or information as are availablewith the Assessing Officer and relatable to suchevidence], as reduced by the aggregate of the totalincome, or, as the case may be, as increased by theaggregate of the losses of such previous years,determined. ... ** Substituted for 'in accordance with the provisions ofChapter IV, on the basis of evidence found as a resultof search or requisition of books of account ordocuments and such other materials or information as areavailable with the Assessing Officer' by the FinanceAct, 2002, w.r.e.f. 1.7.1995.'” 7.2. According to the learned counsel for the assessee, theAssessing Officer made certain deductions for the years prior to 1988as probable expenditure and, thus, came to the conclusion that theopening balance of Rs.5,00,000/- as on 1.4.1988 is incorrect.Expatiating the said plea, he contended that as the department hasaccepted the sum of Rs.5,00,000/- as opening balance, they cannotrely upon the so-called expenditure of the period prior to 1.4.1988for disallowing the claim of opening balance of Rs.5,00,000/-, andthe same would be hit by the provisions of Section 158BB of the Act,which envisages that evidence found as a result of search orrequisition of books of account or other documents and such othermaterials or information as are available with the Assessing Officerrelatable to such evidence alone should be taken into considerationand not issues prior to the block period. To bolster this plea, thelearned counsel relied on the following decisions: (i)Commissioner of Income Tax v. Khushlal Chand NirmalKumar, [2003] 263 ITR 77 (MP); (ii)Commissioner of Income Tax v. G.K.Senniappan,[2006] 284 ITR 220 (Mad.); 7.3. To put it differently, the main plea of the learned counselfor the assessee is that block assessment of undisclosed income is tobe based on evidence found in the search and material or informationgathered in post-search inquiries made on the basis of evidence found https://hcservices.ecourts.gov.in/hcservices/ in the search. In the present case, the Assessing Officer is relyingon probable material or evidence in the nature of expenses incurredprior to the block period to compute the undisclosed income, which iscontrary to the provisions of Section 158BB of the Act. 7.4. The learned counsel for the assessee relied on theprovisions of Section 158BB(1) of the Act, post amendment brought inby Finance Act, 2002, to contend that the evidence found as a resultof search or requisition of books of account or other documents ormaterials or information available with the Assessing Officerrelatable to such evidence alone should be taken into considerationand in the present case, the probable expenses are not based onevidence and, therefore, it could not have been disallowed. 8.1. Per contra, Mr.M.Swaminathan, learned counsel for theRevenue impressed upon the Court that the provisions of Section 158BBof the Act, as amended and even prior to the amendment brought in byFinance Act, 2002, would make no difference insofar as the presentcase is concerned, as the Assessing Officer has taken intoconsideration the cash flow statement as admitted by the assessee forthe purpose of computation of undisclosed income for the blockperiod. To buttress this argument, he relied upon the annexure tothe assessment order and the summary, which are relevant to thepresent issue and read as under: 8.1. Per contra, Mr.M.Swaminathan, learned counsel for theRevenue impressed upon the Court that the provisions of Section 158BBof the Act, as amended and even prior to the amendment brought in byFinance Act, 2002, would make no difference insofar as the presentcase is concerned, as the Assessing Officer has taken intoconsideration the cash flow statement as admitted by the assessee forthe purpose of computation of undisclosed income for the blockperiod. To buttress this argument, he relied upon the annexure tothe assessment order and the summary, which are relevant to thepresent issue and read as under: 8.2. On the basis of this computation of undisclosed income, itwas contended that the undisclosed income was determined after givingdue weightage to the drawings for each of the block years. Hepleaded that if there were drawings out of the funds for each blockassessment year, the assessee cannot claim that the entire amount ofRs.5,00,000/- remained as such till 1.4.1988, namely, the beginningof the block assessment. In support of this plea, he placed emphasison the reasoning given in the assessment order, based on the cashflow statement furnished by the assessee, which is in the followingterms: “On the opening balance of Rs.5,00,000 (2 issue) I am ofthe opinion that the assessee is not entitled to getthis benefit. First function was celebrated somewhere in1979 and second function was celebrated in 1985. Theassessee presumed that the