The Commissioner Of Income-Tax, Amritsar v. M/S Lal Woollen & Silk Mills Pvt. Ltd., Amritsar

ITR No.105 of 1982 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. ITR No.105 of 1982Date of decision:18.3.2009 The Commissioner of Income-tax, Amritsar ... Applicant Versus M/s Lal Woollen & Silk Mills Pvt. Ltd., Amritsar. ... Respondent CORAM:Hon'ble Mr. Justice J.S.Khehar.Hon'ble Mr.Justice Uma Nath Singh. Present:Ms.Naveender P.K.Singh, Advocate, for the applicant-revenue.Mr.S.K.Mukhi, Advocate,for the respondent-assessee. ... J.S.KHEHAR, J.(ORAL) Through this reference, the following substantial question of law has been posed for our determination: “Whether on the facts and in the circumstances of the case, theTribunal is right in holding that the claim of the bad debt to theextent of Rs.1,30,242/- was to be allowed as a deduction in theassessment of the assessee.” So as to determine the question posed, it would be necessary todelineate the factual background giving rise to the issue. Upto the assessment year 1973-74, certain business was carriedout by M/s Lal Woollen & Silk Mills as a firm. M/s Lal Woollen & SilkMills had several branches including M/s Lal Worsted Spinning Mills, M/sLal Oil & Chemical Mills and M/s H.M.Mehra & Co. The business of M/sLal Woollen & Silk Mills was taken over by two companies. Therespondent-assessee was one of the companies, which had taken over the ITR No.105 of 1982 2 business of M/s Lal Woollen & Silk Mills. The respondent-assessee wasincorporated on 16.2.1972. It commenced its business on 1.7.1972. It is not a matter of dispute that a sum of Rs.1,30,242/- wasrecoverable by M/s Lal Woollen & Silk Mills. The aforesaid asset of M/sLal Woollen & Silk Mills is claimed to have fallen to the share of therespondent-assessee. This emerges from certain observations made in theorder dated 30.1.1982 passed by the Income Tax Appellate Tribunal,Amritsar Bench, Amritsar. In this behalf, reference may be made to thefindings recorded in paragraph 13 thereof. For the assessment year 1976-77, after having partly acquired the assets and liabilities of M/s LalWoollen & Silk Mills, the respondent-assessee declared the debtsrecoverable at the hands of M/s Lal Woollen & Silk Mills amounting toRs.1,30,242/- as irrecoverable. The same were, therefore, written off as abad debt during the aforesaid assessment year 1976-77 ( i.e. previous year1975-76). The Assessing Officer accepted the claim of the respondent-assessee and allowed deduction of the written off debt vide order dated17.9.1979. The respondent-assessee preferred an appeal before theCommissioner of Income-tax (Appeals), Amritsar, against the order of theAssessing Officer. During the course of appellate proceedings, the issuewhether the respondent-assessee could claim a deduction on the basis of thebad debt written off was re-examined. The Commissioner of Income-tax(Appeals), Amritsar, while determining the instant issue, set aside the orderpassed by the Assessing Officer. The Commissioner of Income-tax(Appeals), Amritsar, arrived at the conclusion that the respondent-assesseewas not entitled to any such deduction. This determination was rendered by ITR No.105 of 1982 3 the Commissioner of Income-tax (Appeals), Amritsar, under the mandate ofSection 36 of the Income Tax Act, 1961. ITR No.105 of 1982 3 the Commissioner of Income-tax (Appeals), Amritsar, under the mandate ofSection 36 of the Income Tax Act, 1961. The respondent-assessee preferred an appeal on the aforesaiddetermination rendered at the hands of the first appellate authority. TheIncome Tax Appellate Tribunal, Amritsar Bench, Amritsar, accepted theappeal preferred by the respondent-assessee. While doing so, the IncomeTax Appellate Tribunal relied on the decision rendered by the AndhraPradesh High Court in Commissioner of Income Tax, A.P. vs.T.Veerabhadra Rao K.Koteswara Rao & Co. (1976) 102 ITR 604. In thisbehalf, the findings recorded by the Income Tax Appellate Tribunal inparagraphs 12 and 13 of its order dated 30.1.1982, were pointedly broughtto our notice during the course of arguments, the same are being extractedhereunder: “12.The learned counsel for the assessee has submitted thatthe whole question has been considered by the Andhra PradeshHigh Court in the case of T.Veerbhadra Rao and by theAllahabad High Court in the case of T.N.Shah Pvt. Ltd.-120I.T.R. 354 and there was no decision of any High Courtregarding section 36 of the Income-tax Act which might havetaken a view different from the above. It was, therefore,contended that the learned C.I.T. (Appeals) has erred indiffering from the above High Courts decisions and enhancingthe assessee's income. 