Dismissed

Indra Rani v. Income-Tax Officer, Ward v (2), Ludhiana

Punjab & Haryana HC2 Jan 2012ITA/320/2011

Case brief

AI extract

What is this about?

The appellant appealed against the Tribunal's order disallowing bad debt deduction under Section 36(1)(vii). The High Court observed that the assessee did not raise the plea for deduction as a business loss under Section 28 read with Section 37 during earlier proceedings and found no merit in the contention, dismissing the appeal.

What did the court decide?

No relief; the appeal was dismissed with a clarification that the dismissal did not preclude the Tribunal from considering the application for recall under Section 254(2) regarding the bad debt of M/s

Indra Rani Vs Income-Tax Officer… — Civil Procedure and Limitation | Punjab & Haryana HC (2012)

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ITA No. 320 of 2011

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IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH

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ITA No. 320 of 2011

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Date of Decision: 2.1.2012

Smt. Indra Rani

....Appellant.

Versus

Income Tax Officer

...Respondent.

CORAM:HON'BLE MR. JUSTICE M.M. KUMAR. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.

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PRESENT: Mr. Ravi Shankar, Advocate for the appellant.

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AJAY KUMAR MITTAL, J.

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This appeal has been filed by the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 28.2.2011 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafter referred to as “the Tribunal”), in ITA No. 398/Chandi/2009 relating to the assessment year 2005-06, claiming the following substantial questions of law:-

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“A. Whether the ITAT is justified in allowing deduction neither as bad debts nor as business loss u/s 28 read with Section 37 in the instant case since the relief under Section 37 was clearly available to the assessee on account of non-recovery of advances made to M/s Neepaz Metaliks on the facts of the

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ITA No. 320 of 2011

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case on record before the Tribunal which is contrary to the binding nature of circular of the board (supra) specifically mentioning that the “officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in “the matter of claiming and securing reliefs”, particularly when now it is a settled law that the circulars of CBDT are binding on the Income Tax Authorities as also held by the Constitutional Bench of the Hon'ble Supreme Court in the case of Navnit Lal C. Javeri (Supra)?

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B. Whether the ITAT is justified by not giving the relief to the assessee u/s 28 read with Section 37 suo motu on account of M/s Neepaz Metaliks, when the Tribunal is duty bound to grant the relief u/s 37 even when the counsel of the assessee has not raised that plea as held by the Hon'ble Supreme Court in the case of Mahalakshmi Textile Mills Limited (Supra), particularly when the business loss has not been disputed?

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C. Whether the ITAT is justified in not ignoring the mistake of the counsel claiming the deduction of bad debts u/s 36(1)(vii) on account of non-recovery of advances to M/s Neepaz Metaliks which could be rightly claimed u/s 28 read with Section 37 as

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ITA No. 320 of 2011

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business loss, as by this order the innocent assessee has suffered on the advise tendered by the counsel, which is based on bona fide belief of being correct when it is already a well settled law that no litigant should suffer on account of the mistake committed by the counsel and specifically held by this Hon'ble High Court?

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D. Whether the Income Tax Appellate Tribunal is justified in not considering the issue of bad debt on account of sales made to M/s Mega Alloys Ltd. to the tune to Rs.2,20,000/-, when the condition/section 36 (2)(i) is duly fulfilled?”

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Briefly stated, the facts necessary for adjudication of controversy involved as narrated in the appeal are that the assessee is a commission agent and trader in sponge iron. The assessee filed a return declaring an income of Rs.4,78,552/- on 31.10.2005 for the assessment year 2005-06 claiming deduction of Rs.19,50,052/- on account of rebate and discount. The return was processed under Section 143(1) of the Act and the same was selected for scrutiny. During the course of assessment proceedings, the details of account of rebate and discount were examined by the Assessing Officer. The entries in respect of bad debts claimed by the assessee were scrutinized and Rs.14,30,000/- and Rs.2.20,000/- were disallowed vide order dated 28.12.2007 under Section 36(1)(vii) of the Act on account of bad debts claimed by the assessee in respect of M/s Neepaz Metaliks (now M/s Adhunik Metaliks Ltd.) and M/s Mega Alloys Limited,

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ITA No. 320 of 2011

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Jalandhar, respectively. The Assessing Officer disallowed the claim of bad debt in respect of M/s Neepaz Metaliks (now M/s Adhunik Metaliks Ltd.) on the following grounds:-

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(i) the assessee had claimed that she was hopeful to recover 50% of the outstanding balance amount whereas balance 50% was taken as bad debts. However, this was found to be incorrect as the same was never communicated to the debtor nor any credit note for the 50% written off amount was issued.