moi receipts were kept intacttill 1.4.88. The assessee was also not able to produceevidence in what form the moi receipts were kept. Whenhe is receiving moi from various parties/relatives it isalso mandatory on the part of the assessee to pay backto the parties/relatives on occasion like earboring/house warming/marriage etc., if not more, anequal amount as moi. For the function the assessee would have spent heavy amount for booking halls, food,drinks, beverages etc. Further the time gap is also verybig. It is therefore hard to believe that he has notspent any amount in moi payments, celebration offunctions etc. till the date of search. In thisconnection, I draw the attention to the finding given byme under the head Moi receipts. Therefore assessee'splea that he has the entire moi receipts intact on1.4.88 is not correct/true and hence it is rejected.Similarly the amount of Rs.50,000 stated to have beengiven by her wife out of her savings. There is noevidence for this. The assessee was an employee. Hiswife was also not doing any business. He is also verypoorly paid. In this circumstances no savings would bepossible. The assessee's representative vehemently argued againstthe stand taken by me once again before the JointCommissioner of Income Tax, Madurai. The matter wasagain discussed. Based on the evidence produced and thedirections given by the JCIT, Madurai an amount ofRs.2,50,000 is taken as opening balance and also assource.” 8.3. He further stated that the amount of Rs.2,50,000/- taken asopening balance by the Assessing Officer was increased by theCommissioner of Income Tax (Appeals) to Rs.3,00,000/- and the samewas approved by the Tribunal and in relation to the increase in theopening cash balance, there is no dispute raised by the department. 9.1. The core question that arises is as to whether theAssessing Officer relied upon any material other than what was foundin the course of search or proceedings thereafter to come to theconclusion that the sum of Rs.2,50,000/- alone should be shown asopening cash balance and other amount should be treated asundisclosed income. 8.3. He further stated that the amount of Rs.2,50,000/- taken asopening balance by the Assessing Officer was increased by theCommissioner of Income Tax (Appeals) to Rs.3,00,000/- and the samewas approved by the Tribunal and in relation to the increase in theopening cash balance, there is no dispute raised by the department. 9.1. The core question that arises is as to whether theAssessing Officer relied upon any material other than what was foundin the course of search or proceedings thereafter to come to theconclusion that the sum of Rs.2,50,000/- alone should be shown asopening cash balance and other amount should be treated asundisclosed income. 9.2. We find that the provision of Section 158BB of the Act isin relation to computation of undisclosed income for the block periodand that is to be done in accordance with the provisions of the Acton the basis of evidence found as a result of search or requisitionof books of account or other documents and such other materials ofinformation as are available with the Assessing Officer and relatableto such evidence. 9.3. In this case, the Assessing Officer based on the cash flowstatement and the statement of the assessee recorded consequent tothe search held that the opening cash balance should be Rs.2,50,000/-only. No doubt, we find that for drawing this inference theAssessing Officer has stated that some expenditure should be https://hcservices.ecourts.gov.in/hcservices/ allowable for the previous years. We do not find any error in such areasoning, given the statement of the assessee in the cash flowstatement that for ten long years his drawing is around Rs.50,000/-to Rs.75,000/- during every block year. In view of the admission ofthe assessee that there is a drawing of certain amount during everyblock year, which we have already set out in the previous paragraphs,the assessee cannot claim that there was no drawing at all prior tothe block assessment period 1989-1990. 9.4. The contention of the learned counsel for the assessee thatamount fixed as opening cash balance is based on no material itselfcannot be countenanced, because the cash flow statement of theassessee is a record which speaks for itself. Nothing more isrequired for the Assessing Officer in the course of search todetermine the opening cash balance and for computation of theundisclosed income for the block period. What is relevant forcomputation of undisclosed income under Section 158BB of the Act isnot merely evidence found as a result of the search, but materialinformation available with the Assessing Officer relatable to suchevidence. The cash flow statement is a piece of evidence before theAssessing Officer given at the behest of the assessee and thatmaterial has been considered to compute the undisclosed income. Theemphasis of Section 158BB of the Act is on computation of undisclosedincome and for that necessary materials can be taken intoconsideration and one such material is the cash flow statement andthe inference by the Assessing Officer appears to be justified. Itis not hypothetical or fanciful imagination of the assessing officer,but a stark reality, based on the cash flow statement made by theassessee and the contents therein. 