Kerala H.C : the revised return filed by the assessee subsequent to the search is to be considered as a return under the Amnesty Scheme

Counsel Appeared

P.K.R. Menon & George K. George, for the Revenue : M. Pathrose Mathai, Thomas Vellapally & John Ramesh K.I. John, for the Assessee

JUDGMENT

C.N. RAMACHANDRAN, NAIR, J. :

All the income-tax reference cases pertain to the same assessee and the issues are also common. Therefore, we have heard them together and proceed to dispose of them by this common judgment. IT Ref. Nos. 22 and 23 of 1998 at the instance of the Revenue, arise out of the order of the Tribunal disposing of appeals against the assessments for the asst. yrs. 1981-82 and 1982-83, while IT Ref. No. 20 of 1996 also at the instance of the Revenue arises out of the order of the Tribunal disposing of assessment appeal of the assessee for the asst. yr. 1984-85. IT Ref. Nos. 31 to 33 of 1998 at the instance of the Revenue arise out of the two separate orders of the Tribunal dismissing penalty appeals filed by the Department for the corresponding asst. yrs. 1981-82, 198283 and 1984-85. The only reference case at the instance of the assessee, namely, IT Ref. No. 21 of 1998, arises out of the order of the Tribunal dismissing the assessment appeal of the assessee for the asst. yr. 1986-87. The assessee is a partnership firm, running a bar hotel at Kottayam. The business premises of the assessee and the residential premises of the partners were searched by the IT Department on 9th April, 1986, and the records relevant for the asst. yrs. 1982-83 to 1986-87 were recovered. Prior to the issue of notice on 13th Jan., 1987, proposing income escaped assessments under s. 148 of the IT Act, 1961, the assessee filed revised returns on 30th Sept., 1986, for the asst. yrs. 1981-82 and 1982-83, claiming to be returns under the Amnesty Scheme. However, assessments were completed under s. 147 for the asst. yrs. 1981-82 and 1982-83 and under s. 143(3) for the asst. yrs. 1984-85 and 1986-87 by making further additions to the income returned by the assessee and penalty under s. 271(1)(c) was also levied after rejecting the assessee’s claim for immunity under the Amnesty Scheme for all the years except for the year 1986-87. The first appeals filed against assessments completed under ss. 147 and 143(3) of the IT Act were dismissed by the CIT(A).

In the second appeals before the Tribunal the only dispute that was agitated was whether the assessee was entitled to write-off of bad debts for all the assessment years and was eligible for the benefit of the Amnesty Scheme for claiming protection against penalty on the ground that true and full disclosure of income was made voluntarily, before the same was detected by the Department. Though the assessee’s claim for write off of bad debts was rejected by the AO as well as by the first appellate authority, the Tribunal accepted the claim of the assessee that it was entitled to claim the benefit of write off of bad debts under s. 36(1)(vii) of the IT Act in reassessment proceedings under s. 148 of the IT Act. Further, on the facts, the Tribunal found that the writing-off of bad debts for the asst. yr. 1981-82, which were not accepted by the Department on the ground that the same is not reflected by charging the P&L a/c, was allowable for the reason that the assessee had written off the same in the personal account of the debtors. For the asst. yrs. 1982-83 and 1984-85, the Tribunal found that even though the bad debts were not written-off by the assessee, as there is no time specified for writing off of bad debts, the assessee can be given an opportunity to write-off of the bad debts especially because the assessee did not have the books of accounts, as the same were in the custody of the Department after seizure. Based on the orders of the Tribunal in the appeals against assessments the CIT(A) cancelled the penalty orders for all the three years 1981-82, 1982-83 and 1984-85. In the second appeals filed by the Department in the penalty matter the Tribunal found that the assessee voluntarily and in good faith, filed returns disclosing escaped income before the same was detected by the Department, and, therefore, the assessee is entitled to immunity under the Amnesty Scheme. On this line of reasoning, the Tribunal confirmed the orders of the CIT(A) cancelling the penalties for the asst. yrs. 1981-82, 1982-83 and 1984-85. The questions referred to this Court at the instance of the Revenue are against the finding of the Tribunal on these issues in favour of the assessee, whereunder bad debts were ordered to be allowed, and penalties were cancelled by the Tribunal for all these assessment years. Though the assessment for the asst. yr. 1986-87 was also completed pursuant to the data gathered on the same inspection, the Tribunal declined to allow write-off of bad debts claimed by the assessee, for the reason that the assessee has not in fact written off the bad debts, nor did it file details of bad debts either before the AO or before the Tribunal. According to the assessee, it was entitled to the same opportunity granted by the Tribunal for the earlier asst. yrs. 1982-83 and 1984-85, and so much so the assessee questions the legality and propriety of the order of the Tribunal in declining to grant an opportunity to them to write off the bad debts for the asst. yr. 1986-87. Accordingly, the question referred at the instance of the assessee in IT Ref. No. 21 of 1998 is for the purpose of getting bad debts written off. We have heard Sri P.K.R. Menon, senior counsel for the Revenue, and Sri Pathrose Mathai, learned counsel for the assessee. For the sake of completeness, we give below the specific questions referred by the Tribunal for the opinion of this Court :

