Orient Fabritex Limited, Ahmedabad vs Department Of Income Tax

ी एन0एस0 सैनी, लेखा सद य एवं ी कुल भारत, या%यक सद य के सम& BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER आयकर अपील सं./ ITA No. 802/Ahd/2006 %नधा)रण वष)/Assessment Year: 2002-2003 ITO, Ward-5(2) Orient Fabritex ltd. Ahmedabad. Vs Opp: Jain Temple Gandhi Road Ahmedabad.

अपीलाथ,/ (Appellant) -.यथ,/ (Respondent)

Revenue by : Shri Nimesh Yadav, Sr.DR Assessee(s) by : Shri G.C. Pipara

सन ु वाई क तार ख/ Dateof Hearing : 25/03/2015 घोषणा क तार ख / Date of Pronouncement: 10/04/2015

आदे श/O R D E R

PER N.S. SAINI, ACCOUNTANT MEMBER: This is an appeal filed by

the Revenue against the order of the Commissioner of Income-Tax (Appeals)-XI, Ahmedabad dated 24.1.2006.

2. This appeal was dismissed by the Tribunal due to low tax effect vide order dated 3.7.2009 in ITA No.802/Ahd/2006 for the Asstt.Year 2002-03. The Revenue carried the matter before the Hon'ble Gujarat High Court. The Hon'ble High Court vide its order dated 30.9.2013 passed in Tax Appeal No.208 of 2010 quashed and set aside the order of the Tribunal, and remanded the matter back to its file to decide the same on merits and issue arising in the appeal.

3. The sole ground of appeal taken by the Revenue reads as under:

ITA No.802/Ahd/2006 2 "1. The ld.CIT(A) has erred in law and on facts while deleting the disallowance of Rs.34,64,718/- on account of bad debts."

4. Brief facts of the case are that the AO observed that the assessee has claimed bad debts of Rs.34,64,718/-. He required the assessee to file account copy of each party with details of debits and credits, steps taken for recovery with proof, complete name and postal address and also PAN of each party. The assessee vide its letter dated 25.8.2004 submitted that it was not in touch with the debtors as they were very old. The assessee submitted that the company has closed its business since October, 1996 i.e. prior to almost nine years. The relation and mutual faith between the company and its debtors and creditors deteriorated each day. The company has written off liabilities no longer required to be paid to the creditors amounting to Rs.36,90,095/- and has offered the same as income as evident from Schedule-8 forming part of balance sheet. Similarly, the assessee-company has also written off bad debts amounting to Rs.34,64,718/- in case of debts where the company has lost hope of any recovery whatsoever. Thus, it can be seen that the company has offered income on account of writing off of the creditors, the said figure being more than the figure of bad debts written off during the year under consideration, therefore, no adverse view was warranted, and the degree of evidence being the same in the case of both the debtors and creditors.

5. The AO observed that Income Tax Act does not provide any scheme for adjustment of income generated by way of writing off of very old liabilities against the debts of an assessee. There was no explanation to section 36(1)(vii) of the Act. The contention raised by the assessee was not acceptable, and was also not in accordance with law. The AO observed that vide its notice dated 10.2.2005, the assessee was required to justify the bad debt claim in the light of decision of Delhi Bench of the Tribunal reported in 56 ITD 307 (Bench- B) wherein it was clarified that even as per amended provision of ITA No.802/Ahd/2006 3 section 36(1)(vii) of the Act w.e.f. 1.4.1989 the assessee has to establish that the debts were bad debts. He also relied on the decision of Madras Bench of the Tribunal in the case of Bhawarlal C. Bafna Vs. ACIT, (2004) 25 SITC 440 (Mad). He also observed that the Ahmedabad Bench of the Tribunal had also followed the decision and held that writing off is to be of a bad debt and not of any debt which is not bad, and therefore, he disallowed deduction of Rs.34,64,718/-.