13.We have considered the facts of the case and thearguments advances from both the sides. There is nodifference on the facts and it is an admitted position that the ITR No.105 of 1982 4 enhancement made by the C.I.T. (Appeals) relates to thosedebts, which had been contracted during the existence of theerstwhile firm which was predecessor in business to theassessee-company. The question for consideration is onlywhether in view of the language of section 36(2) a debt, whichis standing as the debt of the business taken over by theassessee and paid for at the time of the take over of thebusiness as a whole becomes bad in the relevant year can it beallowed as a deduction or it has to be disallowed on the groundthat it had not been taken into account in the computation ofthis particular assessee though it might have been taken inaccount in the computation of income of this particularbusiness. The whole matter turns on the interpretation of theprovisions of section 36(2) and it cannot be denied that theinterpretation placed by the C.I.T. (Appeals) is possible.However, the question of interpretation of the provisions ofsection 36(2) had come up for consideration before the AndhraPradesh High Court in the case of T.Veerbhadra Rao and afterconsidering the background of the provisions and its languagethe court had held that the deduction available under section 36(2(i)(b) was not only available to the assessee but it is alsoavailable to the succeeding assessee and the person claimingthe deduction need not be the same assessee. The court hadfurther held that since the assessee had taken over the assetsand liabilities of the predecessor firm and since the successorfirm continued the business and was even assessed to tax on the ITR No.105 of 1982 5 ITR No.105 of 1982 5 income accrued on the debt which was taken over the assesseecould write off the debts and claimed deduction therefore. Inthis connection, it was held by Their Lordships that the presentAct does not make any departure from the law in this respectas was found by the decisions of several High Courts. TheirLordships had also considered the comments of authorsSampath Lyengar and had held that it was not in accordancewith the provisions of law. Their Lordships also referred to theposition regarding the banking business and held that thereshould be no difference between this business and the otherbusiness in this regard.” During the course of hearing, learned counsel for therespondent-assessee also invited our attention to the fact that the decisionrendered by the Andhra Pradesh High Court (referred to in the foregoingparagraphs) had been affirmed by the Supreme Court in Commissioner ofIncome Tax, A.P. vs. T.Veerabhadra Rao K.Koteswara Rao & Co. (1985)155 ITR 152. It is, therefore, the contention of learned counsel for therespondent-assessee that a seal of approval has been affixed by the SupremeCourt on the determination rendered by the Andhra Pradesh High Court. We have given our thoughtful consideration to the questionposed. According to learned counsel for the applicant-revenue, theanswer to the aforesaid question has to evolve from Section 36 of theIncome Tax Act, 1961, which envisages the deduction under reference. Inthis behalf, our pointed attention was invited to Section 36(1)(vii) as well asSection 36 (2) (i) of the Income Tax Act, 1961 (hereinafter referred to as the ITR No.105 of 1982 6 1961 Act). The aforesaid two provisions relied upon are being extractedhereunder for facility of reference: “36. (1)The deductions provided for in the followingclauses shall be allowed in respect of the matters dealt withtherein, in computing the income referred to in section 28- xx xx xx (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. (Provided that in the case of an assessee to which clause(viia) applies, the amount of the deduction relating toany such debt or part thereof shall be limited to theamount by which such debt or part thereof exceeds thecredit balance in the provision for bad and doubtfuldebts account made under that clause.) (Explanation.- For the purposes of this clause, any baddebt or part thereof written off as irrecoverable in theaccounts of the assessee shall not include any provisionfor bad and doubtful debts made in the accounts of theassessee;) (2)In making any deduction for a bad debt or partthereof, the following provisions shall apply- (i)no such deduction shall be allowed unless suchdebt or part thereof has been taken into account incomputing the income of the assessee of the previousdebt or part thereof has been taken into account incomputing the income of the assessee of the previous ITR No.105 of 1982 7 year in which the amount of such debt or part thereof iswritten off or of an earlier previous year, or representsmoney lent in the ordinary course of the business ofbanking or money-lending which is carried on by theassessee.” (2)In making any deduction for a bad debt or partthereof, the following provisions shall apply- (i)no such deduction shall be allowed unless