9.5. We find that the decisions relied upon by the assessee maynot apply to the facts of the present case for the following reasons:(i)In the case of Commissioner of Income Tax v.Khushlal Chand Nirmal Kumar, [2003] 263 ITR 77 9.5. We find that the decisions relied upon by the assessee maynot apply to the facts of the present case for the following reasons:(i)In the case of Commissioner of Income Tax v.Khushlal Chand Nirmal Kumar, [2003] 263 ITR 77 (MP), the issue was whether a report obtainedsubsequently from a Departmental Valuation Officercould be used and it was held that such documentwas not part of the documents found in the courseof search or seizure and, therefore, no reliancecan be placed on the same.(ii)The decision of this Court in Commissioner ofIncome Tax v. G.K.Senniappan, [2006] 284 ITR 220(Mad.), is also a case of search conducted underSection 132(1) of the Act in respect of oneA.P.Shanmugaraj and documents seized in the courseof such search were used as materials in the caseof the assessee and in that view of the matter, theCourt found it not in consonance with Section 158BBof the Act; (iii)The decision in Commissioner of Income Tax v. https://hcservices.ecourts.gov.in/hcservices/ K.Bhuvanendran and Co., [2008] 303 ITR 235 (Mad.),was a case of no material found during the search;(iv)In the case of Commissioner of Income Tax v.R.M.Patel (HUF), [2008] 298 ITR 274 (Mad.), theseized material did not relate to the assessee and,therefore, the provisions of Section 158BB of theAct were held not be applicable.(v)The decision in Commissioner of Income Tax v. AshokKhetrapal, [2007] 294 ITR 143 (Del.) is inrelation to a case of no incriminating materialfound during the course of search;(vi)In the case of Commissioner of Income Tax v.Ganeshwar, [2009] 308 ITR 124 (Mad.), a DivisionBench of this Court following the decision in CITv. Ajit Kumar, [2008] 300 ITR 153 (Mad.) held thatthere was no material found during the course ofsearch operation and, therefore, it cannot be thebasis for making addition in the block assessment.Hence, all these decisions do not throw any light on the plea made bythe assessee. 9.6. On the contrary, Mr.Swaminathan, learned Standing Counselwas at pains to point out a decision of the Kerala High Court inVengat Bava v. Commissioner of Income Tax, [2009] 318 ITR 276(Ker.). In the said decision, based on cash flow statement furnishedby the assessee, certain additions towards unexplained investmentsand expenditure were made and additions to cash credit was also made.Under such circumstances, a Division Bench of the Kerala High Courtheld that when assessment is based on the materials gathered oninspection which showed proof of investment in landed properties andexpenditure in the course of time under various heads, additionunder Sections 68 and 69 of the Act is permitted in an assessmentunder Section 158BB read with Section 158BC of the Act. This is inline with the key word in Section 158BB of the Act that it should bein accordance with the provisions of the Act and fortifies our viewon this issue. 9.7. In such view of the matter, we answer the first substantialquestion of law against the assessee and in favour of the revenue.REMODELING OF HOUSE AT No.15-B, GOKALAY ROAD– (C.M.A.No.1244 of 2007) 10.1. The assessee claimed that the receipt of buildingconstruction materials valued at Rs.90,000/- was a capital receiptand not taxable. The Assessing Officer has held that it is notcapital receipt and treated it as undisclosed income. Theexplanation offered by the assessee that friends had given himcertain amount in consideration of his services rendered inresolution of disputes, in the absence of details and materials, did https://hcservices.ecourts.gov.in/hcservices/ not find favour with the Assessing Officer, who treated it asundisclosed income. 9.7. In such view of the matter, we answer the first substantialquestion of law against the assessee and in favour of the revenue.REMODELING OF HOUSE AT No.15-B, GOKALAY ROAD– (C.M.A.No.1244 of 2007) 10.1. The assessee claimed that the receipt of buildingconstruction materials valued at Rs.90,000/- was a capital receiptand not taxable. The Assessing Officer has held that it is notcapital receipt and treated it as undisclosed income. Theexplanation offered by the assessee that friends had given himcertain amount in consideration of his services rendered inresolution of disputes, in the absence of details and materials, did https://hcservices.ecourts.gov.in/hcservices/ not find favour with the Assessing Officer, who treated it asundisclosed income. 