ORDER
Joginder Singh, Judicial Member
1. Out of these two appeals first one is preferred by the assessee and remaining one by the revenue on the following grounds:-
ITA No. 583/Chandi/2003
1. that the CIT(A) Patiala has erred in upholding the disallowance of bad debts claimed by the appellant company amounting to Rs. 2,37,43,429/-
2. That the learned CIT(A) Patiala has erred in not disposing of ground No. 3 & 7 of the grounds of appeal taken before him.
ITA No. 604/Chandi/2003
1. On the facts and in the circumstances of the case and in view of the amendment made in Section 145 of the Income Tax Act, 1961, the learned CIT(A) has erred in. deleting the addition of Rs. 41,79,803/- made in respect of the income from contracts.
2. The learned CIT(A) has further erred in deleting the addition of Rs. 28,57,8977- made on account of interest on interest free loans advanced by the assessee company to its subsidiary companies.”
2. The assessee decaled a loss of Rs. 5,74,09,380/- in its return filed on 30.11.98 which is consisted of (i) unabsorbed depreciation of Rs. 2,24,89,038/- (ii) business loss of Rs. 3,49,20,342/-. The return was processed Under Section 143(1)(a) accepting the returned loss on 4.5.99. Notice under Section 143(2) was issued to the assessee on 5.5.99 along with detailed questionnaire in response to which the assessee/authorized representative attended the assessment proceedings on various occasions. The assessee also filed a written reply.
3. The assessee is manufacturer of power cables claimed amount of Rs. 2,37,43,429/- as bad debts. During assessment proceedings the assessee was asked to justify and to produce the evidence to prove that the debts have indeed gone bad and irrecoverable. The assessee in its reply claimed, “that the only requirement of law was that bad debts were allowable in the year in which the amount was written off. The amount has been written -of the current year and the bad debts were duly approved by the Board of the Company.” The assessee further claimed that the bad debts pertains to government parties like HSEB, GEB, HPSEB and various other -Electricity Bards and Power Plants. The Assessing Officer placed reliance upon the decision in the case of Associated Banking corporation of India Ltd v. CIT [1965] 56 ITR 1 (SC) and disallowed the claim of debts and made the addition of Rs. 2,37,43,429/- to the total income of the assessee.
4. The Assessing Officer also made an addition of Rs. 4,20,635/- against loss of Rs. 43,000/- claimed by the assessee on sale of raw material. A disallowance of interest amounting to Rs. 2,44,09,260/- on account of investment in the share capital of subsidiary company was also made by the Assessing Officer. The assessee carried the assessment order in appeal before the first appellate authority where it was partly allowed. Now the assessee, is in further appeal before the Tribunal.
5. During arguments we have heard Shri G.N. Gupta learned advocate for the assessee and Shri Varinder Mehta learned DR for the revenue.
6. The gist of arguments on behalf of the assessee on the issue of bad debts is that the debts were written off and the judicial pronouncement in the case of Associated Banking Corporation’s case pertains to old Act and relied upon the decision pronounced in the case of 256 ITR 792(P &H). It was also contended that ground Nos 3 & 7 raised before the first appellate authority were not disposed of and the same may be sent back for adjudication. On the other hand the learned DR for the revenue contended that genuineness for debts has 1:0 be established by the assessee, however, told this Bench that ground Nos.3 & 7 raised in the grounds of appeal before the first appellate authority has not been dealt with. We have considered the rival submissions.
7. On perusal of record and after hearing the rival contentions, the first ground pertain to disallowance of Rs. 2,37,43,429/- as bad debt claimed by the assessee. There is no dispute to the fact that debts pertain to Government agencies like HPSEB, GEB, HPSEB and other Electricity Boards and plants. This fact is also not in dispute that the opportunity was given to assessee to justify its claim and produce evidence to prove that the impugned debts were indeed gone bad and were irrecoverable. The Assessing Officer disallowed the claim with the following reasons which are reproduced as under:-
i) The debts are all from Electricity Boards or reputed Govt. companies. Therefore, there is no question of the debtor going insolvent or being unable to pay.
