Commissioner of Income Tax-I, Lucknow vs U.P. Rajkiya Nirman Nigam Ltd.

Heard Mr. D.D. Chopra, learned counsel for the appellant and Mr. Dhruv Mathur, learned Counsel for the respondent. The income tax Appeal No. 159 of 2008 has been filed by the revenue assailing the judgment and order dated 11-4-2008 passed by the income tax Appellate Tribunal, whereby the bad debts as claimed by the assessee during the Assessment Year 2004-05 has been allowed and the contention of the revenue that decision to write off bad debt, physically and actually, was not taken in the relevant previous year by the respondent and the account cannot remain open for an indefinite period was rejected. In the connected Appeal No. 17 of 2009, the Revenue has assailed the judgment and order dated 25-9-2008 passed by the income tax Appellant Tribunal.

This Court has admitted the instant appeal on the following substantial questions of law:-

(1) Whether on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in holding that assessee can keep his accounts open for an indefinite period and pass an entry at a later stage even after 12 months from the closure of the accounting period?

(2) Whether on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in allowing the claim of bad debts of the assessee on the ground that it has been written off in the accounts of the relevant period year while failing to appreciate that decision to write off bad debt was not taken in the relevant previous year and the same were actually not done in the previous year by 31st, March?

Brief facts, giving rise to the instant appeal, are that the assessee U.P. Rajkiya Nirman Nigam Ltd. is a State Government Undertaking engaged in the construction activities. During the year Assessment Year under consideration, i.e. 2004-05 relevant to the F.Y. 2003-04, the assessee had filed its original return declaring therein Rs. 6,34,21,360/- on 1-11-2004, but subsequently, the same was revised at Rs. 4,32,14,180/- on 18.8.2005 and while revising the said return, it has been declared that the debts to the tune of Rs. 2,13,50,967.28, out of Rs. 42.07 crores of sundry debtors, had become bad and irrecoverable, as these debts were pertaining to the period 1987-88 and 1998-99. A notice u/s 143(1) of the income tax Act was issued requiring the assessee to explain as to how the debts which had become bad only on 30-3-2005 and accordingly relates to Assessment Year 2005-06, but the same has been claimed in the Assessment Year 2004-05 to which reply was tendered by the Assessee-respondent and the relevant para of the reply reads as under:-

(i) That the financial year ended on 31-3-2004.

(ii) That the audit for the period 1-4-2003 upto 31-3-2004 could only be finalized after the closure of financial year that is after midnight of 31-3-2004.

(iii) That when the audit is to be taken up for finalization by the auditors after the closure of the financial year, i.e. after the midnight of 31-3-2004, any decision by the AUDITORS to reconcile, audit, pass rectification entry (if any), passing of journal entry in the Books, any correction by the auditors, or decision regarding debit of expenditure or any outgoing or credit of any income or receipt, accounting of any asset or liability different from what the assessee has already done, can and shall only be taken after 1-4-2004. Hence whether any decision for debiting an entry or crediting an entry is to be taken, whether by the auditors, Management or by the management on, the advise and guidance of the Statutory Auditors so as to disclose the correct income for the purpose of assessment, will only be taken on or after 1-4-2004. Hence whether the same is taken on 1-4-2004 or 30-9-2004 or any other date after 1-4-2004 will not change the nature and complexion of the entry. In the present case, when the due date for filing return came, the accounts had not been completely audited and finalized the Books were still subject to audit and open for any correction by the auditors. Hence any decision made before finalization of Accounts can in any manner effect and correct the Accounts and the decision so taken has in all circumstances to be considered as a method and procedure for placing correct income for assessment both as per the statutory provisions of Companies Act, 1956 and I.T. Act, 1961.

The Assessing Authority did not agree with the explanation/justification given by the Assessee and accordingly, add the same on the grounds that these debts were to be written off in the Financial Year 2004-05 relevant to the Assessment Year 2005-06, as the decision with regard to the said debt being bad and was irrecoverable had been taken on 30-3-2005. The First Appellate Authority while dismissing the appeal of the assessee uphold the reasoning of the Assessing Officer. Under these circumstances, the assessee filed an appeal before the income tax Appellate Tribunal and the Tribunal came to the conclusion that there is no requirement in law u/s 36(1)(vii) of the income tax Act, that the amount should actually be written off before the end of the financial year.

Relevant provisions of Section 36(1)(vii) read as under:-

36(1) ** ** **

(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.

On perusal of the provisions here-in-above, it reveals that the only requirement for allowing the bad debt u/s 36(1)(vii) of the income tax Act, is that any bad debt or part thereof is written off as irrecoverable and secondly, they should be written off in the accounts of the assessee for the previous year. In the instant appeal, neither the department nor the assessee disputes that the debt had become bad and it was written off.

The prescription as provided is to write off bad debt by the assessee in the accounts ''for the previous year'', but it does not say to write off bad debt ''in the previous year''. Thus, there is a vast difference if the word ''in'' would have been there in place of ''for''. Further, the words ''accounts of the assessee'' are qualified with further words ''for the previous year''. Thus, it only means that the accounts in which the act of writing off is to be done by the assessee should be for the previous year. Therefore, the law requires to write off the bad debt in the accounts of the assessee in the relevant accounting year. There is neither any condition nor any provision that the writing off should be done in the previous year, i.e. before end of the financial year.

In the present case, debts relating to the period 1987-88 and 1998-99 claimed in the accounts which were prepared up to 31-3-2004 and as the accounts of the assessee are open and subject to corrections by the Auditors, as per the Companies Act, then such writing off can be done in those account books. No new legal proposition has been brought to our notice for treating the debt as bad or irrecoverable should be taken in the previous year itself. In other words, where account books are not closed and not signed by the Board of Directors and not adopted by the shareholders as per the Companies Act, it is legally permissible to make adjustments before they are finally adopted.

Further, it is admitted that the original return, on the basis of un-audited accounts, was filed on 1-11-2004. After audit had taken place and report of the Auditors was accepted, revised return was filed on 18-8-2005 and it is only in the revised return, the debts to the tune of Rs. 2 crores and odd had been declared as bad. The ground taken by the Assessing Authority and Appellate Authority for not accepting the said bad debts during the assessment year under consideration, i.e. 2004-05 is contrary to the provisions of Section 36(1)(vii) of the income tax Act, and further in view of the interpretation as stated here-in-above. Therefore, the Tribunal has rightly allowed the appeal of the assessee.

The Apex Court in the case of Kerala State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax, , while dealing with the State Public Sector Undertaking and the provisions of Section 36(1)(vii) has laid down two conditions to be satisfied at the relevant time, namely, that (a) bad debt must be established to have become bad in that year and (b) bad debt should have been written off in the books of account of that year. If both these conditions are satisfied, then the assessee is entitled for the claim of bad debt.

In view of above, the questions are answered in negative, i.e. against the Revenue and is in favour of the assessee. Accordingly, both the income tax Appeals are dismissed.