High Court Of Bombay
Jhunjhunwala Co. vs. Assistant Commissioner Of Income Tax
Sections 36(1)(vii), 36(2)
Asst. Year 1988-89
S.H. Kapadia & J.P. Devadhar, JJ.
IT Appeal No. 42 of 2001
21st November, 2002
Counsel Appeared
Atul Jasani with P.Y. Vaidya, for the Appellant : R.V. Desai with P.S. Jetly, Mrs. S.V. Bharucha & K.R.
Chaudhari i/b R.N. Bandopadhyay, for the Respondent.
JUDGMENT
S.H. KAPADIA, J. :
The appellant is engaged in the business of dealing in cotton. The appellant filed its return of income for the year ending 22nd Oct., 1987, relevant to asst. yr. 1988-89 returning income of Rs. 14,13,280 along with copy of the accounts and tax audit report. The return was filed on 11th Aug., 1988. In the P&L a/c for the year ending 22nd Oct., 1987, the assessee claimed bad debt in respect of an amount of Rs. 5,87,531.01 due from M/s Podar Mills Ltd. (Bombay). The assessee also claimed bad debt in respect of the amount of Rs. 6,25,704.14 due from M/s Podar Spinning Mills (Jaipur).
2. M/s Podar Spinning Mills (Jaipur) and M/s Podar Mills Ltd. (Bombay) were taken over by the Central Government vide Notification dt. 18th Oct., 1983, issued under s. 4(3) of the Textiles Undertakings (Taking Over of Management) Ordinance, 1983. In the circumstances, the assessee contended before the AO that it was impossible to recover the debts from M/s Podar Mills Ltd. (Bombay) and M/s Podar Spinning Mills (Jaipur). The assessee further pointed out that even the financial position of the acquiring body, viz., National Textile Corporation, which was appointed as a custodian by the Central Government, was very weak and, therefore, as a prudent businessman, the assessee was entitled to write off the bad debts under s. 36(1)(vii) r/w s. 36(2) as it stood before 1st April, 1989. This claim of the assessee was rejected by the AO vide assessment order dt. 22nd Oct.,
1987. According to the AO, the assessee-firm had not taken any steps for recovery of the debts for the mills whose management was taken over by the Central Government.
Accordingly, the AO disallowed the claim for bad debt in respect of the above two mills as premature. Being aggrieved by the assessment order, the assessee carried the matter in appeal to the CIT(A) who confirmed the order of the AO. The matter was carried in appeal to the Tribunal. The Tribunal has confirmed the order of the CIT(A). Consequently, the assessee has come before us under s. 260A of the IT Act. Arguments
3. Mr. Jasani, learned counsel appearing on behalf of the appellant-assessee, invited our attention to various provisions of the Ordinance under which the management of the above two mills was taken over by the Central Government. Mr. Jasani briefly submitted that under the said Ordinance, all assets have been taken over by the Central Government and all liabilities are left over with the textile companies. He contended that under the
Ordinance, recovery by way of receiver/liquidation was ruled out because permission was required to be taken from the Central Government before such recovery could be made. He further contended that although filing of the suit was not barred under the Ordinance, a prudent businessman was entitled to take the view after reading the Ordinance not to put good money for recovery of bad money. He further submitted that the accounts of the mills in the books of the assessee for the earlier year ending Diwali 1983, year ending Diwali 1984, year ending Diwali 1985, and year ending Diwali 1986, clearly showed that no amount was received from the said two mills during the asst. yrs. 1985-86, 1986-87, 1987-88 and, therefore, ultimately, in the assessment year in question the assessee had no option but to write off the claim as bad debt. In this connection, he relied upon Exhibit B to the paper book. Mr. Jasani also invited our attention to the judgments of the Division Benches of the Bombay High Court in Jethabhai Hirji & Jethabhai Ramdas vs. CIT 1978 CTR (Bom) 415 : (1979) 120 ITR 792 (Bom) at 811; Lord’s Dairy Farm Ltd. vs. CIT (1955) 27 ITR 700 (Bom) at 708. He further submitted that in the case of a sister concern of the assessee, on identical facts, the Tribunal had allowed the claim of bad debt aggregating to Rs. 12,13,235 for the same assessment year. He, therefore, submitted that, in this case also, the Tribunal should not have disallowed the claim for bad debt made by the assessee.
