First Leasing Company of India Ltd. vs Commissioner of Income Tax

P.P.S. Janarthana Raja, J.—The assessee has filed the present appeal against the order of the income tax Appellate Tribunal u/s 260A of the income tax Act, 1961, for the assessment year 2006-07, raising the following questions of law:

Whether the Tribunal erred in upholding the order passed by the Commissioner of income tax u/s 263 of the income tax Act, 1961, when the same was based on mere change of opinion and audit objection ?

Whether the Tribunal erred in rejecting the claim for bad debts on the ground that the amounts were borrowed by the Madhya Pradesh State Transport Corporation that was allegedly managed or enrolled by the State of Madhya Pradesh ?

The appellant-assessee also moved M. P. for injunction restraining the Revenue from collecting tax and submitted that the main issue in the tax case is covered by the apex court judgment in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, . Therefore, by consent of both parties, the tax case appeal itself is taken up for final disposal.

The brief facts arising out of the appeal are as under:

The assessee is a company registered under the Companies Act. It engaged in the business of hire purchasing and leasing. The relevant assessment year is 2006-07 and the corresponding accounting year ended on March 31, 2006. The assessee filed e-return of income on November 6, 2006, admitting income of Rs. 7,35,73,950 and the same was accepted u/s 143(1) of the income tax Act, 1961 (hereinafter called as "the Act"), on March 30, 2008. Later, the same was taken up for scrutiny and notice u/s 143(2) of the Act was issued and the assessment was completed u/s 143(3) of the Act and determined, the total income at Rs. 8,68,26,700. While completing the assessment, the Assessing Officer allowed the claim of bad debt of Rs. 7,39,52,514 out of the total bad debt at Rs. 8,46,14,046 being the lease amount to be received from Madhya Pradesh State Transport Corporation. Thus, the Assessing Officer allowed a sum of Rs. 7,39,52,514 as bad debt. Subsequent to the assessment, the Commissioner of income tax u/s 263 of the Act issued a show-cause notice to the assessee directing the assessee to show-cause as to why the provisions of section 263 of the income tax Act 1961, should not be invoked in respect of the assessment completed by the Assessing Officer and also directed the assessee to furnish a written reply or to appear through a duly authorised representative on the hearing date fixed on November 9, 2010. The assessee had also sent objections denying all the allegations and stated that the Assessing Officer completed the assessment u/s 143(3) of the Act after making a thorough scrutiny of return of income and other details, particulars and explanations and also stated that the assessee had written off bad debts as per section 36(1)(vii) of the Act. After considering the objection, the Commissioner of income tax set aside the order of the assessment on the ground that the Assessing Officer had not considered the material properly and did not consider the ratio of the judgment of this court in the case of South India Surgical Co. Ltd. Vs. Assistant Commissioner of Income Tax, which is squarely applicable to the facts of the case. Therefore, the Commissioner of income tax directed the Assessing Officer to pass fresh assessment order after giving opportunity to the assessee. Aggrieved by that order, the assessee filed appeal before the income tax Appellate Tribunal. The income tax Appellate Tribunal dismissed the appeal and held that the principle enunciated in this court judgment in the case of South India Surgical Co. Ltd. Vs. Assistant Commissioner of Income Tax, ) was squarely applicable to the facts of the case. Therefore, the order passed by the Commissioner of income tax is in accordance with law and accordingly, confirmed the order and rejected the appeal filed by the assessee. Aggrieved by that order, the assessee filed the present appeal raising the above questions of law.

The learned senior counsel appearing for the appellant-assessee contended that the order passed by the Tribunal is illegal, wrong and without justification. It is further submitted that the Tribunal failed to appreciate that the bad debt claim has been properly written off in the books of account on commercial consideration and it is not open to the tax authorities to ignore such crucial decision taken in the course of carrying on of the business. Further, it is contended that the Commissioner of income tax and the Tribunal failed to appreciate that the Assessing Officer in his order u/s 143(3) of the Act has given several hearings and has gone through the facts thoroughly and, hence, there is nothing wrong or erroneous in the order passed by the Assessing Officer. Further, it was vehemently contended that the Tribunal erred in holding that the Assessing Officer is incorrect inasmuch as the claim of bad debt is justifiable in law as the same is written off as irrecoverable in the accounts of the appellant. Further, the counsel appearing for the appellant-assessee relied on the apex court judgment in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, to support his proposition that it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

The learned counsel appearing for the Revenue submitted that the Tribunal has correctly followed the principle enunciated in the judgment of this court, in the case of South India Surgical Co. Ltd. Vs. Assistant Commissioner of Income Tax, Therefore, the order passed by the Commissioner of income tax as well as the Appellate Tribunal are in accordance with law and the same has to be confirmed.

Heard the learned counsel on either side and perused the materials available on record. The honourable apex court in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, considered the scope of the provisions of section 36(1)(vii) of the Act and held that after the amendment it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. The Supreme Court, in the above cited case, in paragraphs 4 and 5, held as follows (page 398):

This position in law is well-settled. After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in the accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer''s account is credited, thus, closing the account of the customer, In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the abovementioned aspect only and that too only to the extent of the write-off.

The Supreme Court after considering the scope of the provisions, held that the only requirement is that the bad debt should be written off as irrecoverable in the accounts of the assessee. In the case on hand, the contention of the assessee is that the Assessing Officer on examination of the case and on going through the facts carefully held that the claim of bad debt is justifiable in law as the same is written off as irrecoverable in the accounts. Even in the reply to the show-cause notice, it was brought to the notice of the Commissioner of income tax about the debt being written off as irrecoverable in the accounts. However, the Tribunal in its order had stated that the Assessing Officer has not discussed anywhere in the order that the assessee has written off the bad debts in their accounts. Further, the Tribunal held that the Madhya Pradesh State Road Transport Corporation Ltd., was fully owned, controlled and managed by the Government of Madhya Pradesh and, therefore, it cannot be said that the said amount would be written off as irrecoverable. The Tribunal further held that the decision of this court judgment in South India Surgical Co. Ltd. Vs. Assistant Commissioner of Income Tax, , is squarely applicable to the facts of the case and rejected the contention of the assessee. The apex court judgment in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, was rendered on February 9, 2010, but the same was not brought to the notice of the Tribunal by both the counsel. In view of the statutory provision as well as the apex court judgment in TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, and in the interest of justice, we set aside the order of the income tax Appellate Tribunal with a direction to rehear the matter afresh after giving opportunity to both parties to substantiate their case and decide the matter in the light of the apex court judgment in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, and in accordance with law. Such orders shall be passed as expeditiously as possible preferably within a period of three months from the date of receipt of a copy of this order. We direct the respondent not to take any recovery proceedings against the assessee in respect of tax collection till the matter was disposed of by the Tribunal. It is also made clear that both the parties shall not take unnecessary adjournments but co-operate for the speedy disposal of the case.

With the above observation, the tax case appeal stands disposed of. No costs. Consequently, connected miscellaneous petitions are closed.