6. On appeal, the CIT(A) allowed the claim of the assessee. The CIT(A) observed that the assessee-company had written off the liabilities to extent of Rs.36,91,095/- and has claimed bad debts of Rs.34,64,718/-. Thus, the assessee has offered income on account of writing off of the creditors, on which it has paid tax, and has claimed Rs.34,64,718/- as bad debts as in some cases, the assessee has no chance of recovery. The assessee has duly complied with all the conditions as laid down in section 36(1)(vii) of the Act for claiming such bad debts. He also observed that the sales made by the assessee in the earlier years in respect of which the assessee has claimed bad debts have duly been accepted as genuine by the AO. He observed that as per law, it was not necessary to establish that the debt has really become bad. He placed reliance on the decision of the Hon'ble Gujarat High Court in the case of CI Vs. Ahmedabad Electricity Co. Ltd. 262 ITR 97 (Guj).

7. Before us, the DR supported the order of the AO, whereas AR of the assessee supported the order of the CIT(A) and submitted that the issue was now covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of T.R.F. Ltd. Vs. CIT, 323 ITR 397 (SC) wherein it was held that after the amendment of section 36(1)(vii) of the Income Tax Act, w.e.f. 1.4.1989 in order to obtain deduction in relation to bad debt, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable, and it is ITA No.802/Ahd/2006 4

enough if the bad debt is written off as irrecoverable in the accounts of the assessee. The Hon'ble Supreme Court accordingly remanded the matter to the AO to examine solely to the extent of written off, whether the debt or part thereof was written off in the accounts of the assessee.

8. We have heard rival submissions and perused the orders of the lower authorities and material available on record. The undisputed facts of the case are that the assessee has disclosed write off of liabilities no longer required of Rs.36,91,095/- and offered the same as income. Simultaneously, the assessee claimed write off of bad debts of Rs.34,64,718/- and claimed the same as deduction from the income. The AO though taxed the liability no longer required written off as income of the assessee, but did not allow deduction for bad debts claimed by the assessee on the ground that the assessee failed to submit the details and also could not show that the debt had in fact become bad. The AO was of the view that even after the amendment made in section 36(1)(vii) of the Act after 1.4.1989, the assessee was required to show that the debts infact have become bad.

9. On appeal, the CIT(A) allowed the claim of the assessee on the ground that the assessee had shown income by way of writing off of the liabilities of earlier years of Rs.36,91,095/-, and thereby the assessee has shown net income, and therefore, no disallowance was warranted. He further observed that the Hon'ble Gujarat High Court in the case of Ahmedabad Electricity Company (supra) has held that it was not necessary for the assessee to establish that the debt had in fact become bad.

10. Being aggrieved, the Revenue is in appeal before us.

11. The DR has simply relied on the order of the AO. He could not point out any specific error in the order of the CIT(A).

ITA No.802/Ahd/2006 5 12. We find that on the one hand, the AO is taxing the income shown by the assessee by way of liabilities no longer required written off of Rs.36,91,095/-, but, on the other hand, the AO was not allowing deduction for bad debts of Rs.34,64,718/- claimed by the assessee. Further, the DR has not controverted the findings of the CIT(A) that bad debt of Rs.34,64,718/- claimed by the assessee was shown as sales by the assessee in the earlier years, which was accepted by the AO as genuine. Further, the Hon'ble Supreme Court in the case of T.R.F.Ltd. (supra) has held that it was not necessary for the assessee to show after 1.4.1989 as per amended section 36(1)(vii) of the Act that the debts have in fact become irrecoverable, but only writing off of the same in the accounts by the assessee was enough. It is not in dispute that the assessee has written off debts of Rs.34,64,718/- as bad in its books of accounts. It has not been disputed that the debt which has been written off by the assessee arose out of sales made on credit in earlier years and the same was shown as receivable by the assessee in last several years. The same balance was brought forwarded from earlier several years and no recovery therein was made in last few years. The write off of the debts in the books of accounts by the assessee is prima facie evidence of its becoming bad. The Revenue could not bring any material on record to show that the debt had not become bad or any recovery was made by the assessee. Therefore, we find no good reason to interfere with the order of the CIT(A), which is hereby confirmed and the ground of appeal of the Revenue is dismissed.

13. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Court on Friday, the 10th April, 2015 at Ahmedabad.

Sd/- Sd/- (KUL BHARAT) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Ahmedabad; Dated 10 /04/2015