10.2. The Commissioner of Income Tax (Appeals), however,modified the assessment order and held that Rs.5,000/- should beexempted as per Section 10(3) of the Act and the balance Rs.85,000/-was treated as undisclosed income, being a casual and non recurringtype. The Tribunal approved the same. 10.3. The assessee relied upon a decision in Commissioner ofIncome Tax v. Ahmad Badsha Saheb, [1943] 11 ITR 590 (Mad.), wherearbitration payments were treated as capital receipts. We find thatthe admission of the assessee itself is that it is not a case ofarbitration per se. It is the claim of the assessee that it was paidas a gratis by some of his friends and relatives as a matter ofgoodwill and that too in kind, namely timber and asbestos.Therefore, the said decision is of no help to the assessee. 10.4. The reliance placed by the assessee on the decision ofthis Court in Commissioner of Income Tax v. Gopala Naicker Bangaru,[2012] 344 ITR 297 (Mad.) is of no assistance to the assessee herein,as the facts of the said case are different in entirety. In the saidcase, devotees out of natural love and affection and venerationvoluntarily donated to the assessee and it was held that the amountreceived by the assessee were gifts and they were not considerationsfor his profession/vocation. 10.5. In the case on hand, the assessing Officer was of the viewthat Rs.7,00,000/- has been expended towards renovation of the houseand Rs.3,50,000/- was claimed towards cost of material. That wasaccepted to some extent, except for Rs.90,000/- Therefore, the onuswould rest on the assessee to show as to how the sum of Rs.90,000/-was received by him either in kind or in value. There being nomaterial to substantiate that, the mere statement of the assessee isof no avail and the department was, in our considered opinion,justified in treating the balance amount of Rs.85,000/- asundisclosed income, giving exemption to the extent of Rs.5,000/- asper Section 10(3) of the Act. 10.6. In such view of the matter, the second question of law isanswered against the assessee and in favour of the Revenue. BAD DEBTS – (C.M.A.No.1245 of 2007)11.1. This issue relates to the advances made by the assessee toone Pothiraj to the tune of Rs.3,50,000/- and his claim that it hasbecome bad debt. It is on record that after the demise of Pothiraj,as a complete settlement towards the loan taken by Pothiraj, theassessee took over 58 Cents of land at Kannanendal Village worthabout Rs.64,600/-. https://hcservices.ecourts.gov.in/hcservices/ 10.6. In such view of the matter, the second question of law isanswered against the assessee and in favour of the Revenue. BAD DEBTS – (C.M.A.No.1245 of 2007)11.1. This issue relates to the advances made by the assessee toone Pothiraj to the tune of Rs.3,50,000/- and his claim that it hasbecome bad debt. It is on record that after the demise of Pothiraj,as a complete settlement towards the loan taken by Pothiraj, theassessee took over 58 Cents of land at Kannanendal Village worthabout Rs.64,600/-. https://hcservices.ecourts.gov.in/hcservices/ 11.2. Even though the Assessing Officer brought to taxRs.3,50,000/- given as loan and Rs.64,600/- being the value of land,the Commissioner of Income Tax (Appeals), directed deletion ofRs.3,50,000/-. However, the Tribunal reversed the said findingrelying upon Section 36 of the Act. The main reason for the Tribunalto disallow such a claim is that there were no books of account inthis case and there was no seized material to show that the debt hasbecome bad. It is was observed that in block assessment, undisclosedincome has to be computed in accordance with the provisions of theAct and, therefore, if the assessee had not offered this amount asincome in the previous year, he cannot claim benefit of bad debt. Thefinding of the Tribunal on this issue is as under: “13. We have heard both the parties and also perused thedocuments placed on record. Section 36(1)(vii) reads asbelow with effect from 1.4.1989. 'Clause (vii) of sub-section (1) of section 36 ofthe Income Tax Act provides for deduction of theamount of any bad debt or part thereof which iswritten off as irrecoverable in the accounts ofan assessee in the previous year'. Thus, not itis a mandatory condition that deduction can beallowed as bad debt only, when it is actuallywritten off as irrecoverable not on mereprovision. To allow the bad debt as per sec. 36(2), the following conditions are to befulfilled:- i. It must be a proper debt, or a part thereof.ii.Of a revenue nature contradistinguished fromcapital nature.iii.Which has been written off as irrecoverablein the accounts of the assessee for theprevious year. iv.