IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN TUESDAY, THE 20TH DAY OF DECEMBER 2011/29TH AGRAHAYANA 1933 ITA.No. 38 of 2003 ( ) ====================== ITA.168/C/2000 of I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/APPELLANT ============ M/S.SAMPANNA KURIES(P) LTD., REP. BY CHAIRMAN C.A.FRANCIS, HIGH ROAD, TRICHUR-1. BY ADV. DR.K.B.MUHAMED KUTTY (SR.) SRI.K.M.FIROZ RESPONDENT/RESPONDENT ============= DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-I, DIVISION-II, TRICHUR. BY ADV. SRI.P.K.R.MENON (SR.), SC ADV. SRI.JOSE JOSEPH, SC THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20-12-2011 , THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX ANNEXURE A: TRUE COPY OF ASSESSMENT ORDER DT.13.1.1998. ANNEXURE B: TRUE COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX, COCHIN, UNDER SEC.263 OF THE I.T. ACT DT.22.3.2000. ANNEXURE C: TRUE COPY OF ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH DT.30.1.2003. TRUE COPY P.S. TO JUDGE C.R. C.N.RAMACHANDRAN NAIR & K.VINOD CHANDRAN, JJ. .................................................................... I.T. Appeal No.38 of 2003 .................................................................... Dated this the 20th day of December, 2011. JUDGMENT Ramachandran Nair, J. This is an appeal filed under Section 260A of the Income Tax Act against the Single Bench order of the Tribunal declining to interfere with the order issued by the Commissioner under Section 263 of the Income Tax Act directing revision of assessment for the purpose of withdrawing claim of bad debt allowed in the original assessment under Section 36(1)(vii) of the Income Tax Act. We have heard Senior counsel Dr.Mohammedkutty appearing for the appellant and Standing Counsel for the respondent. 2. The appellant is engaged in kurry business and the assessment involved is for the year 1995-96. The assessee returned a net income of Rs.1,00,550/- after claiming deduction of Rs.3,69,550/- towards bad debt written off. Though the Assessing Officer allowed the claim, the Commissioner of Income Tax perused the records and noticed that the ITA 38/2003 2 bad debt did not represent debts which had become irrecoverable or written off as bad debt in the accounts for the previous year relevant for the assessment year. He, therefore, declared the assessment as prejudicial to the interest of the Revenue and directed revision of the same. It is against this order of the Commissioner assessee filed appeal before the Tribunal. The Tribunal through a detailed order held that the assessee had neither written off the debt by debiting the Profit and Loss Account nor is there anything to indicate that the debts had become irrecoverable which were still shown as payable by the debtors in the accounts of the assessee. What is clear from the finding of all the authorities is that the amounts remaining as debt due from the various subscribers who have got the chitty price amount, is claimed by the assessee as bad debt. Since on facts the Tribunal found that there is no write off of bad debt while finalising the accounts for the relevant previous years, the Tribunal did not go into the question as to whether the debts had become irrecoverable. It is against this order of the Tribunal assessee has come up in appeal before us. 3. Before us Senior counsel has relied on the decision of the ITA 38/2003 3 Delhi High Court in COMMISSIONER OF INCOME TAX Vs. GLOBAL CAPITAL LTD. reported in (2008) 306 ITR 335 and that of the Patna High Court in LAWLYS ENTERPRISES P. LTD. Vs. COMMISSIONER OF INCOME TAX reported in (2009) 314 ITR 297 wherein both the High Courts have held that in order to claim deduction under Section 36(1)(vii) under the amended provisions after 1st April, 1989, the assessee need not prove debt as irrecoverable or bad, but it is enough the assessee writes off the debt. Section 36(1)(vii) provides for write off of bad debt that has become irrecoverable. In our view, the qualifying terms of debt, both bad and doubtful have got definite meaning and content, the scope of which is not considered in the above decisions. The High Courts of Delhi and Patna seem to have been influenced by the deletion of the words “established to have become bad debt in the previous year” from the Section. In our view, even after deletion of these words, the Section makes it clear that the debt to be written off should be irrecoverable. We do not know how a debt that is recoverable, particularly debts of chitty companies which are covered by adequate security, can be written off when debt could be ITA 38/2003 4 easily recovered by resort to legal process. In any case we do not think there is any need to consider whether we agree with the view expressed by the two High Courts in the above two decisions in this case because on facts the Tribunal has found that the appellant has not written off the bad debts by debiting the Profit and Loss Account. On the other hand the finding of the lower authorities including the Commissioner is that the amounts claimed as bad debt are still shown in the accounts of the debtors and so much so, the appellant-assessee has not written off bad debt entitling him to claim deduction. 4. Assessee's counsel contended before us that writing off of bad debt in the Profit and Loss Account is not a mandatory requirement for claiming deduction of bad debt. We are unable to accept this proposition because Profit and Loss Account is the final computation of profit made by the assessee based on which assessment has to be made. Unless bad debt is written off by debiting the Profit and Loss Account which necessarily means that the debtors' account should be credited or so much of the amount debited in the Profit and Loss Account should be written off from amount due from the debtors, the ITA 38/2003 5 writing off as contemplated under Section 36(1)(vii) is not satisfied. Even though counsel for the appellant-assessee contended that when bad debt is recovered, there is provision for assessment of the same under Section 41, we do not think such a safety provision will entitle the assessee to claim bad debt as a deduction without satisfying the conditions contained in Section 36(1)(vii) of the Act. We, therefore, dismiss the appeal as devoid of any merit. Sd/- C.N.RAMACHANDRAN NAIR Judge Sd/- K.VINOD CHANDRAN Judge True copy P.S. to Judge pms