IT Ref. No. 20 of 1996 (at the instance of the Revenue):

“(1) Whether, on the facts and in the circumstances of the case and considering the search that was conducted in the premises of the assessee under s. 132 of the IT Act, was the Tribunal right in law in holding that the revised return filed by the assessee subsequent to the search is to be considered as a return under the Amnesty Scheme?

(2) Was the Tribunal right in law in holding that an opportunity should be given to the assessee to write off the ‘irrecoverable amounts’ in the books of account?

(3) Was the Tribunal justified in giving the above directions having regard to the fact that the claim for bad debts was made for the first time in the revised return filed after the search?”

IT Ref. Nos. 22 & 23 of 1998 (at the instance of the Revenue):

(1) Whether, on the facts and in the circumstances of the case and considering the search that was conducted in the premises of the assessee under s. 132 of the IT Act, was the Tribunal right in law in holding that the revised return filed by the assessee subsequent to the search is to be considered as a return under the Amnesty Scheme?

(2) Whether, the Tribunal was justified in finding that the bad debts for the asst. yr. 1981-82 were written off in the assessee’s books and that the assessee was entitled to deduction of bad debts for a sum of Rs. 1,97,208?

(3) Was the Tribunal right in law in directing the ITO to permit the assessee to write off the bad debts for the year 1982-83 when the claim was put forward for the first time during the reassessment proceedings?”

IT Ref. Nos. 31 to 33 of 1998 (at the instance of the Revenue):

“(1) Whether, on the facts and in the circumstances of the case, will the ‘revised return’ filed subsequent to the search come within the purview of the Amnesty Scheme?

(2) Whether, on the facts and in the circumstances of the case and in the light of the circulars including the questions and answers, all of them together forming the Amnesty Scheme, the assessee who had invoked the Amnesty Scheme subsequent to the search and seizure, is entitled to the benefit of the Amnesty Scheme?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the disclosure made by the assessee in the ‘amnesty returns’ could be considered as having been made voluntarily and in good faith and are not the findings, such as ‘amnesty returns’; ‘voluntarily’; ‘good faith’, wrong, unreasonable and against law and logic?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in confirming the cancellation of penalty levied under s. 271(1)(c)?” IT Ref. No. 21 of 1998 (at the instance of the assessee):

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in not giving the assessee the benefit of write off of bad debts in the books of account even though the Tribunal had given the benefit of such write off in the assessee’s own case for the asst. yrs. 198586 and earlier years?”

6. Broadly speaking, the issues can be summarised as follows :

“(1) Whether the assessee is entitled to write off of bad debts in reassessment proceedings initiated under s. 147 of the IT Act pursuant to search conducted by the Department?

(2) If the answer to the above question is in the affirmative, whether the Tribunal was justified in allowing bad debts for the asst. yr. 1981-82 and directing the Department to permit the assessee to write off bad debts for the asst. yrs. 1982-83 and 1984-85?

(3) Whether the Tribunal was justified in not permitting the assessee to write off bad debts for the asst. yr. 1986-87?

(4) Whether the Tribunal was justified in finding that the assessee has made true and full disclosure of its income prior to detection by the Department under the Amnesty Scheme to claim immunity from penalty under s. 271(1)(c) of the IT Act?”

