Case: Kerala State Industrial Development Corporation Ltd Vs. Commissioner of Income Tax

S.H. Kapadia, C.J. & Madan B. Lokur, J. 1. Heard learned counsel on both sides. 2. This civil appeal filed by the Assessee pertains to the assessment year 1988-89. This case pertains to the period prior to April 1, 1989.3. The Assessee is a State public sector undertaking. It claimed deduction for bad debt under Section 36(1)(vii) of the Income-tax Act, 1961 (for short, "the Act"), which required two conditions to be satisfied at the relevant time, namely, that (a) bad debt must be established to have become bad in that year; and (b) bad debt should have been written off in the books of account of that year. The question before us is, whether the claim of the Assessee satisfies both the afore stated conditions.4. The Assessee is a State Industrial Development Corporation Ltd., Trivandrum. It had advanced loans/credit facilities to M/s. Vanchinad Leathers Ltd., a joint sector company promoted by the Appellant for processing hides and skins. M/s. Vanchinad Leathers Ltd. was set up sometime in the year 1974. Though M/s. Vanchinad Leathers Ltd. started commercial production in the year 1977, it closed in the year 1980 due to poor performance. It was reopened in September, 1982, and again closed down in January, 1983. The company had huge liabilities by end of December, 1986, running into Rs.362.80 lakhs as against its assets worth Rs.106.80 lakhs.5. In February, 1988, M/s. Vanchinad Leathers Ltd. moved a reference application for declaration that it was a sick company under the BIFR. On inquiry, a declaration was made by the BIFR, vide order dated February 22, 1988, that M/s. Vanchinad Leathers Ltd., was a sick company. In the circumstances, suit and recovery proceedings were not adopted by the Appellant.6. The Tribunal seems to be proceeding on the basis that because such suit/recovery proceedings were not instituted by the Appellant, the Appellant had failed to establish that debt had become bad in the accounting year ending March 31, 1988, corresponding to the assessment year 1988-89. In appeal, the High Court has proceeded on the basis that the second condition under Section 36(2)(i)(b) of the Act (identical to Section 36(1)(vii) of the Act) was not satisfied and, consequently, the High Court disallowed Kerala State Industrial Development Corpn. Ltd. v. CIT, (2006) 281 ITR 413 (Ker) the deduction for bad debt. The High Court did not examine the merits so far as the first condition is concerned. 7. We are of the view that the Appellant satisfied both the conditions for claiming deduction for bad debt under Section 36(1)(vii) read with Section 36(2)(i)(b). Firstly, the Appellant is a State public sector undertaking; and, secondly, the Appellant was the promoter of M/s. Vanchinad Leathers Ltd. This aspect has not been considered by the Tribunal. The Assessee was in the business of promoting industrial development in the State of Kerala. In the course of the business of the Assessee, it had promoted M/s. Vanchinad Leathers Ltd. As a promoter, it was in a position to find out whether M/s. Vanchinad Leathers Ltd. was in a position to carry on business in future. Thirdly, M/s. Vanchinad Leathers Ltd. was a joint sector company. It was a typical public/private partnership. None of these aspects have been considered by the Tribunal as well as by the High Court. Lastly, as stated above, the reference application was made in February, 1988; declaration was made in February, 1988, by the BIFR that M/s. Vanchinad Leathers Ltd. has become a sick company. Till the end, the company could not even be revived. It has been wound up. In the circumstances, applying the commercial test and business exigency test, we are of the view that both the conditions under Section 36(1)(vii) read with Section 36(2)(i)(b) of the Act are satisfied.8. Before concluding, we are of the view that at the relevant time, prior to April 1, 1989, two distinct approaches were available to the Assessee in the matter of write off of bad debt. This has been examined by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT, reported in (1981) 130 ITR 95 (Guj) , against which we are informed that Department has not filed a special leave petition. Moreover, in the case of Southern Technologies Ltd. v. Joint CIT, (2010) 2 SCC 548 in para 36, this Court has observed as under: (Southern Technologies Ltd. Case, (2010) 2 SCC 548 , SCC p. 572) "36. Prior to April 1, 1989, the law, as it then stood, took the view that even in cases in which the Assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the Assessee and crediting the amount to the account of the debtor, the Assessee was still entitled to deduction under Section 36(1)(vii). (See CIT v. Jwala Prasad Tiwari, (1953) 24 ITR 537 (Bom) and Vithaldas H. Dhanjibhai Bardanwala v. CIT, (1981) 130 ITR 95 (Guj)) . Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 1989) of a new Explanation to Section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the Assessee will not include any provision for bad and doubtful debt made in the accounts of the Assessee. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to Section 36(1)(vii). Consequently, after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii)." 9. In the circumstances, we

Decision reasoning: 1[ds]7. We are of the view that the Appellant satisfied both the conditions for claiming deduction for bad debt under Section 36(1)(vii) read with Section 36(2)(i)(b). Firstly, the Appellant is a State public sector undertaking; and, secondly, the Appellant was the promoter of M/s. Vanchinad Leathers Ltd. This aspect has not been considered by the Tribunal. The Assessee was in the business of promoting industrial development in the State of Kerala. In the course of the business of the Assessee, it had promoted M/s. Vanchinad Leathers Ltd. As a promoter, it was in a position to find out whether M/s. Vanchinad Leathers Ltd. was in a position to carry on business in future. Thirdly, M/s. Vanchinad Leathers Ltd. was a joint sector company. It was a typical public/private partnership. None of these aspects have been considered by the Tribunal as well as by the High Court. Lastly, as stated above, the reference application was made in February, 1988; declaration was made in February, 1988, by the BIFR that M/s. Vanchinad Leathers Ltd. has become a sick company. Till the end, the company could not even be revived. It has been wound up. In the circumstances, applying the commercial test and business exigency test, we are of the view that both the conditions under Section 36(1)(vii) read with Section 36(2)(i)(b) of the Act are satisfied.8. Before concluding, we are of the view that at the relevant time, prior to April 1, 1989, two distinct approaches were available to the Assessee in the matter of write off of bad debt. This has been examined by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT, reported in (1981) 130 ITR 95 (Guj) , against which we are informed that Department has not filed a special leave petition. Moreover, in the case of Southern Technologies Ltd. v. Joint CIT, (2010) 2 SCC 548  in para 36, this Court has observed as under: (Southern Technologies Ltd. Case, (2010) 2 SCC 548 , SCC p.Prior to April 1, 1989, the law, as it then stood, took the view that even in cases in which the Assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the Assessee and crediting the amount to the account of the debtor, the Assessee was still entitled to deduction under Section 36(1)(vii). (See CIT v. Jwala Prasad Tiwari, (1953) 24 ITR 537 (Bom) and Vithaldas H. Dhanjibhai Bardanwala v. CIT, (1981) 130 ITR 95 (Guj)) . Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 1989) of a new Explanation to Section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the Assessee will not include any provision for bad and doubtful debt made in the accounts of the Assessee. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to Section 36(1)(vii). Consequently, after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii)."