Commissioner Of Income Tax vs Auto Pins India Ltd.
2012 Latest Caselaw 2255 Del

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*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+      ITA 500/2009

       COMMISSIONER OF INCOME TAX                ..... Appellant
                   Through  Mr. Sanjeev Sabharwal, sr. standing
                            counsel.

                   versus


       AUTO PINS INDIA LTD.                              ..... Respondent
                     Through           Mr. Ved Jain and Mr. Ashish
                                       Aggarwal, Advocates.

       CORAM:
       HON'BLE MR. JUSTICE SANJIV KHANNA
       HON'BLE MR. JUSTICE R.V.EASWAR

                            ORDER

% 09.04.2012

By order dated 8th November, 2010, this appeal under Section 260A

of the Income Tax Act, 1961 (Act, for short) filed by the Revenue

impugning order of the Income Tax Appellate Tribunal dated 21 st August,

2008 was admitted and the following two substantial questions of law were

framed:-

"1. Whether ITAT was correct in law in allowing the claim of assessee as bad debts written off amounting to 5.12 crores u/s 36(1)(vii) of the Act?

2. Whether provisions of Section 36(1) are at all applicable to the present case?

2. The aforesaid appeal relates to the assessment year 2003-04 and

arises in the case of Auto Pin India Ltd., the respondent-assessee.

3. The respondent-assessee is engaged in manufacture and sale of

automobile parts. For the assessment year in question, the assessee on 21st

November, 2003, had filed its return of income declaring a loss of

Rs.19,88,20,459/-. By assessment order dated 10th March, 2006, the total

income of the assessee was assessed at loss of Rs.7,94,51,570/-. One of the

major additions made by the Assessing Officer was disallowance of bad

debt of Rs.5,12,78,675/- written off by the assessee. The entire amount

was disallowed by the Assessing Officer after noticing that the bad debts

were substantial and almost 50% of the turnover during the current year. It

was observed that bad debts related to parties, to whom supplies were

made, but had refused to make payment on the ground that the material

supplied was defective. These supplies were made over a period of seven

years, prior to the assessment year in question. It was observed that the

assessee had earlier claimed bad debt of Rs.18,11,242/- in the assessment

year 2000-01 and thereafter bad debt of Rs.5,12,78,675/- was claimed in

the assessment year in question. The Assessing Officer observed that the

assessee had not furnished year wise analysis of the bad debts claimed or

invoices year wise details. The documents furnished by the appellant were

regarding the material supplied in the previous financial years, other than

the financial year under consideration. He held that the assessee had also

not furnished details of efforts made to recover the bad debt. The

Assessing Officer concluded that the deduction towards bad debt cannot be

allowed as it would give a distorted picture of business in the year in

question. Accordingly, an amount of Rs.5,12,78,675/- was disallowed and

added back to the income of the assessee.

4. The CIT (Appeals) deleted the said addition after referring to the

case law on the subject and observed that the Assessing Officer had not

disputed the factum that bad debts written off, relate to trading transactions.

The case of the assessee was that the transportation cost and cost of lifting

the rejected goods itself was prohibitive. The contention of the assessee

was accepted.

5. The appeal preferred by the Revenue has been dismissed by the

tribunal. The tribunal went into the factual matrix of the case and observed

that full details of bad debt along with the dates on which invoice for sale

was raised, copy of bill and copy of accounts for earlier years with efforts

made by the assessee for recovery, were filed before the Assessing Officer,

but these were ignored. The assessee had given full details of the

transactions with the respective parties with copy of ledger account, copy

of vouchers etc. It was held that bad debt written off in the books of

accounts was a bona fide claim and was allowable under Section 36(1)(vii)

of the Act.

6. Learned counsel for the Revenue does not dispute that the bad debts

were written off in the year in question. He, however, contends that the

writing off bad debts of Rs.5.12 crores in one year itself would distort the

income of the said year and this aspect has been ignored by the tribunal. It

is submitted that allowing the claim would result in anomalies and

distortion of the profit and loss account of the year in question.

7. The question, which arises for consideration, is whether bad debt

should be allowed under Section 36(1)(vii) read with Section 36(2)(i) of

the Act. The two provisions read as under:-

"36(1) Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-

(vii) Subject to the provisions 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 for the previous year."

"36(2) In making any deduction for a bad debt or part

thereof the following provisions shall apply-

(i) No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee."

8. A combined reading of the aforesaid two clauses shows that two

conditions are stipulated. (i) The amount should be written off as

irrecoverable in the accounts of the assessee for the previous year. (ii) The

amount, which is sought to be written off, should have been taken into

account as income of the assessee in the previous year relevant to the

assessment year or in the earlier previous years.

9. The tribunal has noticed that the assessee had made sales of

Rs.231.57 crores to the parties in the seven previous years. In some cases,

sale proceeds were not received on the ground that the material supplied

was defective. Learned counsel for the Revenue has not been able to

dispute and show that the provisions of Section 36(1)(vii) read with Section

36(2)(i) are not satisfied in the present case. We may only record that in

the case of TRF Ltd. Vs. Commissioner of Income Tax (2010) 323 ITR

397 (SC), it has been held that after 1st April, 1989, it is not necessary for

the assessee to establish that the debt, in fact, had become irrecoverable. It

is enough if the assessee has been able to show that the bad debt is written

off as irrecoverable in the profit and loss account of the assessee. The fact

that these conditions are satisfied is not disputed by the Revenue.

10. The contention of the Revenue that writing off bad debts of Rs.5.12

crores in one assessment year would result in distortion of the profit and

loss accounts of the year in question, is an attractive contention. But in the

present case we are not inclined to examine the same. We may record here

that the there have been several instances where Revenue has disallowed

warranty claims on the ground that it was merely presumptive and

unascertained liability and could be only allowed when the claim was

actually made. However, in view of the decision of the courts, warranty

claims are now allowed if made on scientific and on rational basis/data. As

noticed, the income returned in the year in question was at loss and the

income assessed by the Assessing Officer is at a loss of more than Rs.7.94

crores. Writing off of bad debts would result in increase in the loss figure.

There is no evidence or material on record to show that the there was

deliberate attempt by the assessee to delay writing off the bad debts in the

earlier assessment years, which has resulted in understatement of income or

short recovery of tax. The Assessing Officer on the contrary had recorded

that the assesee was unable to establish/show the efforts made to recover

the amounts. We do not have before us and the Assessing Officer has not

referred to the income returned by the assessee in the earlier assessment

years or in the subsequent years. In a given case, if we have full facts and

necessary details, we may examine the aforesaid contention, but in absence

of factual details, we do not think that the said aspect should be examined

in vacuum. We may only note that the learned counsel for the assessee has

stated that in most of the earlier years, the assessee had shown taxable

income and if bad debts were written off in the said years, it would have

resulted in lower taxation or nil taxation.

10. With the aforesaid observation, we answer the aforesaid two

questions of law in affirmative i.e. in favour of the assessee and against the

Revenue. The appeal is disposed of without any order as to costs.

SANJIV KHANNA, J

R.V.EASWAR, J APRIL 09, 2012 NA