TAX CASES No.7 OF 1999 (Reference against the statement of case of M/S Lawlys Enterprises (P) LTD Vs. The Commissioner of Income Tax, Patna which has been drawn on 21.4.1999 by Income-Tax Appellate Tribunal, Patna Bench Patna in R.A. No. 120 (Pat)/98) ------------------------- M/S LAWLYS ENTERPRISES (P) LTD--------------------------- (Appellant) Versus THE COMMISSIONER OF INCOME TAX,PATNA------------ (Respondent) For the Appellant :- Mr. Ajay Rastogi For the Respondent:- Mr. Harshwardhan Prasad, Sr. Standing Counsel Mr. Rishi Raj Sinha, Jr. Standing Counsel. P R E S E N T THE HON'BLE MR. JUSTICE CHANDRAMAULI KUMAR PRASAD THE HON'BLE (DR.) MR.JUSTICE RAVI RANJAN Prasad & Ranjan,J.J. This matter has come up before us on a reference made by the Patna Bench of Income-Tax Tribunal at the instance of the assessee. Assessee is a Private Limited Company and derives income from dealing in motor vehicles and hotel business. For the assessment year 1990-91 it filed return showing loss of Rs. 23,40,873/-. However, the assessment - 2 - was completed reducing the loss to Rs. 11,26,676. It has resulted on account of disallowance of various expenses including bad debts amounting to Rs. 1,48,219/-. The Assessing Officer did not allow the bad debts because in its opinion there was no evidence to establish that debts had actually become bad during the relevant accounting period. The assessee carried the matter in appeal, but did not succeed. It carried the matter in second appeal before the Patna Bench of the Income-Tax Tribunal. The Tribunal examined the controversy of writing off the debts in the light of the amendment made by Direct Tax Laws (Amendment) Act, 1987 with effect from 1.4.1989 and observed that the assessee would have been entitled for deduction of the bad debts if, writing of the bad debts was done fairly, reasonably and bonafidely. The Tribunal accordingly found that the provisions of Section 36 (1) (vii) is not attracted in the case of assessee. The tribunal while coming to the aforesaid conclusion had also taken into consideration, that the debts were coming in the books of account from earlier years, but the bills and other details were not furnished. - 3 - On these facts the Tribunal had referred the following questions for our opinion:- “1. Whether on the facts and in the circumstances of the petitioner’s case, the Tribunal was justified in confirming disallowance of Rs. 1,01934/- under the head bad debts the nature of which was remission ? 2. Whether on the facts and in the circumstances of the petitioner’s case the Tribunal was correct in disallowing the bad debt on the ground of absence of bill No. and date in respect of the fact that the appellant’s accounts are duly audited by reputed Chartered Accountants and the method of accounting has always been accepted including the year under appeal?” Mr. Ajay Rastogi, appearing on behalf of the assessee, submits that inadvertent error has crept in question No.1 of the reference made and he submits that the only question which required to be answer is as to whether the Tribunal erred in confirming disallowance under the head bad debts. Accordingly, we re-frame question No.1 as follows:- “1. Whether on the facts and in the circumstances of the petitioner’s case, the Tribunal was justified in confirming disallowance of Rs. 1,01934/- under the head bad debts ? - 4 - Mr. Rastogi submits that Section 36 (1) (vii) of the Income-Tax Act before its amendment by Direct Tax Laws Amendment Act,1987 provided deduction of the account of any debt or part thereof which is established to have become a bad debt in the previous year. Section 36 (1) (vii) before its amendment by the Direct Tax Laws Amendment Act, 1987 read as follows:- “Section 36:- 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: x x x x x x (vii) Subject to the provisions of sub- section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year;” x x x x x x It is relevant here to mention that by Direct Tax Laws Amendment Act, 1987, which was made effective from 1.4.1987, amendments and substitutions have been made in Section 36 (1) (vii) of the Act. Section 36 (1) (vii) of the Act after its amendment by the Direct Tax Laws Amendment Act, 1987 reads as follows:- “Other deductions. 36. (1) The deductions provided for in the - 5 - following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- x x x x x x (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. Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Explanation – For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;” Mr. Rastogi submits that the account of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year itself shall entitle the deduction. He submits that earlier an assessee was required to establish that amount of any debt or part thereof has become a bad debt, but now assessee shall be entitled for deduction under the head bad debt, amount which is written off as irrecoverable in the accounts of the - 6 - assessee for the previous year. Mr. Prasad appearing on behalf of the Revenue however submits that there is no evidence on record to show that assessee took any steps to realise the account and as such it cannot be said to be a bad debt. We find substance in the submission of Mr. Rastogi. The law, as is stood prior to amendment provided that the debt must be established to have become bad in the previous year. It seems that it led to enormous litigations on the question of allowability of bad debt in a particular year. In order to eliminate the disputes, the Legislature intervened and amended the law and permitted deduction of 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. It is not in dispute that the assessee has written off the bad debt. In that view of the matter the condition precedent for seeking deduction has been made out. We are of the opinion that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in accounts for the previous year. - 7 - It is worth mentioning that the Department has issued Circular No. 551, dated 23rd of January, 1990 (see [1990] 183 ITR (Statute) 7) which also lends support to the view which we have taken. It reads as follows:- “6.6 The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the Section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987, has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. 6.7 Clauses (iii) and (iv) of Sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become - 8 - redundant, as the bad debts are now being straightaway allowed in the year of write off. The Amending Act, 1987, has, therefore, amended these clauses to withdraw them after the assessment year 1988-89.” Accordingly, the answer to the first question is in the negative against the Revenue and in favour of the assessee and it is held that the Tribunal was not justified in confirming disallowance under the head bad debts. Mr. Rastogi submits that in view of the answer to the first question, second question sent for our opinion has become redundant. Accordingly we refrain to give our opinion on this question. Let, our opinion be forwarded to the Patna Bench of the Income-Tax Tribunal. Patna High Court Dated 30th July, 2008 A.F.R./P.K/ (Chandramauli Kumar Prasad,J.) (Dr. Ravi Ranjan,J.)