7. We will first deal with the questions arising in the assessments for 1981-82, 1982-83 and 198485. The question is whether the Tribunal is justified in allowing the claim for 1981-82 and directing the Department to allow the claim for 1982-83 and 1984-85 after giving the assessee an opportunity to write off bad debts. Bad debt is a claim of deduction allowable under s. 36(1)(vii) of the IT Act provided the assessee proves that the debt has become bad and the same is written off in the accounts. This obviously means that the assessee should be satisfied on materials that the debt is irrecoverable and that it has become bad and consequently has decided to write off the same, and in fact the same is written off at the time of finalisation of the accounts for the previous year relevant to the assessment year. In this particular case, the assessee had already finalised its accounts, filed returns and assessments were also completed. However, the Department got information that the assessee was practising inflation in purchases and suppression in sales and search was conducted on 9th April, 1986, much after the relevant years are over which led to the seizure of accounts. In fact, the finding of the Tribunal is that the assessee has written off the bad debts after the search in the personal accounts of the debtors for the asst. yr. 1981-82 as against writing off of bad debts by charging the same to the P&L a/c. In other words, admittedly, the assessee has not properly carried out the write off of bad debts which should have been reflected in the P&L a/c. The assessee after finalising its accounts for the relevant previous year filed the returns and even assessment was completed and, therefore, writing off of bad debts in reassessment proceedings is against the scheme contemplated in the Act. However, the Tribunal accepted the assessee’s case stating that the write off of bad debts in the personal account of the debtors is sufficient for claiming deduction under s. 36(1)(vii) of the IT Act. The assessee has placed reliance on the decision of the Andhra Pradesh High Court in State Bank of Hyderabad vs. CIT (1988) 67 CTR (AP) 68 : (1988) 171 ITR 232 (AP) : TC 13R.1037. This, of course, is not a case of claim of bad debt after finalisation of the accounts. Apart from this, the Supreme Court in CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC) : TC 51R.314, disapproved the view expressed in the decision of the Andhra Pradesh High Court. We feel that writing off of bad debts, without charging the same in the P&L a/c is not a write off at all because assessment is made based on the audited accounts and the P&L a/c and balance sheet filed along with the returns. It is not enough if the assessee writes off the same in some of the books maintained by them, which do not form part of the audited accounts including the P&L a/c based on which assessment is made. Unless the write off took place at the time of finalisation of the accounts and reflected in the books of accounts, it cannot be treated as a write off at all, We do not find any special circumstance under which the Tribunal has accepted the write off stated to have been done by the assessee in the personal account of the debtors maintained by the assessee, as against the normal practice of charging the same to the P&L a/c. We are also of the view that the reassessment proceedings under s. 147 of the IT Act is income escaped assessment where the Department has reopened the assessment for the purpose of assessment of escaped income. Whatever claims may be eligible for deduction in reassessment proceedings, we are of the view that a deduction of bad debts is not permissible in reassessment proceedings because in reassessment proceedings, there is no finalisation of accounts to write off bad debts. The assessee’s accounts were once finalised and the same was filed before the Department. Writing off of bad debts is to be made in the finalisation of the accounts of the previous year in which the debt has become bad. It is for the assessee to conduct an investigation or make efforts to recover the amounts during the previous year and to decide to write them off, if it is satisfied that the debts had in fact become bad. The claim made in the reassessment proceedings is a belated claim only to offset the suppressed income detected by the Department on search. Therefore, the writing-off of bad debts allowed by the Tribunal for the asst. yr. 1981-82 is not permissible under the IT Act. Moreover, the method of writing off adopted by the assessee which is not reflected in the P&L a/c does not make it eligible for deduction under s. 36(1)(vii) of the IT Act. We accordingly reverse the finding of the Tribunal for the year 1981-82 allowing this claim. It is the admitted fact that the assessee has not written off the bad debts for the subsequent years 1982-83 and 1984-85. The reason given by the Tribunal for giving an opportunity to the assessee to write off the bad debts is that the books were with the Department after seizure. The search was conducted on 9th April, 1986, much after all the relevant previous years are over and finalisation of the accounts was made by the assessee, and the same was furnished before the Department. The Tribunal has pointed out that there is no time-limit for writing off of bad debts. We cannot agree with this proposition. We have already held that the writing off of bad debts should be done at the time of finalisation of the accounts for the previous year in which the debt had become bad and there cannot be finalisation of the accounts several times. This is a case of detection of suppressed income and consequently reassessment proceedings were initiated for assessment of escaped-income. At this stage, the assessee is not entitled to conduct an investigation about the debts, declare them bad, and decide to write it off, years after the end of the relevant previous year. In fact, the debts that had become bad in the relevant previous year only can be written off at the time of finalisation of the accounts for that year. Therefore, the Tribunal’s observation that there is no time-limit for writing off of bad debts cannot be accepted, and is against the scheme of accounting relevant for the income-tax assessment. Obviously, if the assessee is allowed to write off the bad debts after the close of the accounts for the relevant year, it is as if the debt has become bad at a later time and the same can be written off only in the finalisation of the accounts for the relevant year in which the assessee found that the debt had become bad. Therefore, the permission granted by the Tribunal is against the scheme of s. 36(1)(vii) of the IT Act. We are of the view that the writing off of bad debts cannot be permitted in reassessment proceedings initiated after the finalisation of the accounts. Therefore, the Tribunal went wrong in directing the Department to permit the assessee to write off the bad debts for the asst. yrs. 1982-83 and 198485 and in allowing the appeals. We, therefore, reverse the finding of the Tribunal for the years 1982-83 and 1984-85 also.

