Commissioner of Income Tax vs Khaitan Chemicals and Fertilizers Ltd.

Badar Durrez Ahmed, J.—This appeal filed by the revenue is directed against the order dated 5-5-2006 passed by the Tribunal in ITA No. 5314/Del/1996 pertaining to the assessment year 1990-91.

The learned Counsel for the revenue contended that the Tribunals findings are incorrect on two grounds. The first ground of challenge is that the Tribunal has erred in holding that the amount of Rs. 14.79 lacs claimed by the Assessee was allowable as a bad debt u/s 36(1)(vii) of the Income Tax Act, 1961 (hereinafter referred to as the said Act). Secondly, the learned Counsel for the revenue contended that the Tribunal had gone, wrong in holding that even if the said amount was not to be treated as a bad debt, it would still be an expenditure u/s 37(1) of the said Act incurred for the purposes of the business of the Assessee and was therefore, allowable as a deduction.

The facts are that in the year in question, the Assessee had written off an amount of Rs. 14.79 lacs by way of subsidy not received, which had been shown in the earlier year as a receivable, as per the mercantile system of accounting followed by it. The Assessee claimed this amount as a bad debt u/s 36(1)(vii) of the said Act.

The assessing officer did not agree with the view taken by the Assessee and came to the conclusion that the said amount did not fall within the purview of Section 36(1)(vii) of the said Act in as much as it did not amount to a bad debt. The assessing officer took the view that the Assessee did not have a legal right to claim the subsidy and therefore, could not take the matter to court by way of a suit to claim the same. As such, it was not a bad debt in the terms described in Section 36(1)(vii) of the said Act. Consequently, the assessing officer disallowed the claim of deduction by the Assessee.

The Commissioner (Appeals) confirmed the view taken by the assessing officer. However, the Tribunal, in the appeal preferred by the Assessee, came to the conclusion that it was an allowable expenditure. The Tribunal, of course, did not return a definite finding as to whether the said amount represented a bad debt or not in as much as the Tribunal came to the conclusion that even if it were not to be a bad debt, it would amount to an expenditure u/s 37(1) of the said Act, incurred by the Assessee for the purposes of its business and which would be allowable to the Assessee.

We find that insofar as the question of the said amount representing a bad debt is concerned, the contention of the learned Counsel for the revenue is correct that it cannot be termed as a bad debt. The subsidy that was to be received from the Government by the Assessee was not a matter of right. There was no debtor-creditor relationship established and therefore, the same cannot be treated as a debt, and consequently, as a bad debt.

It is true that the subsidy was given by the Government to the Assessee, who was in the business of selling fertilizers so that fertilizers were available at a lower price to the farmers. The Assessee had calculated the subsidy in the earlier year provisionally on the basis of the claim made. However, when the final rates of the subsidy were communicated by the Fertilizer Industry Co-ordination Committee (FICC), the same were sought to be adjusted as subsidy not received. We agree with the learned Counsel for the Appellant/Revenue that the Assessee had wrongly claimed it as a bad debt u/s 36(1)(vii) of the said Act. However, we find that the Tribunal has examined the matter in the correct light and allowed the same as an expenditure u/s 37(1) of the said Act. A plea was raised by the learned Counsel for the revenue that the Tribunal ought not to have done this and ought to have remanded the matter to the assessing officer to determine as to whether the claim was allowable u/s 37(1) of the said Act or not. However, we find that the decisions cited by the learned Counsel for the Assessee, namely, Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., and CIT v. Rose Services Apartment India (P) Ltd. IT Appeal No. 777 of 2008 decided on 20-2-2009, give a clear indication that the Tribunal was empowered to deal with the issue Of allowability of the said amount of Rs. 14.79 lacs and as to whether the Assessee was entitled to claim it as a bad debt or as an expenditure u/s 37(1).

We see no reason to disagree with the view taken by the Tribunal. In any event, no substantial question of law arises for our consideration.

The appeal is dismissed.