(ii) the assessee has merely stated that it can produce evidence regarding In the In the irrecoverability. However, in spite of the fact that the assessee was asked to specifically to do so the evidence had not been brought forth.
(iii) The assessee stated that most of these debts pertained to LD’s on late delivery of material. This aspect has to be proven by the assessee by providing copies of the contract, specific material which was delivered late and the specific clauses under which this payment has been denied to the assessee. Further, if there was a specific clause in the contract then there was no question having a claim so long. The assessee should have claimed this amount in the year under which it fulfilled the contract. These aspects have not been discussed by the assessee in any of its reply and no evidence has been brought forth.
iv) The assessee has stated in its reply that most of the amounts pertained to late delivery of material. However what about the other amounts apart from these which have been claimed as bad debts’ The assessee has chosen not to provide any of these details.
v) In view of the above discussions, claim of bad and doubtful debts is disallowed and additions of Rs. 2,37,429/- is made to the total income of the assessee.
8. The main contention of the assessee though its reply before the authorities below was in nutshell that the assessee wrote of the debts as bad and irrecoverable during the year. The thirst of the Assessing Officer is that the assessee has not filed the evidence to prove that these debts have gone bad and were irrecoverable specially when the debts pertain to various government agencies such as HSEB, GEB, HPSEB and other Electricity Boards, power plants whereas the major contention of the assessee is that the amount written of after due approval of the Board of Directors of the company.
The provision of Section 36(1) (vii) were amended w.e.f. 1.4.89 which reads as under;-
“Subject to the provision of Sub-section (2), the amount of [any bad debt or part thereof], which is written off as irrecoverable in the accounts of the assessee in the previous years.
Before the amendment i.e. before 1.4.89, the said section was as under:-
Subject to the provision of Sub-section (2), the amount of any bad debt or part thereof, which is established to have become a bad debt in the previous year”
9. If both the provisions are put in juxta position, the only condition after the amendment remains that the bad debts have to be written off as irrecoverable in the account of the assessee. The assesses is also supported by the decision of the Hon’ble High Court of Gujarat in the case of CIT v. Girish Bhagwatprasad 256 ITR 772 wherein it was held as under:-
“Held that under provisions of Section 36(1)(vii) of the Act, deduction had to be allowed in computing the income referred to in Section 28 of the Act of the amount of any bad debt or part thereof which is written off as irrecoverable in the account of the assessee for the previous year subject to the provisions of Sub-section 2. Prior to amendment from April 1, 1989, the allowance under this clause was confined to debts and loans which had become irrecoverable in the accounting year. Thus, under the provisions of Section 36(1)(vii) as in force form April 1, 1989, all that that the assessee had to show was that bad debt was written of as irrecoverable”
The thirst of the decision of the Hon’ble High Court of Gujrat is that the genuineness of the claim of assessee is not in doubt and there is no chance for the assessee to receivers the amount. The major thirst before us by the assessee is that the assessee , not required to establish that debts had become bad in previous years and mere writing off is sufficient but it is not is not so. The assessee as per this decision of the Hon’ble Court also has to prove the genuineness of the claim and also that there is no chance to recover the amount.
10. In the present case undisputedly the debtors are government agencies/Board and the assessee has not stopped business with these parties. One cannot believe that any debt can be said to have gone bad. The assessee company was continuously found engaged in the business transaction with such parties in future also. There is a specific finding that receipts are coming from those parties for other transactions and the assessee wants to show from the same parties the amount/debts as irrecoverable. This is not the intention of the Legislature as per Section 36(1)(vii) of the Act. Because the assessee was free to denounce relation with these parties but that was not done by the. assessee. As the action of the assessee has to be treated the application of their income and not of generate unwanted expenditure within the meaning of the impugned section of debt as debt is an outstanding which if recovered would have swelled the profits. It is not money handed over to someone or purchasing a thing, which that person has failed to return. In this section a debt is something more than a mere advance. It means something, which is related to the business or results from it. Undisputedly the bad debt/irrecoverable amounts are towards government agencies/boards, so there is as ray of hope for the recovery. The debt may become bad when it is proved to be irrecoverable on account of the fact that the debtor is in a bad financial position or that it has become irrecoverable. So long there is a ray of hope of recovery of the debt, however, dim it may be, and so long as the debt is in the process of realization it cannot be said that it has become irrecoverable. Some views were expressed by the Hon’ble High Court of Kerala in the case of Travancore Tea Estates v. CIT .
