Delhi High Court
Dy. Commissioner Of Income Tax vs M/S.Insilco Ltd. on 29 April, 2011
Author: M. L. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No.311/2011
%
Date of Decision: 29.04.2011
Dy. Commissioner of Income Tax .... APPELLANT
Through: Mr. Kamal Sawhney, Advocate
Versus
M/s.Insilco Ltd. .... RESPONDENT
Through: Mr. V.P. Gupta and Mr. Basant Kumar,
Advocates
CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA
1. Whether reporters of Local papers be No
allowed to see the judgment?
2. To be referred to the reporter or not? No
3. Whether the judgment should be No
reported in the Digest?
M.L. MEHTA, J.
*
C.M. No. 2894/2011 (exemption)
Exemption allowed, subject to all just exceptions.
Accordingly, the application stands disposed of.
ITA No.311/2011 & CM No.2894/2011
1. With the consent of the counsel for the parties, we have heard
the matter finally.
2. This is an appeal preferred by the Revenue under Section 260A
of the Income Tax Act, 1961 (for short "the Act") against the
order of the Income Tax Appellate Tribunal (for short "the
Tribunal") dated 13th November, 2009 for the assessment year
2004-05.
3. The assessee had claimed bad debts to the extent of
Rs.1,48,51,364/- in the return filed for the relevant assessment
year. The Assessing Officer vide his assessment order dated
22.12.2006 allowed the deduction of the bad debts claimed. The
CIT(A) observed the assessment order to be erroneous and
prejudicial to interest of Revenue. The CIT(A) further observed
that AO has allowed the claim of deduction of bad debt written
off during the year without any enquiry and investigation and
without even ascertaining as to whether the condition as laid
down in Section 36(1)(vii) & Section 36(2)are satisfied or not.
Accordingly, he proceeded to revise the assessment order and
issued a show-cause notice under Section 263 of the Income Tax
Act (for short „the Act‟) to the assessee. In reply thereto,
assessee submitted that the Assessing Officer had asked for the
details of the bad debts written off vide questionnaire dated
24.08.2006 and the same were submitted to the Assessing
Officer vide letter dated 09.11.2006. The assessee also
submitted that the issues which had been proposed to be
reconsidered by the CIT(A) in its order passed under Section 263
of the Act were already considered by the Assessing Officer
during the assessment proceedings. However, the CIT(A)
allowed the plea of the Revenue vide order dated 27.03.2009
observing that the order of the Assessing Officer was erroneous
and prejudicial to the interest of Revenue and set aside the same
on the issue of allowability of claim of deduction of bad debts
written off during the year. The Assessing Officer was also
directed to verify and examine the claim of the assessee and
make a fresh assessment according to law with an opportunity of
being heard to the assessee.
4. Aggrieved by the order of the CIT(A), the assessee filed an
appeal before the Tribunal. The assessee contended that there
was no error in the assessment order and the order passed under
Section 263 of the Act by the CIT(A) is liable to set aside. The
Revenue contended before the Tribunal that the amount in
question were in respect of inter-corporate deposits given by the
assessee and the amount written off did not have any connection
with the business of the assessee. It was also contended that
the provisions of Section 36(2) were not complied with as the
assessee did not show the above-stated amount as income
during the years preceding to the assessment year. The
assessee had conceded that though the amounts written off in
respect of some persons were on account of inter-corporate
deposits, the same had been given in the course of business.
The assessee further submitted before the Tribunal that he had
specifically brought this fact to the notice of the CIT(A) in an
alternate prayer that the deduction of the same was allowable to
the assessee company as a business loss under section 37 and
the CIT(A) did not consider the same.
5. The Tribunal considered the rival contentions and took note of
the fact that reply of the assessee to the show cause notice of
the CIT(A) showed that the assessee had categorically brought
the fact that the details of the bad debt had been produced
before the assessing authority during the assessment
proceedings and the same had been considered by the
Assessing Officer.
6. It is against this order of the Tribunal that the Revenue is in
appeal before us. The submissions made by the learned counsel
for the Revenue are the same as were raised before the CIT(A)
and also the Tribunal. The main submission of the learned
counsel for the Revenue is that the amounts which were sought
to be claimed as bad debts by the assessee were in fact inter-
corporate deposits and that the assessee could not claim
deduction under Section 36(1)(vii) since the pre-requisite of
Section 36(2) was not complied with. The learned counsel for
the Revenue also submitted that since the claim under Section
36(1)(vii) was not allowable, neither Section 37 nor Section 28 of
the Act was applicable. The learned counsel submitted that the
order passed by the CIT(A) was maintainable whereas that of the
Tribunal was erroneous and liable to be set aside.
7. On the other hand, learned counsel appearing for the assessee
submitted that the amounts were irrecoverable and so the
assessee was entitled to claim deductions as bad debts. Learned
counsel also submitted that all the details in this regard were
presented before the AO, who had considered the same in detail
and even had gave a questionnaire to the assessee which was
duly replied with the details as required.
