IN THE HIGH COURT OF JUDICATURE AT BOMBAY
\nO.O.C.J.
\nINCOME TAX APPEAL NO. 1265 OF 2017
\nWITH
\nINCOME TAX APPEAL NO. 1469 OF 2017
\nPr. Commissioner of Income Tax -10 .. Appellant
\nVersus
\nHybrid Financial Services Ltd
\n(Formerly known as Mafatlal Finance Co Ltd) .. Respondent
\n……………….
\n\uf0b7 Mr. Akhileshwar Sharma for the Appellant
\n\uf0b7 Mr. Nitesh Joshi i\/by R.V. Pillai for the Respondent
\n……………….
\nCORAM : UJJAL BHUYAN &
\nMILIND N. JADHAV, JJ.
\nDATE : FEBRUARY 11, 2020.
\nORAL ORDER [ PER UJJAL BHUYAN, J. ]:
\n1. This order will dispose of both Income Tax Appeal
\nNos. 1265 of 2017 and 1469 of 2017.
\n2. Heard learned counsel for the parties.
\n3. Assessee in both the appeals is the same. While
\nIncome Tax Appeal No. 1265 of 2017 relates to assessment
\nyear 2001-02, Income Tax Appeal No. 1469 of 2017 relates
\nto assessment year 2003-04.
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\n4. However, for the sake of convenience, we may
\nrefer to the facts in Income Tax Appeal No. 1265 of 2017.
\n5. This appeal under Section 260A of the Income Tax
\nAct, 1961 (“the Act” for short) is preferred by the revenue
\nagainst the order dated 26.8.2016 passed by the Income Tax
\nAppellate Tribunal, Mumbai “H” Bench, Mumbai (“Tribunal”
\nfor short) in Income Tax Appeal No. 7175\/Mum\/2010 for the
\nassessment year 2001-02.
\n5.1. As already noted, Income Tax Appeal No. 1469 of
\n2017 assails the same order but arising out of Income Tax
\nAppeal No. 7176\/Mum\/2010 for the assessment year 2003-
\n04.
\n6. Revenue has preferred this appeal projecting the
\nfollowing two questions as substantial questions of law:-
\n(i) Whether on the facts and in the circumstances of the case and
\nin law, the order of the Tribunal for AY 2001-2002 and 2003-
\n2004 is perverse as it is not based on the facts, relevant to the
\nassessment year?
\n(ii) Whether on the facts and in the circumstances of the case and
\nin law, Tribunal has erred in law to allow bad debts on account
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\nof inter corporate debt and advances in contravention of
\nSection 36(1)(vii) read with Section 36(2) of the Act inspite of
\nthe fact that the assessee company is not a banking company
\nor engaged in the business of money lending?
\n7. Basically, the two questions center around
\nallowance of the claim of the respondent – assessee of bad
\ndebts by the Tribunal by deleting the additions made by the
\nAssessing Officer as affirmed by the first appellate authority.
\n8. For proper appreciation of the aforementioned two
\nquestions, it may be apposite to deal with the orders passed
\nby the authorities below.
\n9. Respondent is an assessee under the Act and
\nsubject to assessment jurisdiction of the Assessing Officer,
\nAssistant Commissioner of Income Tax, Range-10(1)(1),
\nMumbai. Respondent – assessee is a company engaged in
\nthe business of providing finance in the field of lease and
\nhigher purchase transaction, management consultancy
\nservices etc. During the assessment proceedings for the
\nassessment year 2001-02, Assessing Officer noticed that
\nassessee had claimed bad debts of Rs. 13,01,04,359.00.
\nWhile in three cases, assessee had written off inter corporate
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\ndeposits, in respect of four cases, the written off of bad debts
\npertains to advances given either for purchase of vehicles or
\nplant and machinery. Referring to Section 36(1)(vii) of the
\nAct, Assessing Officer took the view that unless there was an
\nadmitted debt it could not be allowed as bad debt when it is
\nwritten off. Besides, the debt must be incidental to the
\nbusiness or profession of the assessee. Taking such view,
\nAssessing Officer issued notice to the assessee to show
\ncause as to why the amounts covered by the bad debits
\nshould not be added to the income of the assessee.