suchdebt or part thereof has been taken into account incomputing the income of the assessee of the previousdebt or part thereof has been taken into account incomputing the income of the assessee of the previous ITR No.105 of 1982 7 year in which the amount of such debt or part thereof iswritten off or of an earlier previous year, or representsmoney lent in the ordinary course of the business ofbanking or money-lending which is carried on by theassessee.” Undoubtedly, the deduction under reference relates to a writtenoff debt, which had become irrecoverable and had been shown as such bythe assessee. The deduction envisaged under Section 36(1)(vii) of the 1961Act is, however, subject to the provisions of sub-section (2) of Section 36.Consequently, primarily, the issue under reference calls for an interpretationof clause (i) of Section 36(2) of the 1961 Act. It is apparent from the plainreading of the aforesaid provision that an assessee is entitled to a deductionequivalent to the amount of a written off debt, under Section 36(1)(vii) ofthe 1961 Act. The question of applicability of Section 36(1)(vii) of the1961 Act will, however, arise if the respondent-assessee can establish thefulfillment of the ingredients of Section 36(2) of the 1961 Act. A plainreading of clause (2) of Section 36(2) of the 1961 Act prima facie shows thefollowing essential ingredients thereof:- Firstly, the assessee ought to have depicted the debt underreference, as his income, during the previous year (duringwhich the deduction is sought) or any other earlier previousyear (prior to the year during which the deduction is sought).Secondly, the assessee ought to have shown the debt asirrecoverable or as a bad debt, and ought to have written off thesame during the previous year. Thirdly, the deduction for such a debt which has been written ITR No.105 of 1982 8 off, can be claimed in the previous year during which theassessee has written off the debt. It is the vehement contention of learned counsel for theapplicant-revenue that the debt of Rs.1,30,242/- allegedly recoverable byM/s Lal Woollen & Silk Mills, which allegedly fell to the share of therespondent-assessee, had never been depicted as the income of therespondent-assessee in the accounts of the respondent-assessee, either in theprevious year during which it was sought to be written off, or in any otherprevious year prior thereto. It is, therefore, the vehement contention oflearned counsel for the applicant-revenue that one of the essentialconditions of deduction having not been met by the respondent-assessee, thededuction claimed by the respondent-assessee cannot be granted. Insofar asthe aforesaid factual position is concerned, the same emerges from thenotice issued to the respondent-assessee under Section 251(2) of the 1961Act for enhancement, which reads as under:- “ While discussing the subject regarding write off of bad debtsto the tune of Rs.89,332/-, it was found that these debtspertained to the old firm whose business was taken over by thelimited company styled Lal Woollen & Silk Mills P. Ltd.during the accounting period relevant to the assessment year1974-75. It appears that the assessing officer the then ITO,Distt. I (i) allowed a deduction of bad debts totallingRs.2,35,226/- relating to a Govt. department i.e. The DirectorGeneral Supplies and Disposal and rejected your claim withregard to the further sum of Rs.89,332/-. In my opinion thededuction of Rs.2,35,226/- was erroneously allowed by the ITR No.105 of 1982 9 “ While discussing the subject regarding write off of bad debtsto the tune of Rs.89,332/-, it was found that these debtspertained to the old firm whose business was taken over by thelimited company styled Lal Woollen & Silk Mills P. Ltd.during the accounting period relevant to the assessment year1974-75. It appears that the assessing officer the then ITO,Distt. I (i) allowed a deduction of bad debts totallingRs.2,35,226/- relating to a Govt. department i.e. The DirectorGeneral Supplies and Disposal and rejected your claim withregard to the further sum of Rs.89,332/-. In my opinion thededuction of Rs.2,35,226/- was erroneously allowed by the ITR No.105 of 1982 9 assessing officer as a bad debt because one of the essentialconditions for allowing such a deduction is that the amountshould have been taken into account in computing the incomeof the assessee for that previous year or an earlier previous yearor should represent money lent in the ordinary course ofbusiness of banking or money lending carried on by theassessee. In the present case, the sum of Rs.2,35,226/- was nottaken into account in computing the income of the assesseenamely the limited company whose assessment is under appealand could, therefore, not have been allowed a deduction.Consequently I propose to enhance the assessed income byRs.2,35,226/-. You are