High Court Of Kerala
CIT vs. Kerala State Industrial Development Corporation Ltd.
Section 36(1)(vii)
Asst. Year 1993-94
K.S. Radhakrishnan & K.T. Sankaran, JJ.
IT Appeal No. 117 of 2001
27th February, 2006
Counsel Appeared
P.K. Ravindranatha Menon & George K. George, for the Revenue : M. Pathrose Mathai & Saji Varghese, for the Assessee
JUDGMENT
K.S. Radhakrishnan, J. :
This appeal has been preferred under s. 260A of the IT Act, 1961, aggrieved by the order of the Tribunal, Cochin Bench, in ITA No. 445/Coch/1996 holding that the assessee is entitled for deduction of the two amounts in question, i.e., Rs. 47,776 being the debt due from Vanchinad Leather Ltd. and Rs. 27,04,875 being the debt due from Velton Prefab Elements Ltd. under s. 36(1) (vii) of the IT Act. The following questions of law are raised for our consideration :
“1. Whether, on the facts and in the circumstances of the case and also in view of the fact that the final order of the official liquidator did not become available within the year of account relevant for the present assessment year is not the claim for deduction of the two amounts premature ?
Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee is entitled for the deduction of the two amounts in question, Rs. 47,776 being the debt due from Vanchinad Leather Ltd. and Rs. 27,04,875 being the debt due from M/s Velton Prefab Elements Ltd. ?
Whether, on the facts and in the circumstances of the case, did the assessee discharge the burden of proving that the two debts in question did become actually bad in the previous year relevant to the asst. yr. 1993-94 ?”
2. The assessee is a limited company owned by the Government of Kerala. Return of the income for the year 1993-94 was filed on 16th Dec., 1993, and subsequently it was revised on 18th Aug., 1994, declaring total income as nil. The assessee had debited an amount of Rs. 27,52,651 towards provision for bad debt which represents Rs. 47,776 due from Vanchinad Leather Ltd. and Rs. 27,04,875 due from Velton Prefab Elements Ltd. Both the abovementioned companies were under orders of winding up. In the case of Vanchinad Leather Ltd. the assets were not sufficient to recover dues to the assessee after paying the secured debts and in the case of Velton Prefab Elements Ltd., the official liquidator had advertised sale of assets and the amount realisable is expected to be Rs. 45 lakhs which should be shared between KFC, SBT and KSIDC. The assessee had debited those amounts to the P&L a/c and claimed it as bad debt. The AO however, disallowed this claim pointing out that the assessee can make a claim for deduction only when the dues from the borrower companies are finally settled. Further, the assessing authority also pointed out that the nature of assets owned by the company, technical evaluation of its market value and evidence for the amounts owing to other institutions, etc. were not furnished and in the absence of such details it was premature to allow the deduction. Further, the assessing authority pointed out that the assessee has not written off the amount as contemplated under s. 36(1)(vii) by crediting the borrower’s account. The assessee aggrieved by those orders took up the matter in appeal before the CIT(A), Trivandrum. The CIT(A) rejected the claim for deduction under s. 36(1)(vii) holding that for claiming the deduction the assessee should have established that the debt in question had become a bad debt in fact. Further, it was also held by the CIT(A) that the claim for deduction based on the assessee’s perception of the financial position of the two debtor companies especially when final orders are yet to be passed by the liquidator for winding up of those companies cannot be sustained.Aggrieved by the order of the CIT(A), the assessee took up the matter in appeal before the Tribunal. The assessee had raised a contention that the mere fact that the winding up proceedings have not attained a finality would not mean that the assessee is not entitled to claim deduction under s. 36(1)(vii) of the IT Act. Counsel appearing for the assessee pointed out that the winding up proceedings may continue over a long period running into decades and there is no justification for forcing an assessee to keep alive certain debts even after they have become bad till the final report/order of the official liquidator is received. The assessee had placed reliance on the balance sheet of M/s Velton Prefab Elements Ltd. as on 30th June, 1987, in which the details of the secured loans are stated. The balance sheet also relates to the bad debts as well. Taking note of the materials made available to the Tribunal as well as the financial position of the two debtor companies, the Tribunal allowed the appeal holding that there is sufficient material to hold that the debts due to the assessee company are irrecoverable. The Tribunal held that the assessee is entitled to get the benefit of deduction under s. 36(1)(vii) of the Act. Aggrieved by the said order this appeal has been preferred by the CIT.
3. Senior counsel appearing for the Revenue, Sri P.K. Raveendranatha Menon, contended that the assessee had failed to prove that the debts had become bad in the previous year relevant to the asst. yr. 1993-94. Counsel contended that s. 36(1)(vii) provides for deduction of any bad debt or part thereof which is written off as irrecoverable. Counsel submitted that Vanchinad Leather Ltd. is yet to be wound up and in the case of the other company the liquidator is yet to pass final orders and therefore counsel contended that the mere fact that the debt had become bad by itself would not mean that the debt had been written off by the assessee. Counsel referred to cl. (vii) of s. 36 (1) which was in force prior to 1st April, 1989, and also referred to the amendment effected w.e.f. 1st April, 1989. Counsel referred to the decision in CIT vs. Khem Chand Bahadur Chand (1981) 25 CTR (P&H) 359 : (1982) 134 ITR 65 (P&H) and contended that the assessee should establish that debt has actually become bad debt and the mere writing off of the debt in the books is not sufficient to claim deduction. Reference was also made to the decision of the Madras High Court in T.S.Pl.P. Chidambaram Chettiar vs. CIT (1967) 64 ITR 181 (Mad) and contended that the assessee who claims a bad or doubtful debt has to prove not merely that the debt he seeks to deduct is bad or doubtful but also that it became bad or doubtful in the accounting year. Counsel submitted that the finding of the Tribunal that the debts had become bad before the accounting year was not based on any evidence or material and was also vitiated by an erroneous approach. Reference was also made to the decision of the Madras High Court in Chettinad Co. (P) Ltd. vs. CIT (1984) 147 ITR 724 (Mad).