8. We have heard the learned counsel for the parties. We may note
that the Tribunal in the impugned order has gone into the details
of the reply and also the documents furnished by the assessee
before the AO and also in response to the notice under Section
263 of the CIT(A). Some of the observations, which the Tribunal
made are noted hereafter. The assessee had also filed the
copies of the documents in respect of the legal cases against
each of the parties for recovery of the amounts to justify its claim
for bad debts before the Assessing Officer. The assessee had
filed party-wise details on 09.11.2006. The record also shows
that there has been discussion on various dates thereafter and
on 21.11.2006 there was a further reference to the issue of bad
debts. The AO also maintained order sheets which showed that
he had taken the detailed notes of the discussion that took place
before finalizing the assessment with regard to the claim of bad
debts. In the circumstances, it should not be said that there was
lack of inquiry conducted by the Assessing Officer. The assessee
had made an alternate prayer also in respect of claim of business
loss in the event the CIT(A) felt that the claim was not allowable
under Section 36(1)(vii) of the Act. However, the CIT(A) rejected
the contentions of the assessee only on the ground that the
Assessing Officer had not properly examined the details
furnished. The non-recording of all these details and the
detailed discussion which has taken place in the course of
assessment proceedings cannot be faulted on the assessee nor
can it be said that the assessing authority has not applied his
mind on the details filed and held that it did not give occasion to
the CIT(A) for invoking the powers under Section 263 of the Act.
9. The Tribunal further observed that the decision of the AO was
based on the decision of Coordinate Bench in the case of
Singnode India Limited reported in 110 TTJ 170, which is to
the effect that in respect of inter-corporate deposits, the amount
is capable of being treated as a bad debt and allowable as such.
Thus, the view of the AO is also supported by the decision of
their Coordinate Bench. The Tribunal also observed that it
cannot be said that there is an error, much less an error
prejudicial to the interest of the revenue, in the assessment
order and thus set aside the order of the CIT(A) passed under
Section 263 of the Act.
10. In the case of Commissioner of Income-Tax, Mysore v.
Mysore Sugar Co. Ltd., 46 ITR 649, the corresponding sections
of the Income Tax 1922 were for interpretations before the
Hon‟ble Supreme Court. This case related to claim of bad debts
under the said Act of 1922. The assessee company was
changing its case regarding claim of bad debt from one Section
to another from time to time. In that context, the Hon‟ble
Supreme Court observed that they did not wish to emphasise the
nature of the question posed, because the central point to decide
is whether the money which was given up represented a loss of
capital, or must be treated as revenue expenditure. The
Supreme Court held as under:
"The tax under the head "Business" is payable under
section 10 of the Income-tax Act. That section provides by
sub-section (1) that the tax shall be payable by an
assessee under the head "profits and gains of business,
etc." in respect of the profits or gains of any business,
etc., carried on by him. Under sub-section (2), these
profits or gains are computed after making certain
allowances. Clause (xi) allows deduction of bad and
doubtful business debts. It provides that when the
assessee's accounts in respect of any part of his business
are not kept on the cash basis, such sum, in respect of
bad and doubtful debts, due to the assessee in respect of
that part of the his business is deductible but not
exceeding the amount actually written off as
irrecoverable in the books of the assessee. Clause (xv)
allows any expenditure not included in clauses (i) to (xiv),
which is not in the nature of capital expenditure or
personal expenses of the assessee, to be deducted, if laid
out or expanded wholly and exclusively for the purpose of
such business, etc. The clauses expressly provide what
can be deducted; but the general scheme of the section is
that profits or gains must be calculated after deducting
outgoings reasonably attributable as business
expenditure but so as not to deduct any portion of an
expenditure of a capital nature. If an expenditure comes
within any of the enumerated classes of allowances, the
case can be considered under the appropriate class; but
there may be an expenditure which, though not exactly
covered by any of the enumerated classes, may have to
be considered in finding out the true assessable profits or
gains. This was laid down by the Privy Council in
Commissioner of Income-tax v. Chitnavis, (1932) L.R. 59
IA 290 and has been accepted by this Court. In other
words, Section 10(2) does not deal exhaustively with the
deductions, which must be made to arrive at the true
profits and gains.
To find out whether an expenditure is on the capital
account or on revenue, one must consider the
expenditure in relation to the business. Since all
payments reduce capital in the ultimate analysis, one is
apt to consider a loss as amounting to a loss of capital.
But this is not true of all losses, because losses in the
running of the business cannot be said to be of capital.
The questions to consider in this connection are : for that
was the money laid out ? Was it to acquire an asset of an
enduring nature for the benefit of the business, or was it
an outgoing in the doing of the business? If money be lost
in the first circumstances, it is a loss of capital, but if lost
in the second circumstances, it is a revenue loss. In the
first, it bears the character of an investment, but in the
second, to use a commonly understood phrase, it bears
the character of current expenses."
11. In the present case, we have seen that the Tribunal has rightly
observed that the assessee had given all the details to the AO
regarding the debts and also the steps taken for recovery of
those amounts and ultimately failing to recover the same.
12. In view of our discussions as above, we do not find that any
substantial question of law arises. Consequently, the appeal is
dismissed.
M.L.MEHTA
(JUDGE)
A.K. SIKRI
April 29, 2011 (JUDGE)
„Ak/Dev‟
