Kerala H.C : Whether or not the Tribunal was right in law in not allowing a deduction of Rs. 1,06,978 as bad debt under s. 36(2) of IT Act ?

High Court Of Kerala

Kerala Transport Company vs. CIT

Sections 36(1)(vii), 36(2)

Asst. Year 1988-89

K.S. Radhakrishnan & V. Ramkumar, JJ.

IT Appeal No. 110 of 2000

6th July, 2006

Counsel Appeared

C. Kochunny Nair & Dale P. Kurien, for the Appellant : P.K.R. Menon & George K. George, for the Respondent


K.S. Radhakrishnan, J. :

This is an appeal preferred by the assessee under s. 260A of the IT Act against the order of Tribunal in ITA No. 622/Coch/1992. Following are the questions of law raised for our consideration :

“1. Whether or not the Tribunal was right in law in not allowing a deduction of Rs. 1,06,978 as bad debt under s. 36(2) of IT Act ?

Whether or not the Tribunal misdirected itself and acted perversely taking into consideration that the goods did not belong to the assessee and that there is no amount due to the assessee particularly when the claim of the assessee was that the freight due has become bad and written off as evidenced by pp. 50 and 51 of the paper book ?

Whether or not the Tribunal was right in holding that the three items of bad debt in aggregate Rs. 44,527 is not an allowable deduction as a bad debt without considering each item on its merits about irrecoverability like period of pendency, difficulty for initiation of legal proceedings and other similar matters but only on a rule of thumb that amounts above Rs. 3,000 are not bad debt ?

Whether or not the Tribunal was right in law in disallowing payment of interest on Rs. 73,996 when it is a liability incurred by the assessee and when there is no attornment when the vehicle was transferred to their sister-concern and also when there is no material to show that the interest payment was for extra legal, personal or any non-business consideration and voluntary in nature ?”

Assessee is a partnership firm engaged in the business of transportation of goods. For the asst. yr. 1988-89, assessment under s. 143(3) on a total income of Rs. 74,05,000 was made as against the total income of Rs. 31,83,510 returned by the assessee. Aggrieved by the various findings rendered by the AO, assessee preferred an appeal before the CIT(A). Appeal was partially allowed. Dissatisfied with the order of the CIT(A), assessee took up the matter in appeal before the Tribunal. A cross-objection was also filed by the Revenue. Assessee had claimed deduction of an amount of Rs. 1,06,978 as cost of goods damaged in transit. Disallowance was upheld by the CIT (A) as well as by the Tribunal. Claim raised by the assessee as bad debt under s. 36(2) was also decided against the assessee.

Aggrieved by the same this appeal has been preferred. Assessee had claimed three items of deduction, Rs. 1,06,978 being the amount of freight which had become bad and irrecoverable as a result of the damage claimed by the customers, Rs. 49,527 being the aggregate of other bad debts and Rs. 73,996 being the interest payable to the financier on account of purchases of motor vehicles. Tribunal rejected the claims except bad debts to the extent of Rs. 23,024 made up of various debts each being below Rs. 3,000. According to the assessee, the reasonings for the disallowance are flimsy, perverse and contrary to the provisions of IT Act, 1961. Assessee had claimed freight charges which had gone into the computation of the earlier years and had become irrecoverable because of the refusal by the customer to pay the freight due to the assessee on account of the pending claim for damages by the customer. Assessee has also stated that the Tribunal has committed an error in disallowing bad debts of three items. Counsel appearing for the Revenue contended that no question of law arises for consideration in this case and the question as to whether a debt had become bad or the point of time when it became bad are essentially questions of fact and therefore, this appeal cannot be entertained. Reference was made to the decision of the apex Court in Travancore Tea Estates Co. Ltd. vs. CIT (1999) 151 CTR (SC) 231 : (1998) 233 ITR 203 (SC). We notice that all the authorities have concurrently found that the assessee’s claim for deduction of Rs. 1,06,978 cannot be allowed, especially, on the basis of audit report. Assessee while computing the income, had claimed deduction of the abovementioned amount as the amount payable to Kerala State Detergents & Chemicals Ltd., for the damage caused to their goods transported by the assessee. Before the AO it was stated that Kerala State Detergents & Chemicals Ltd. had despatched 725 cartons of soaps to their Indore Depot and that the cartons were damaged due to seepage of water. KSDC refused to take delivery of the damaged goods. The assessee sold 172 cartons to M/s P.V.S. Hospital. The remaining 578 cartons were taken by KSDC and they disposed of 200 cartons.

The remaining 378 cartons were taken by the assessee in January, 1986. In the audit report under s. 142(2A), the auditors observed that it was not known as to how the quantity of 378 cartons were disposed of and why no value had been credited in the accounts. Further assessee had also claimed that deduction could be allowed as a bad debt under s. 36 of the IT Act. According to the assessee, on account of damages caused to the goods the assessee could not recover the sum of Rs. 1,06,978 from KSDC and in that sense there was a bad debt allowance under s. 36(2).The stand of the Revenue is that the assessee was not entitled to claim the deduction either as a trading loss or as a bad debt for the asst. yr. 1988-89. Revenue placed considerable reliance on the report of the auditor. It was stated that the loss was incurred in the year 1983 and the matter was settled and the remaining goods were taken back in 1986. It was pointed out by the Revenue that even if there was any liability that related to the earlier year. On the claim for bad debt, stand of the Revenue was that this was not an amount which had been taken into account in computing the assessee’s income for the current year or for any earlier year. Further it was pointed out that the assessee was only transporting the goods belonging to KSDC and there was no question of crediting the value of the goods in the assessee’s account. We find no error in the reasoning of the authorities below. This is a case where the assessee’s accounts were subjected to audit under s. 142(2A) of the IT Act. In the report, it has been specifically stated that the goods had been despatched by KSDC in the year 1983 and that if at all there was damage caused to the goods it was in the year 1983 and the matter was also settled later in January, 1986. However, the assessee claimed deduction for the asst. yr. 1988-89 for a liability which had arisen in an earlier year. Further, it may also be noted that the goods never belonged to the assessee and the value of the goods was not credited in the assessee’s books. It cannot therefore be said that there was a bad debt. Further the amount was also not due from KSDC to the assessee, but claimed as payable by the assessee to them. Therefore it cannot be considered as bad debt due to the assessee within the meaning of s. 36(2) of the Act.

7. It is true that the Tribunal has granted the assessee some relief. The Tribunal had gone through the list of the parties against whom the debts were written off. Tribunal had noticed that there are only three amounts totalling Rs. 21,503 and had felt that a direction be given to the AO to allow the deduction for the bad debts below Rs. 3000 in each case. As regard the balance amount of Rs. 21,503 the Tribunal sustained the disallowance. We find no reason to take a different view. First of all the question as to whether a debt had become bad or the point of time when it became bad are essentially questions of fact and this Court in this appeal is not justified in giving any direction to the AO. Under such circumstance we answer all the questions in favour of the Revenue and against the assessee. Consequently this appeal lacks merits and the same would stand dismissed.

[Citation : 294 ITR 91]

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