We are aware that the requirement is that if the debts has become bad or irrecoverable does not mean that the department can insist upon demonstrative and infallible proof that the debt has become bad but certainly the onus is on the assessee to prove the same. The word ‘bad’ used in conjunction with the word ‘debt’ 36(1)(vii) means ‘worthless debt.’ In order to take advantage to this provision the assessee is required to establish that a debt due to it has become a worthless debts. It is not necessary for the assessee to show that he has failed to recover the debt despite taking legal action. What he is required to show is that having regard to the facts and circumstances of the case of a bonafide assessment has been made by him to the effect the realisation of the debt is not possible. The assessee can not say that he has become pessimistic about the prospect of the recovery of the debt in question. At the same time the department cannot insist on demonstrative and infallible proof that the debt has become bad. The assessee is required to show that he has taken an honest judgment that the debt has become a’ bad debt’ and if he is able to demonstrate that he has taken an honest judgment, the same would establish that the debt in question is a bad debt. The facts and circumstances of which the judgment is based should show that debt was not realisable for some fault on the part of the debtor or some supervening impossibility on the part of the debtor to pay, but not because of the possible difficulties or hurdles, the assessee might have incurr to compel the recalcitrant debtor to pay. The assessee for his convenience might deicide that the debtor was too small and it Would was not worthwhile to pursue the debtor but that judgment would not be an honest judgment which would establish that the debt had become a bad debt or worthless debt. The facts on which the judgment has to be taken by the assessee should reveal the irrecoverability of the debt form the angle of the debtor and not on the basis of the ability of the assessee to recover the same. Bad debt is claimed as an allowance by the. assessee and therefore, the burden is on him to show that he had not reasonable expectations of recovery it at the time he wrote it off or that there is no ray of hope at all on which he could rely upon to recover the amount form the debtor. For this purpose we are fortified by the judicial pronouncements
Jacavi Narsidas & Co v. CIT
L. Bani Mal Dalal v. CIT [1941] 9 ITR 222 (Lahore)
Binjraj Hukamchand v. CIT 5 ITC 303 (Cal)
Vallabhdas Murlidhar v. CIT 4 ITC 318(Bom)
CIT v. Khem Chand Bahgadur Chand
Munnalal Biharilal v. CIT [1956] 30 ITR 809(Nag.)
Nandlal Vithaldas v. CIT
11. In the present case before us 3 since the parties involved are government agencies/Electricity Board etc, in our humble opinion, there is a ray of hope that the amount will be recovered. In view of these facts we are upholding the order of the learned first appellate authority. So this ground of the assessee is dismissed.
12. The second ground raised is that ground Nos. 3 & 7 of the grounds taken before the learned CIT(A) were not adjudicated upon. On perusal of record it is seen that ground No.3 pertains to addition of Rs. 4,20,635/- against a loan of Rs. 43,000/- on sale of raw material and ground No. 7 pertain to disallowance of interest amount to Rs. 2,44,09,260/- on investment made of shares in different companies has not been adjudicated by the learned CIT(A), so, without going into the merits of the case, ground No. 2 raised before us is sent to the file of the learned first appellate authority for disposal as per the provision of law. So, this ground of the assessee is allowed for statistical purposes only.
The learned first appellate authority will afford due opportunity to the assessee. The assessee is also at liberty to produce evidence, if any, to substantiate its claim. The assessee is also directed not to seek unnecessary adjournments without any cogent reasons since the issue pertains to assessment year 98-99. So this ground is sent back to the file of the learned CIT(A) for adjudication.