8. The next issue in the Department’s reference cases is whether the Tribunal is justified in confirming the orders of the CIT(A) cancelling the penalty levied under s. 271(1)(c) of the IT Act for the asst. yrs. 1981-82, 1982-83 and 1984-85. In order to appreciate the issues raised, it is necessary to refer to the following facts and figures relating to the three assessment years :(return on 30-3-1987) The assessee did not file any serious objection before the AO against the proposal for penalty, but only tried to protract the matter by requesting for time again and again. The assessing authority, however, considered the entire facts and circumstances and held that income assessed is based on material gathered on search and the assessee is not entitled to the benefit of immunity claimed because the assessee did not make a true and full disclosure. Accordingly, he levied penalty under s. 271(1)(c) of the Act for the years 1981-82, 1982-83 and 1984-85. The first appellate authority based on the Tribunal’s orders in the assessment appeals cancelled the penalty holding that the assessee is entitled to the benefit of immunity. The Tribunal on second appeals by the Department held that the assessee has made a true and full disclosure of income before detection under the Amnesty Scheme under Circular No. 453, dt. 4th April 1986. The Tribunal has noticed that the assessee filed revised returns for the asst. yrs. 1981-82 and 1982-83 on 30th Sept., 1986, much before the issue of notice under s. 147 of the IT Act on 13th Jan., 1987. According to the Tribunal, the mere search and seizure of books of accounts is not sufficient for taking the view that the Department has detected suppressed income. Counsel for the Revenue contended that the returns filed disclosing the income after search and detection are not voluntary disclosure to entitle the assessee for the benefit of the Amnesty Scheme under Circular No. 453, dt. 4th April 1986. He has also relied on the decision of this Court in P.C. Joseph & Bros. vs. CIT (2000) 158 CTR (Ker) 104 : (2000) 243 ITR 818 (Ker) and that of the Bombay High Court in Natwarlal Joitram Raval vs. CIT (1993) 115 CTR (Bom) 518. On the other hand, counsel for the assessee has relied on the decision in CIT vs. Mayank Rotoplast Industries (1999) 154 CTR (Guj) 76, wherein it was held that if the survey yielded no incriminating materials the assessee will still be entitled to the benefit of the Amnesty Scheme for the disclosure made after survey. He has also relied on the decision of the Calcutta High Court in Anand Kumar Saraf vs. CIT (1995) 125 CTR (Cal) 330 : (1995) 211 ITR 562 (Cal) : TC 71R.173 to contend that the disclosure after search will entitle the assessee for the benefit of the Amnesty Scheme. Another decision cited by the assessee is a decision of this Court in A.V. Joy, Alukkas Jewellery vs. CIT (1990) 185 ITR 638 (Ker) : TC 49R.1021. We do not think it necessary to decide whether the declaration subsequent to search will entitle the assessee for the benefit of the Amnesty Scheme under the circular referred to above, because on the facts we find that the assessee has not made any bona fide declaration in the returns filed within the time provided for under the Amnesty Scheme introduced by Circular No. 453, dt. 4th April, 1986. Though the assessee filed the returns before issue of notice under s. 147 after search for the asst. yrs. 1981-82 and 1982-83 on 30th Sept., 1986, the disclosure made therein was not full and complete is evident from the figures furnished in para 8 above. The assessee has put up a belated claim of write off of bad debt to depress the concealment noticed after search and besides all this, as against the income of Rs. 2,16,633 declared by the assessee as coming under the Amnesty Scheme, the assessment sustained was at Rs. 4,98,810 for the asst. yr. 1981-82. Similarly, for the asst. yr. 1982-83, the assessee filed an amnesty return disclosing Rs. 2,58,750 as against the assessment sustained at Rs. 7,37,440. The Amnesty Scheme introduced by the above circular though extended ended on 31st March, 1987. Therefore, the letter filed by the assessee on 21st May, 1987, agreeing for further additions over and above the income stated to have been declared voluntarily on 30th Sept.,1986, is after the last date prescribed for declaration under the Amnesty Scheme. Therefore, the offer of additional income for assessment vide letter dt. 21st May, 1987, is not covered by the Amnesty Scheme. Apart from this, it is evident from the penalty orders that the assessee was involved in manipulations and it was only when the Department detected the same from the assessee’s own accountsrecovered on search and substantiated the extent of concealment proved that the assessee agreed for the assessment. In para 3 of the order for the year 1981-82, the AO has shown the details of concealment detected on search. Admittedly, the assessee had not conceded these amounts until it was confronted with the proof of concealment noticed by the Department. Similar is the position for the asst. yr. 1982-83, wherein the AO has found out massive inflation in the purchase account and suppression in the sales account. Therefore, it is not a case of the assessee voluntarily disclosing the income, but the Department detected the concealment in the course of search and the assessee did not contest the same. For the asst. yr. 1984-85, the assessee filed the original return disclosing an income of Rs.62,120. After search and after the assessee was called upon to file a return, the assessee again filed a return on