requested to please file your objections within fifteendays of the receipt of this letter which may be treated as anopportunity notice under section 251(2).” It is apparent that there was a clear depiction in the notice, which was issued to the respondent-assessee, showing that the respondent-assessee had never indicated the debt under reference, as its income. Theinstant factual position also emerges from the order passed by the IncomeTax Appellate Tribunal (which has been extracted hereinabove). It is, however, the submission of learned counsel for therespondent-assessee, based on the factual position depicted in paragraph 11of the order of the Income Tax Appellate Tribunal dated 30.1.1982, that asum of Rs.1,30,242/- had already been shown as the income of therespondent-assessee. It is the submission of the respondent-assessee that theincome under reference was shown as the income of M/s Lal Woollen & ITR No.105 of 1982 10 Silk Mills. And the respondent-assessee having purchased the aforesaidinterest the same should be treated as the income of the respondent-assessee. It is not possible for us to accept the submission of the learnedcounsel for the respondent-assessee. In fact, the factual position is to thecontrary. Nothing has been brought to our notice which could lead to theconclusion that the respondent-assessee, had shown the debt under referenceas its income. In fact no material has been brought to our notice on thebasis whereof even such an inference could have been made. In thejudgment rendered by the Andhra Pradesh High Court (referred to above),the Income Tax Appellate Tribunal noticed that “the Court had further heldthat since the assessee had taken over the assets and liabilities of thepredecessor firm and since the successor firm continued the business andwas even assessed to tax on the income accrued on the debt which wastaken overthe assessee could write off the debts and claim deductionthereof.” It is, therefore, apparent that in the case relied upon (rendered bythe Andhra Pradesh High Court) the assessee under reference had expresslyshown the debt due as its income. The payment of tax on the interestpayable on the debt by the said assessee, also lead to the clear inference thatthe assessee was reflecting the debt as its income. Insofar as the present case is concerned, there is no materialwhatsoever on the record of this case to depict that the respondent-assesseereflected the debt under reference as its income. It is also not possible forus to accept that the debt income allegedly shown by M/s Lal Woollen &Silk Mills should be treated as the income of the respondent-assesee. Therespondent-assessee is a private limited company, and as such, an entity ITR No.105 of 1982 11 separate and distinct from the erstwhile M/s Lal Woollen & Silk Mills. It isjust not acceptable in law to treat the income of M/s Lal Woollen & SilkMills as the income of the respondent-assessee unless it is expressly shownto be so. Even otherwise the respondent-assessee did not acquire the entireassets and liabilities of M/s Lal Woollen & Silk Mills. The assets andliabilities of M/s Lal Woollen & Silk Mills were admittedly taken over bytwo companies. It is not even clear whether or not the debt under reference,in respect whereof the respondent-assessee is claiming a deduction, came tothe share of the respondent-assessee. It is possible to infer that it did notfall in the share of the respondent-assessee. Had that been so, it wouldcertainly have been reflected in the income of the respondent-assessee.There is also no material whatsoever on the record of this case, on the basiswhereof an inference can be drawn that the respondent-assessee wastreating the aforesaid debt as its income. It is, therefore, apparent that thecontroversy determined by the Andhra Pradesh High Court (as well as theApex Court) in the judgment referred to hereinabove is clearlydistinguishable from the facts and circumstances of the present case. Since we have concluded hereinabove on an analysis of clause(i) of Section 36(2) of the 1961 Act that all 3 essential ingredients thereofmust be fulfilled before an assessee can claim a deduction. And since, weare satisfied that in the present case, the respondent-assessee did not fulfillone of the aforestated mandatory conditions, namely, the debt in questionwas never reflected in the accounts of respondent-assessee as its income,the respondent-assessee would not be entitled to a deduction on the basis ofits having written off the debt under reference. For the reasons recorded hereinabove, the reference made to ITR No.105 of 1982 12 this Court (as has been noticed in the opening paragraph of this order) isanswered in favour of the applicant-revenue and against the respondent-assessee. Disposed of accordingly. ( J.S.KHEHAR) JUDGE 18.3.2009pk ( UMA NATH SINGH ) JUDGE