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(ii) the debtor, M/s Adhunik Metaliks (erstwhile M/s Neepaz Metaliks) had shown credit balance of assessee in its balance sheet as on 31.3.2005, 31.3.2006 and 31.3.2007.

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(iii) On spot cross verification of assessee's claim towards M/s Adhunik Metaliks was found to be good debt.

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(iv) though entry of bad debt was prima facie evidence of debt becoming irrecoverable but was not conclusive unless substantiated by cogent material by the assessee.

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(v) no genuine efforts were made by the assessee to recover the amount from M/s Adhunik Metaliks Ltd. as no correspondence was made with the said company.

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(vi) No basis had been produced by the assessee

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as to on what basis 50% of the outstanding amount was considered to be recoverable.

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(vii) M/s Adhunik Metaliks Ltd. is a public limited company whose shares were listed on National Stock Exchange in India.

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The claim of bad debt of Rs.2,20,000/- relating to M/s Mega Alloys Ltd., Jalandhar was not allowed for the reasons enumerated as

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under:-

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(i) M/s Mega Alloys Ltd. had shown credit balance of assessee in its books of account as on 31.3.2005 and 31.3.2006 and, therefore, good debt would not turn into bad debt only if the assessee so chooses.

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(ii) though entry of bad debt was prima facie evidence of debt becoming irrecoverable but was not conclusive unless substantiated by cogent material by the assessee.

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(iii) no genuine efforts were made by the assessee to recover the amount from M/s Adhunik Metaliks Ltd. as no correspondence was made with the said company.

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Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [In short “the CIT(A)”], who vide order dated 10.2.2009 allowed the appeal and deleted the addition made by the Assessing Officer in both the cases. It was held that the claim of the assessee that debt of Rs.14,30,000/- and Rs.2,20,000/- in

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the names of M/s Neepaz Metaliks (now M/s Adhunik Metaliks Ltd.) and M/s Mega Alloys Ltd. were rightly claimed as bad debts by the assessee. Against the order of the CIT(A), the department approached the Tribunal. The Tribunal vide order dated 28.2.2011 partly allowed the appeal of the revenue. Hence, the present appeal by the assessee.

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We have heard learned counsel for the appellant. 6. Learned counsel for the appellant submitted that the claim of the assessee in respect of bad debts which has been disallowed under Section 36(1)(vii) of the Act was in fact admissible under Section 37 of the Act. According to the learned counsel, Section 37 of the Act provides for deductions of all expenses which are essential for carrying on the business and the business loss incurred by the assessee had wrongly claimed as bad debt whereas the same was admissible under Sections 28 and 37 of the Act. Learned counsel placed reliance on the decision of Delhi High Court in Mohan Meakin Ltd. v. Commissioner of Income-tax, Delhi [2011] 11 Taxman 141 (Delhi) in support of his submission. According to him, once a deduction was admissible under any provision, it was the duty of the Assessing Officer to have allowed the same in view of Circular No. 14(XL-35) of 1955 dated 11.4.1995 as the circulars are binding on the department in view of the judgments of the Apex Court in Navnit Lal C. Jhaveri Vs. K.K. Sen, Appellate Assistant Commissioner of Income Tax, Bombay, (1965) 56 ITR 198 and Ellevman Lines Ltd. v. Commissioner of Income Tax (1971) 82 ITR 913 (SC). Reliance was also placed on the judgment of the Hon'ble Supreme Court reported in Commissioner of Income Tax, Madras v. Mahalaxmi Textiles Mills Ltd. (1967) 66 ITR 710.

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After giving our thoughtful consideration, we do not find any merit in the contention of learned counsel for the assessee.

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The Tribunal while disallowing the claim of the assessee held that under Section 36(1)(vii) of the Act no deduction for a bad debt or part thereof could be allowed unless such debt or part thereof had been taken into account in computing the claim of the assessee of the previous year in which the amount of such debt or part thereof is written off in an earlier previous year as provisions of Section 36(2)(i) of the Act were not fulfilled. The relevant observations of the Tribunal read thus:-

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“We have heard both the parties. The claim of deduction under Section 36(1)(vii) is subject to the provisions of section 36(2). Section 36(2)(i) specifically provides that no deduction for a bad debt or part thereof would be allowed unless such debt or part thereof has been taken into account in computing the claim of the assessee of the previous year in which the amount of such debt or part thereof is written of or an earlier previous year. On being specifically asked as to how the aforesaid conditions are satisfied by the assessee, the learned counsel for the assessee could not give any satisfactory explanation. In this view of the matter, the assessee is not entitled to succeed in its under Section 36(1) (vii) of the Act. In this view of the matter, the order of the CIT(A) is reversed and that of the AO restored. The judgments/decisions relied upon by the ld. CIT

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(A) are not relevant in that they do not hold that deduction u/s 36(2) are not fulfilled. Ground No.1 taken by the Department is allowed.”