4. Mr. R.V. Desai, learned senior counsel for the Department, on the other hand, contended that, in this case, no demand was ever raised by the assessee on the textile companies. That no suit was ever filed against the two textile mills whose management was taken over by the Central Government under the Ordinance. Mr. Desai submitted that under the Ordinance, various amounts were payable by the Central Government on month to month basis to the textile mills. He contended that no claim was ever lodged with the textile mills by the assessee. He contended that the claim for bad debt was, therefore, premature during the asst. yr. 1988-89. He contended that the Department has not disputed non-recovery of the amount from the two mills. However, in this case, we are concerned with the law applicable prior to 1st April, 1989, under which the assessee was required to establish not only that the amount had become a bad debt but also that it had become irrecoverable in the year in which it is written off. He contended that under the Ordinance, it was open to the assessee to seek permission from the Central Government to recover the amount by way of liquidation/receiver. That, no such petition was made to the Government seeking permission to recover the amount vide liquidation/receiver. He relied upon the judgment of the Calcutta High Court in the case of Rallis India Ltd. vs. CIT (2001) 165 CTR (Cal) 661 : (2000) 109 Taxman 279 (Cal) in support of his contention. He accordingly submitted that no case for interference has been made out by the assessee. Findings
5. In the case of Jethabhai Hirji & Jethabhai Ramdas vs. CIT (supra), it has been held, inter alia, that the mere fact that the assessee has not taken legal proceedings against the debtor would not automatically justify the finding that the assessee was not entitled to write off the amount as a bad debt. It was further held that the debt cannot be written off as bad and irrecoverable if on the material available it could be shown that there was a possibility of recovering the same. In our view, the ratio of the said judgment in Jethabhai’s case (supra) squarely applies to the facts of the present case. A prudent businessman has to act on the basis of the material before him and, if from that material available, he could show that there was no possibility of recovering the amount then the assessee was certainly entitled to write off the debt as bad and irrecoverable. In the present case, the accounts annexed at Exhibits B and C show that right from the asst. yr. 1984-85, the assessee could not recover a single penny from the two mills. The record further shows that the assessee had called upon the Central Government for redressal of their grievance. However, the Central Government vide letter dt. 26th June, 1987, categorically informed the assessee who was a member of the East India Cotton Association that it was not possible for the Government of India to make payment to the suppliers of raw material to the two mills during the pre-take-over period. Lastly, one has to look at the Ordinance from the businessman’s point of view. Looking to the object of the Ordinance and particularly in view of s. 8(1)(c) of the Ordinance, it is clear that so long as the management of the textile undertaking remained vested in the Central Government, there was no scope for recovery of the amount because under s. 8(1)(c), it has been stipulated that no proceedings for winding up or for the appointment of a liquidator or for the appointment of a receiver could lie except with the consent of the Central Government. As stated above, various representations were made to the Central Government. The Central Government categorically rejected the representations made. As stated above, one has to look to the Ordinance from the prudent businessman’s point of view and therefore, on the facts and circumstances of this case, it is clear that there was material on record which would justify writing off the claim as bad and irrecoverable. There is no material available which would show possibility of recovery. In the circumstances, we find merit in this appeal. In the case before the Calcutta High Court, the amount in question was Rs. 32.57 lakhs relating to the asst. yr. 1985-86. The Ordinance, as stated above, came into force from 18th October, 1983. For the asst. yr. 1985-86, Rallis India Ltd. (assessee) had claimed write off under s. 36(1)(vii). It was the case of the assessee that because of the takeover of the aforestated mills by the Central Government, the amount of bad debt which was written off as irrecoverable in the accounts of the assessee was to be deducted in respect of the asst. yr. 1985-86. The AO rejected the contention of the assessee but the CIT(A) set aside that finding and came to the conclusion that the amount in question was a bad debt. The Tribunal, however, reversed the order of the CIT(A). Being aggrieved, the assessee came by way of reference under s. 256(1) of the Act to the High Court. The High Court, inter alia, laid down that the Ordinance was enacted in order to take-over the management of the undertaking of the textile mills with a view to improve the working conditions and that the take-over of the management included the assets, rights and leaseholds along-with the privileges. That, under s. 7 of the Ordinance, any liability incurred by the textile company pre-take-over was enforceable against the concerned textile company and not against the Central Government or the custodian. In view of s. 7 of the Ordinance, the Calcutta High Court came to the conclusion that the assessee, Rallis India Ltd. could have proceeded against Tata Mills (textile company) for recovering the amounts due to it and if the amounts, despite such proceedings, could not have been recovered, the assessee had an option to apply to the AO in terms of s. 36(1)(vii) for such relief. The ratio of the judgment of the Calcutta High Court in the case of Rallis India Ltd. (supra) does not squarely apply to the facts of our case. Before us, we are concerned with the asst. yr. 1988-89. Before us, the previous accounts are produced. They show the opening balance on the debit side for each assessment year, viz., 198485, 1985-86, 1986-87 and also 1987-88. These accounts further show the amount receivable by the assessee from M/s Podar Mills Ltd. (Bombay) and M/s Podar Spinning Mills Ltd. (Jaipur). These accounts further show that not a penny had been paid by the said two units during the asst. yrs. 1984-85, 1985-86, 1986-87 and 1987-88. Further, in our case, the assessee as a member of the association, wrote letters to the Central Government seeking redressal. The Central Government has rejected their application. Further, in our case, for the same assessment year, the Tribunal has allowed the claim of the sister concern of the assessee under s. 36(1)(vii). Lastly, s. 8(1)(c) of the Ordinance indicates that no proceedings for winding up/appointment of the liquidator or the receiver could lie without the consent of the Government. The reply of the Central Government to the representation made by the assessee shows that the Government would not have given consent for recovery of the amount by way of winding-up proceedings. One has to look at the problem from the point of view of a prudent businessman. In this case, there is ample material on record to show that there was no possibility of recovering the amounts from the said two mills. There was also no possibility of the Government consenting to the liquidation of the two mills. Therefore, on the facts, this case is not similar to the case of Rallis India Ltd. (supra).
6. For the above reasons, the assessee succeeds. The judgment of the Tribunal is set aside. The appeal is allowed. No order as to costs.
[Citation : 259 ITR 178]