30th March, 1987, disclosing almost the same income, i.e., Rs. 62,150. The Department found inflation in the purchase account and suppression in the sales account, and, ultimately, the income assessed was Rs. 2,06,560. Therefore, on the facts, we find that the assessee has not made true and complete disclosure voluntarily at any stage much less within the time provided for declaration under the Amnesty Scheme, which expired on 31st March, 1987. We find that the assessment of the escaped-income is clearly attributable to the effort made by the Department in the search and the concrete proof obtained by them.

The assessee at no stage has made true and full disclosure of income. But what the assessee has done was that it agreed for the additions when the Department confronted it with the data gathered on search. Therefore, the finding of the CIT (A) and the Tribunal that the assessee is entitled to immunity under the Amnesty Scheme as the assessee has made true and full disclosure before detection, is not sustainable. We are of the view that the cancellation of penalty by the first appellate authority and the order of the Tribunal confirming it are not tenable. However, we feel that for the asst. yrs. 1981-82 and 1982-83, the assessee had filed the revised returns on 30th Sept., 1986, disclosing the additional income. This was done before notice under s. 147 was issued on 13th Jan., 1987, for these two years. We feel that the additional amounts offered under these two revised returns filed on 30th Sept., 1986, are entitled to immunity under the Amnesty Scheme under Circular No. 453, dt. 4th April, 1986. But we make it clear that the income assessed over and above the income originally assessed and returned on 30th Sept., 1986, is concealed income on which penalty is payable under s. 271(1)(c) of the IT Act. It is a fact that the assessee has not made true and full disclosure even for these two years also. However, we feel that at least to the extent of income voluntarily disclosed by the assessee, the assessee should get immunity from penalty. Therefore, penalty for 1981-82 and 1982-83 have to be recomputed after excluding from the concealed income originally fixed, the income additionally offered by the assessee vide its revised returns filed on 30th Sept., 1986. The assessee is not entitled to any relief against the penalty levied for 1984-85 because on the facts, concealment is proved and only the minimum penalty is levied. We, therefore, reverse the orders of the CIT(A) and the Tribunal for 1984-85 and for 1981-82 and 1982-83 with the modification as above.

9. In the assessee’s reference (IT Ref. No. 21 of 1998) for 1986-87 there is a question on claim of bad debts. Admittedly, the assessee has not written off the bad debts for the asst. yr. 1986-87. The assessee’s case is that bad debts could not be written off because the books were with the Department. The Tribunal rejected the assessee’s claim for the reason that the assessee has not proved that the debts have become bad, and the assessee has not written off the bad debts, and the assessee has also not furnished the details of bad debts either before the AO or before the Tribunal to justify the claim of an opportunity. Obviously, the order of the Tribunal is contradictory to its order for the asst. yrs. 1982-83 and 1984-85, wherein the Tribunal has allowed such an opportunity to the assessee. We have already found that the assessee cannot get the benefit of write off of bad debts after the accounts are finalised and the returns are filed. Our reasoning for those years stated above applies for this year also. Therefore, we feel that the Tribunal rightly rejected the claim of the assessee, and we sustain the order of the Tribunal. In the result, we answer the questions referred at the instance of the Department, in both the assessment and penalty cases with the modification indicated above in favour of the Revenue and against the assessee. The question referred at the instance of the assessee for the asst. yr. 198687 is also answered against the assessee and in favour of the Revenue.