(a) Which has been taken into account incomputing the income of the assessee of theprevious year in which the amount of suchdebt or part thereof is written off or of anearlier previous year, or (b) which represents money lent in theordinary course of the business of bankingor money – lending which is carried on bythe assessee.' 14. From the above, it is clear that only bad debtwritten off by the assessee can be claimed as deduction.For claiming the deduction under this provision theassessee must establish that the debt in question hasbecome bad debt. The very writing off of the bad debtin the books of accounts as bad is not sufficient toclaim the deduction under this provision. The debtbecomes bad not because the creditor assessee has https://hcservices.ecourts.gov.in/hcservices/ decided to treat it so at a particular time, but becauseat a particular point of time it was no longer possibleto recover such debt. The debtor had no means torecover the same and thereby recovery would not bepossible and these facts are to be established by theassessee. 14. From the above, it is clear that only bad debtwritten off by the assessee can be claimed as deduction.For claiming the deduction under this provision theassessee must establish that the debt in question hasbecome bad debt. The very writing off of the bad debtin the books of accounts as bad is not sufficient toclaim the deduction under this provision. The debtbecomes bad not because the creditor assessee has https://hcservices.ecourts.gov.in/hcservices/ decided to treat it so at a particular time, but becauseat a particular point of time it was no longer possibleto recover such debt. The debtor had no means torecover the same and thereby recovery would not bepossible and these facts are to be established by theassessee. 15. In the present case, the Assessee has not writtenoff the bad debt in the books of accounts. Theassessee has not furnished details like the date onwhich the debt has become bad and when the assessee haswritten it off as bad debt etc. In fact, there is nobooks of accounts at all in this case and there is noseized material to show that the debt has become bad.In the block assessment, undisclosed income has to becomputed in accordance with the provisions of theIncome-tax Act on the basis of evidence found as aresult of search or requisition of books of accounts orother documents and such other materials or informationas are available with the Assessing Officer andrelatable to such evidence. Where there is no evidenceto suggest that the debt has become bad and the seizedmaterial also does not suggest that the debt has becomebad, it cannot be allowed as bad debt. Further, thisdebt has not been taken into account in computing theincome of the assessee in any earlier year and thecondition laid down in sec.36(2) is not fulfilled. Theratio laid down in the decision of the Tribunal in thecase of K.Easwarappa v. DCIT (89 ITD 229) relied on bythe assessee is not applicable to the facts of thepresent case. In view of this, we are of the opinionthat the CIT (Appeals) is not justified in allowing theground of the assessee on this issue. Accordingly, wereverse order of the CIT (Appeals) and allow the groundtaken by the Revenue.” 11.3. On the contrary, as pointed out by the learned counsel forthe assessee, the Assessing Officer rejected the plea of the assesseeto treat Rs.3,50,000/- as bad debt by holding that the same can onlybe treated as investment in money lending in the year of giving andit is not a bad debt. The reasoning given by the Assessing Officerand the finding of the Tribunal based on Section 36(2) of the Act areon two independent interpretations of the same issue. In such viewof the matter, on facts, there appears to be an issue in relation tothe applicability of Section 36(2) of the Act, which should beconsidered by the Assessing Officer. 11.4. In such view of the matter, to the extent indicated above,we remand the matter to the Assessing Officer. https://hcservices.ecourts.gov.in/hcservices/ 12. In the result, T.C.(A).No.1244 of 2007 is dismissed and T.C.(A) No.1245 of 2007 is disposed of, by remanding the matter to theAssessing Officer, to the extent indicated above. No costs. Sd/-Assistant Registrar(J)//True Copy//Sub Assistant RegistrarsasiTo1.The Assistant Registrar,Income Tax Appellate TribunalChennai Bench "C", Chennai.2.The Secretary, Central Board of Direct Taxes, New Delhi.3.The Commissioner of Income Tax (Appeals) - IIMadurai.4.The Assistant Commissioner of Income Tax Investigation Circle-III, Madurai.1 CC to Mr.R.Srinivasan, Advocate SR.No. 436231 CC to Mr.M.Swaminathan, Advocate SR.No. 43353 T.C.(A).Nos.1244 and 1245 of 2007JSV (CO)PSI (13.11.2014)