\nAssessee in its reply stated that writing off any debt as
\nirrecoverable in the accounts was sufficient compliance to
\nSection 36(1)(vii) of the Act. However, by the assessment
\norder dated 19.2.2004 passed under Section 143(3) of the
\nAct, Assessing Officer did not accept the reply submitted by
\nthe assessee. Assessing Officer held that a debt is allowable
\nonly when it is a debt arising out of and is incidental to the
\ntrade carried out by the assessee. Therefore, Assessing
\nOfficer held that claim of the assessee for writing off all the
\ndues could not be entertained.
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\n10. Aggrieved by the assessment order, assessee
\npreferred appeal before the Commissioner of Income Tax
\n(Appeals) -22, Mumbai (also referred as “first appellate
\nauthority”). By the appellate order dated 4.8.2010, the first
\nappellate authority considered the rival submissions and
\nrelying on the decision of this Court in Director of Income
\nTax (International Taxation) Vs. M\/s. Oman
\nInternational Bank SAOG1 held that apart from writing off
\nthe debts as bad debts, action of the assessee has to be
\nbonafide and such decision must be based on some
\nmaterial in possession of the assessee. Mere reversal of
\nincome in its books of accounts did not entitle the assessee
\nto claim deduction. Affirming the view taken by the
\nAssessing Officer, first appellate authority rejected the claim
\nof bad debts made by the assessee.
\n11. In further appeal before the Tribunal, reliance was
\nplaced in the case of T.R.F. Ltd Vs. CIT2 wherein Supreme
\nCourt held that after 1.4.1989, it was not necessary for the
\nassessee to establish that the debt in fact has become
\n1 [2009] 313 ITR 218
\n2 [2010] 323 ITR 397 (SC)
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\nirrecoverable. It was enough if the bad debt is written off as
\nirrecoverable in the accounts of the assessee. Noticing that
\nassessee had written off all the debts in question as
\nirrecoverable in its accounts, Tribunal set aside the findings
\nof the first appellate authority affirming the view of the
\nAssessing Officer and allowed the claim of the assessee.
\nAggrieved, revenue is in appeal before us raising the above
\ntwo questions for consideration.
\n12. Submissions made have been duly considered.
\n13. Chapter IV of the Act deals with computation of
\ntotal income. Heads of income are mentioned in Section 14.
\nProfits and gains of business or profession is one of the
\nheads of income. Section 28 of the Act deals with
\ncomputation of income under the head ‘profits and gains of
\nbusiness or profession’.
\n13.1 Section 36 deals with other deductions. As per
\nsub-section (1), the deductions provided therein shall be
\nallowed in respect of the matters dealt with therein, in
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\ncomputing the income referred to in Section 28. Clause (vii)
\ndeals with the amounts of bad debt or part thereof which
\nshould be written off as irrecoverable in the accounts of the
\nassessee for the relevant previous year.
\n14. In Oman International Bank (supra), this Court
\ndealt with the question as to whether it was obligatory on the
\npart of the assessee to prove that the debt written off by the
\nassessee is recorded as a bad debt for the purpose of
\nallowance under Section 36(1)(vii). This court opined that to
\ntreat a debt as a bad debt, it has to be a commercial or
\nbusiness decision of the assessee. Once assessee records a
\ndebt as bad debt in his books of accounts that would prima
\nfacie establish that it is a bad debt unless the Assessing
\nOfficer for good reasons holds otherwise. However, a caveat
\nwas put in to the effect that writing off a debt as bad debt in
\nthe accounts has to be bonafide.
\n15. However, this question was specifically dealt with
\nby the Supreme Court in T.R.F. Ltd (supra). Supreme Court
\nnoted the difference in the language of Section 36(1)(vii)
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\nprior to 1.4.1989 and after the amendment, post 1.4.1989.