4. Senior counsel appearing for the assessee, Sri Pathrose Mathai, on the other hand, contended that the Tribunal was justified in holding that the assessee is entitled to get deduction under s. 36 (1)(vii) of the IT Act since the Tribunal was convinced of the irrecoverability of the bad debts in the facts and circumstances of the case. Counsel submitted the mere fact that winding up proceedings have not attained finality would not mean that the assessee cannot claim deduction under s. 36(1) (vii) of the IT Act. Counsel made reference to the decision of the Gujarat High Court in Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 21 CTR (Guj) 190 : (1981) 130 ITR 95 (Guj). Reference was also made to the decision of the Calcutta High Court in Dr. N.K. Brahmachari vs. CIT (1992) 104 CTR (Cal) 209. We heard counsel on either side at length. The assessee admittedly is a Government owned company. Undisputedly, large amounts are due to the assessee company from Vanchinad Leather Ltd. and Velton Prefab Elements Ltd. Vanchinad Leather Ltd. was recommended for winding up by the Board for Industrial and Financial Reconstruction. The balance sheet of the company as on 31st March, 1987, would show that the company has fixed assets worth Rs. 97.81 lakhs against the loan content of Rs. 2.96 crores. The amount receivable (unsecured loan) from the company, including interest and current account balance was Rs. 55.71 lakhs, which was provided for as bad debts during the year 1987-88. KSIDC has invested equity capital amounting to Rs. 17.50 lakhs in that company. The High Court of Kerala has ordered winding up of the company and the amount of investment is not realisable as the company will have no assets even for paying the secured creditors. Admittedly, the amount due to the assessee was an unsecured loan of Vanchinad Leathers Ltd. and Velton Prefab Elements Ltd. which was also recommended for winding up by the BIFR and the High Court had ordered the winding up. The official liquidator had advertised for the sale of assets and the amount realisable including the security deposit forfeited was only Rs. 45 lakhs. Large amounts are due to various financial institutions from the company. The total amount due to the assessee from the company was Rs. 26,72,564 which is also an unsecured loan. During the relevant assessment year winding up proceedings were in progress. The facts would clearly show that there is no possibility of recovering the amount by the assessee company. The balance sheet of M/s Velton Prefab Elements Ltd. as on 30th June, 1987, had shown secured debt at Rs. 1,47,28,612, but the assets are only Rs. 50,67,840. There is also a loss of Rs. 1,58,08,594 reflected in the balance sheet of the company. Materials produced before the authorities would positively show that there is no possibility of recovering the amount of Rs. 27,04,875 by the assessee. The same is the situation with regard to Vanchinad Leather Lt The Tribunal as a final fact-finding authority on the basis of the materials came to the conclusion that it would not be possible to recover the bad debts. The Calcutta High Court in Dr. N.K. Brahmachari’s case (supra) held that the irrecoverability of a bad debt depends upon the facts and circumstances of each case and it is not necessary for the lender to wait till the debtor company actually goes into liquidation before writing off the loan and interest thereon and claiming the deduction under s. 36(1)(vii) of the IT Act. Winding up proceedings is a cumbersome process where claims of a large number of secured and unsecured creditors have to be settled, which may take a considerably long period to attain finality. The creditor company in a given case could form a conscious judgment of its own as to whether any amount would be recoverable or not and make a provision for bad and doubtful debts. In a given case, the assessee could establish that there is no possibility of recovering the bad and doubtful debts depending upon the financial position of the debtor company. The assessee can make an honest judgment that the debt has become bad be written off and in fact has written off not in words, but on conduct. We find it difficult to accept the stand of the AO as well as the CIT(A) that only if a debtor company is wound up through process of law the assessee could claim deduction for writing off bad debts from those debtor companies. We are of the view it is not necessary for the assessee to wait till the debtor company actually goes into liquidation before writing off the loan and interest thereon and then to claim deduction under s. 36(1)(vii) of the IT Act. The assessee in this case is a Government owned company and it is not unreasonable to presume that it would take all possible steps before writing off the assets as bad debt. Being a Government owned company it would not be possible to conclude that the attempt of the company would be to gain unfair advantage in claiming bad debts to reduce its tax liability. The Tribunal as a final fact-finding authority came to the conclusion that the mere fact that the debtor companies were not wound up at the relevant point of time does not mean that the assessee cannot claim deduction under s. 36(1)(vii) of the Act. We are of the view that the Tribunal is right in law in holding that the assessee is entitled to deduction of the two amounts in question, i.e. Rs. 47,776 being the debt due from Vanchinad Leather Ltd., and Rs. 27,04,875 being the debt due from M/s Velton Prefab Elements Ltd. We have allowed the stand of the Revenue in IT Ref. Nos. 145 of 1998 and 25 of 2000, in the assessee’s case for the year 1988-89 on different facts situation. Kerala State Industrial Development Corporation Ltd. vs. CIT [reported as (2006) 201 CTR (Ker) 144—Ed.]. Under such circumstances, the appeal lacks merit and the same would stand dismissed. The questions raised are all answered in favour of the assessee and against the Revenue.
[Citation : 289 ITR 238]