13. Now we shall take up the appeal of the revenue. The first ground raised by the revenue pertains to deleting the addition of Rs. 41,79,803/- made in respect of income from contracts. There is no dispute to the fact that the assessee has been consistently following a particular method. No defect has been, pointed out in the method adopted by the assessee. The impugned addition was made by the Assessing Officer that the assessee could not produce any evidence to indicate why a different system of accounting was followed. No expenses pertaining to incomplete contract is established by he Assessing Officer. In view of these facts simply because the assessee did not follow different system of accounting, same cannot be rejected as the assessee is following from past so many years consistently and had been accepted by the department. We have not found any mistake in the order of the learned CIT(A) in directing the Assessing Officer to delete the impugned addition. This ground of the revenue is having no merit, the same is dismissed.
14. The next ground raised by the revenue pertains to deleting the addition of Rs. 28,57,897/- on account of interest free loans advanced by the assessee to its subsidiary companies. The revenue has relied upon the decision in ITA N.373/Chandi/03 in the case of Biyani Chambal Ka Mahabhandar v. ITO wherein it was concluded that the assessee is paying interest on borrowed capital and also paying interest on capital of the partners, but having given interest free loan to a constituent of HUF partner pro-rata was rightly disallowed by the Assessing Officer. The issue has been dealt with at page 4, para 5 of the assessment order. The assessee claimed a deduction of Rs. 78706736,000/– in the return on account of interest paid/payable on loans. The Assessing Officer found that the interest bearing loans were diverted to subsidiary company wherein the directors of the assessee company were having substantial interest. The total amount of loan outstanding as on 31.3.98 to such company was Rs. 1,58,77,208/-. It was pointed out, that on this issue the Hon’ble Tribunal in the case of assessee for the assessment year 92-93 deleted the impugned addition. There is a specific finding by the learned first appellate authority that for the assessment year 97-98 such addition was deleted by following the decision of the Tribunal in the case of assessee itself for the assessment year 91-92 wherein it was held that merely because the assessee is having overdraft with the bank and having advanced certain loans to subsidiary company, it is not proving the nexus between the interest bearing funds and interest free loans given to the subsidiary company specially when the assessee has surplus sufficient founds and cover to loans given to sister concerns, out of which advances to sister concerns can easily be made.
The relevant portion for the assessment year 97-98 of the order of first appellate authority is reproduced herewith.
“The company has been advancing interest free loans to its subsidiaries or sister concerns from year to year. The total amount of loans as on 31.3.97 was to the extent of Rs. 81,01,000/-. The Assessing Officer has been disallowing interest on the loans advanced to subsidiary companies or sister concerns of the appellant form year to year, which has been under litigation. However, as the department has not been able to prove that the interest free loans were advanced out of the loans taken by the appellant company, my predecessor have been deleting the ‘additions. My predecessor in assessment years 1995-96 and 1996-97 deleted the addition on account of interest on interest free loans except for two companies Upkeep Credit & Portfolio (P) Ltd and ABM Promoters & Development Ltd. To which fresh loans were advanced in assessment year 1995-96 though no nexus between loan obtained and loans advanced to these companies was proved by my predecessors or the department. The issue had also come up before the Hon’ble ITAT, Chandigarh Bench, Chandigarh in assessment year 1991-92 wherein the Tribunal has also held no interest on account of interest free loans is disallowable as no nexus between loan obtained and loans advanced has been proved by the department. The Hon’ble Tribunal has further held that as own fund’s of the appellant company in the shape of reserve and surplus were more than the interest free loans advanced, no interest on interest free loans can be added back to the income.
In view of the orders of my predecessors and the order of the ITAT Chandigarh bench Chandigarh in the case of appellant itself in assessment year 1991-92, there being no fresh loans during the year and the total interest free loans being to the extent of Rs. 81,01,000/- as against the reserve and surplus of Rs. 24,26,38,000/-I, hold that no interest on interest free loans is disallowable and, therefore, delete the addition of Rs. 14,90,678/- made by the Assessing Officer.”
15. In view of these facts and respectfully following the decision of the Coordinate Bench we have not found any mistake in the order of the learned CIT(A). The same is upheld specially when the revenue has not controverted the fact as we have discussed in the above paras and also no contrary decision was produced before us from the higher forum meaning thereby that the same was accepted by the department. In view of these facts, on this issue the order of the learned CIT(A) is upheld. In view of these facts this ground of the revenue is dismissed the appeal of the revenue is dismissed.
16. In the result, both the appeals are disposed of in the above said manner.