Commissioner of Income Tax vs Steel Strips Ltd.

J.S. Khehar, J.—The instant controversy relates to the assessment year 1997-98 more particularly, the same is focussed on interest component of Rs. 26,09,621 reflected by the respondent-assessee in its books of account, the respondent-assessee asserted that the aforesaid component of interest was not assessable towards tax on account of the fact that it had merely been reflected in the books of account to pressurize the loanees to make the payment. The Assessing Officer did not accept the plea advanced by the respondent-assessee and accordingly, included the interest component of Rs. 26,09,621 to the returned income of the assessee.

Not satisfied with the determination rendered by the Assessing Officer, the respondent-assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The appeal preferred by the respondent-assessee was disposed of by an order dated September 27, 2000. The Commissioner of Income Tax (Appeals) accepted the appeal preferred by the respondent-assessee and in determining the issue under reference arrived at the conclusion that during the course of the previous assessment year similar income reflected as interest by the assesses in its books of account was not taken into consideration while determining the quantum of tax payable by the respondent-assessee. The Commissioner of Income Tax (Appeals) accordingly adjudicated upon the controversy on the rule of res judicata.

An appeal was preferred by the Revenue against the order dated September 29, 2000, passed by the Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal dismissed the appeal preferred by the Revenue, vide its order dated July 15, 2005.

Through the instant appeal, the Revenue has impugned the orders passed by the Commissioner of Income Tax (Appeals) dated September 29, 2000, as well as the order passed by the Income Tax Appellate Tribunal dated July 15, 2005.

The first and the foremost contention of the learned Counsel for the appellant is that, the issue under reference cannot be adjudicated upon under the principle of res judicata. According to the learned Counsel for the appellant, every loan extended by a party has to be analysed/deciphered on the basis of the terms and conditions recorded therein and that a determination rendered during an earlier assessment in respect of a particular loan (which forms a part of a different contract/transaction) cannot be the basis of a finding, on an issue of deduction in a subsequent assessment year unless it is the conceded position between the rival parties that the interest arises out of the same transaction or that interest arises out of a contract the terms and conditions whereof are the same as the ones which are the subject of consideration at the present juncture.

The second contention advanced on behalf of the learned Counsel for the appellant directly flows from Section 36 of the Income Tax Act, 1961 (hereinafter referred to as "the Act") under which the present deduction has been sought by the respondent-assessee. So far the present controversy is concerned, only Sub-clause (vii) of Section 36(1) of the Act is relevant. Accordingly, Section 36(1)(vii) of the Act is being extracted hereunder:

36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 ....

(vii) Subject to the provisions of Sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:

Provided that in the case of an assessee to which Clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

Explanation.-For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. (viia) to (xvi) ...

On the basis of the statutory provision extracted hereinabove it is the contention of the learned Counsel for the appellant that the deduction claimed by the respondent-assessee can be allowed only if the respondent-assessee satisfies all the ingredients stipulated in the aforesaid provision. It is submitted that the assessee must satisfy the concerned authority that the deduction claimed is on account of a bad debt. The aforesaid bad debt should be irrecoverable. As a result of its being irrecoverable it should have been written off. And that, the said debt should have been written off in the previous year.

Although, Clause (vii) refers to Sub-section (2) of Section 36, we find no justification to make any reference thereto as the issue in the present appeal can be determined on the basis of a plain reading of Sub-clause (vii) of Section 36(1) of the Act itself.

When confronted with the first submission advanced by learned Counsel for the appellant, it is the case of the learned Counsel for the respondent-assessee, that the entire material was placed by the respondent-assessee before the Assessing Officer as well as before the Commissioner of Income Tax (Appeals), and that the response of the respondent-assessee to the courts'' query would remain the same. The stance adopted by the respondent-assessee before the authorities below has been noticed in the order passed by the Commissioner of Income Tax (Appeals). Learned Counsel for the respondent-assessee also invited our attention to the same. We are accordingly extracting the same hereunder, as the stance of the respondent-assessee to our query:

It was submitted before me that the appellant-company has to receive huge money from its debtors who are not paying the dues in time. The financial position of these debtors was not good, therefore, to pressurize these parties, the appellant issued debit note of Rs. 26,09,621.50 to these parties against interest which was never accepted by these parties. It was pleaded that it was merely a claim and not an income which has accrued to the appellant. A list of 24 such parties was filed before me and it was stated that, out of the said parties, the appellant has been able to recover principal amount only from seven parties and in respect of other parties, the appellant could not effect recovery of the principal amount. It was stated that the appellant has passed the entries in its accounts for interest income, however, since it was merely a claim, the same has been reduced from the taxable income.

In spite of the aforesaid stance adopted on behalf of the respondent -assessee, the issue was not adjudicated on its merits by the Commissioner of Income Tax (Appeals). The matter came to be decided only on account of the fact that in a similar situation had been decided in an earlier assessment year, in a particular manner, and as such, the present case should also be decided in the same manner.

During he course of hearing, learned Counsel for the respondent-assessee handed over to us in court the order passed by the Commissioner of Income Tax (Appeals) dated September 30, 1997, the same is taken on record and marked as annexure A. A perusal of annexure A reveals that the matter which had come up for consideration was for the assessment year 1992-93. Paragraph 2.1 of the aforesaid order reveals that the respondent-assessee during the course of the proceedings of the assessment year 1991-92, had made a claim of deduction to the Assessing Officer in respect of a sum of Rs. 27 lakhs and that the aforesaid claim for deduction was accepted by the Assessing Officer. That being so, the deduction referred to by the Commissioner of Income Tax (Appeals) in his order dated September 29, 2000, has not been shown to have been made under the same contract (under which the loan was earlier extended). It has also not been shown to have been made in respect of a contract, the terms and conditions whereof, were identical to the contract (under which the present loan has been extended) presently in question. In either of the two situations referred to above, the claim of the respondent-assessee could have been upheld under the rule of res judicata. Whether or not the same situation is prevalent for the present assessment year, namely, 1997-98 cannot be deciphered from the orders placed on the record of the instant appeal or the pleadings of the instant appeal. Since the issue relates to a determination on the basis of a finding of fact in each loan case, will revolve on its own facts. In so far as the claim of a deduction u/s 36 of the Act at the hands of the respondent-assessee is concerned, it would be just and appropriate to remand the instant issue (limited to the deduction sought by the respondent-assessee on the disallowed deduction of interest of Rs. 26,09,621) back to the Assessing Officer, requiring him to reconsider the same within the parameters of Section 36(1)(vii) of the Act. We hereby set-aside the orders dated March 30, 1999, September 29, 2000, and July 15, 2005, passed by the Assessing Officer, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, respectively, only to the extent of their determination on the issue of deduction of Rs. 26,09,621 claimed by the respondent-assessee u/s 36(1)(vii) of the Act.

Parties are accordingly directed to appear before the Assessing Officer on February 2, 2009.

In so far as the second contention advanced by the learned Counsel for the appellant is concerned, we find no ambiguity therein whatsoever. In case the deduction is sought by the respondent-assessee u/s 36(1)(vii) of the Act, it would obviously be imperative for him first to demonstrate that the deduction he desires to seek is on account of a bad debt, secondly, that the aforesaid debt was written off as irrecoverable and, thirdly, it should have been written off as an irrecoverable debt in the previous year. The instant appeal is disposed of with the aforesaid observations.