\nSince this aspect is relevant, Section 36(1)(vii) as it existed
\nprior to 1.4.1989 and after 1.4.1989 are extracted
\nhereunder:-
\n“Pre-1st April, 1989:
\n36. Other deductions -(1) The deductions provided for in the
\nfollowing clauses shall be allowed in respect of the matters dealt with
\ntherein, in computing the income referred to in section 28–
\n******************************************
\n(vii) subject to the provisions of sub-section (2), the amount of
\nany debt, or part thereof, which is established to have become a bad
\ndebt in the previous year.
\nPost-1st April, 1989:
\n36. Other deductions-(1) The deductions provided for in the
\nfollowing clauses shall be allowed in respect of the matters dealt with
\ntherein, in computing the income referred to in section 28–
\n*******************************************
\n(vii) subject to the provisions of sub-section (2), the amount of
\nany bad debt or part thereof which is written off as irrecoverable in
\nthe accounts of the assessee for the previous year.”
\n15.1. Comparing the provision of Section 36(1)(vii), pre
\n1.4.1989 and post 1.4.1989, Supreme Court held that the
\nposition in law has become well settled. After 1.4.1989, it is
\nnot necessary for the assessee to establish that the debt in
\nfact has become irrecoverable. It is enough if the bad debt is
\nwritten off as irrecoverable in the accounts of the assessee.
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\n16. This Court in CIT Vs. Shreyas S. Morakhia3 also
\nconsidered a claim of share broker assessee to deduction by
\nway of bad debts under Section 36(1)(vii). This Court
\nreferred to the decision of the Supreme Court in T.R.F. Ltd
\n(supra) and held that under Section 36(1)(vii) of the Act, the
\namount of any bad debt or any part thereof which is written
\noff as irrecoverable in the accounts of the assessee for the
\nprevious year is to be allowed as deduction in computing
\nincome under Section 28 of the Act.
\n17. Thus, it is a settled position in law that after
\n1.4.1989, it is not necessary for the assessee to establish or
\nprove that the debt has in fact become irrecoverable but it
\nwould be sufficient if the bad debt is written off as
\nirrecoverable in the accounts of the assessee. This is
\nbecause, as held by this Court, decision to treat a debt as a
\nbad debt is a commercial or business decision of the
\nassessee. Recording of a debt as a bad debt in his books of
\naccounts by the assessee prima facie establishes that it is a
\nbad debt. If the Assessing Officer disputes that the onus
\nwould be on him to prove otherwise.
\n3 [2012] 342 ITR 285 (Bom)
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\n18. Adverting to the facts of the present case,
\nTribunal recorded from the materials on record that
\nadmittedly, the debt in question had been written off as
\nirrecoverable in the accounts of the assessee.
\n19. If that be the position, then there is compliance to
\nthe requirement of Section 36(1)(vii) of the Act and the
\namount covered by the bad debts would be entitled to be
\ndeducted vide computing income under Section 28 of the
\nAct. Further, it is not necessary, rather there is no
\nrequirement under the Act that the bad debt has to accrue
\nout of income under the same head i.e ‘income from
\nbusiness or profession’ to be eligible for deduction. This is
\nnot a requirement of law. All that is required is that the debt
\nin question must be written off by the assessee in its books
\nof accounts as irrecoverable.
\n20. In the light of the above, we do not find any error
\nor infirmity in the view taken by the Tribunal. No question of
\nlaw arises from the order of the Tribunal. Consequently,
\nappeal filed at the instance of the revenue fails and is
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\naccordingly dismissed. However, there shall be no order as
\nto costs.
\n21. In view of the above, Income Tax Appeal No. 1469
\nof 2017 would also stand dismissed.
\n[ MILIND N. JADHAV, J. ] [ UJJAL BHUYAN, J. ]
\n11 of 11<\/p>\n","protected":false},"excerpt":{"rendered":"
It is a settled position in law that after 1.4.1989, it is not necessary for the assessee to establish or prove that the debt has in fact become irrecoverable but it would be sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee. This is because, as held by this Court, decision to treat a debt as a bad debt is a commercial or business decision of the assessee. Recording of a debt as a bad debt in his books of accounts by the assessee prima facie establishes that it is a bad debt. If the Assessing Officer disputes that the onus would be on him to prove otherwise<\/p>\n