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Learned counsel for the appellant was unable to demonstrate that the Tribunal was not right in disallowing the claim of the assessee as a bad debt. No illegality could be pointed out in the aforesaid finding recorded by the Tribunal which may warrant interference by this Court. However, the emphasis of the learned counsel was that it was admissible as a business loss under Section 28 (i) read with Section 37 of the Act.

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Perusal of the order passed by the assessing authority as well as the CIT(A) and the Tribunal no where suggests that the assessee had ever raised any such plea as has been sought to be projected before this Court. Even examining the claim of the assessee that the assessee was entitled to deduction of the aforesaid amount as a business loss under Section 37 of the Act, in view of the judgment of Delhi High Court in Mohan Meakin Ltd's case (supra), we are not impressed with the same.

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In Mohan Meakin Ltd's case (supra) , the Delhi High Court was dealing with a case where the assessee had established an export division for export of various items including leather products. The assessee established business contacts with Commercial Corporation of USA and received huge orders from them. To maintain their commitment for supply of handmade leather shoes they, entered into an agreement with a boot house for carrying out necessary manufacturing of handmade leather shoes. The assessee had to advance huge

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amount from time to time to the boot house to enable them to maintain their supplies in time. Since the assessee could not realise Rs.25.32 lakhs from said Corporation, the supplies to the boot house had to be suspended. This development resulted in boot house expressing its inability to refund advances given by the assessee on the plea that they had in turn given substantial advances to workers engaged by them. The sole proprietor of Boot house having died, the assessee could not take any action against the deceased proprietor or his legal heirs. The same was claimed to be bad debt by the assessee. The claim of the assessee was rejected. However, the High Court relying upon Chenab Forest Co. v. CIT (1974) 96 ITR 568 (J&K) and Mysore Sugar Co. Ltd. v. CIT (1962) 46 ITR 649 (SC) had accepted the claim of the assessee on the ground that it amounted to business loss and was admissible under Sections 28(i) read with 37 of the Act. The Court on facts had concluded that the boot house to whom huge amount of advance had been made had expressed its inability to refund such advances to the assessee which had resulted in business loss to the assessee.

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In the present case, the Assessing Officer noticed various factors to conclude that the amount recoverable from M/s Neepaz Metalliks (now M/s Adhunik Metalliks Ltd.) and M/s Mega Alloys Ltd. Could not be held to irrecoverable relating to the year under consideration. The CIT(A) primarily reversed the same by observing that after the amendment by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1.4.1989, once an assessee writes off a debt in its books of account, deduction under Section 36(1)(vii) of the Act on account of bad

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debt is allowable. In so far as bad debt and trading loss are concerned, a trading loss has a wider connotation than a bad debt. A bad debt may also be a trading loss but a trading loss need not necessarily be a bad debt. The entry by way of writing off is prima facie evidence of debt having become bad but not a conclusive criterion and the onus rests on the assessee to establish that the debt has become bad in the relevant year.

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The claim whether an expense falls within parameters of Section 37 of the Act would depend upon facts of each case. On facts, the assessee had not been able to establish that the debt was not recoverable in the year under consideration and, therefore, had to be allowed as a business loss. The judgment in Mohan Meakins case

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(Supra), thus, does not advance the case of the assessee-appellant.

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As stated in para 8 of the appeal, a miscellaneous petition under Section 254(2) of the Act requesting the Tribunal to recall the impugned order for limited purpose on account of bad debts arising out of sales made to M/s Mega Alloys Ltd. has been filed. It has been pointed out that no orders have been passed thereon. Thus, it is clarified that the present appeal shall not come in the way of the Tribunal to pass any order on the said application.

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Accordingly, no question of law much less a substantial question of law arises in this appeal. The appeal stands dismissed.

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January 2, 2012 gbs

Indra Rani v. Income-Tax Officer, Ward v (2), Ludhiana

Case brief

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Indra Rani v. Income-Tax Officer, Ward v (2), Ludhiana

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