RALLIS INDIA LTD. vs COMMISSIONER OF INCOME TAX

The following question of law has been referred to us for our opinion u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case and on appreciation of the Ordinance and Central Board of Direct Taxes Circular, the Tribunal was justified in holding that the relief granted by the Commissioner (Appeals) was on wrong appreciation of matter and that the claim was premature ?"

We have heard the learned advocates for the parties and the assessee, and their rival contentions.

Mr. J. P. Khaitan, the learned advocate appearing for the assessee, submitted that in the light of the legal provisions contained u/s 36(1)(vii) of the Act, the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee has to be deducted. The amount in question is Rs. 32,57,894 relating to the assessment year 1985-86. The assessee''s case before the Tribunal was that the assessee had supplied certain materials to Tata Mills Limited which was taken over by the Central Government because of promulgation of an Ordinance called, ''The Textile Undertakings (Taking Over of Management) Ordinance, 1983'' on 18-10-1983. The assessee''s case was that because of the taking over of the aforesaid mills by the Central Government the amount of any bad debt or part thereof which was written off as irrecoverable in the accounts of the assessee was to be deducted in respect of the aforesaid assessment year. The assessing officer''s finding was against the assessee. But the Commissioner (Appeals) set aside that finding and held that the amount in question was really a bad debt. The Tribunal reversed the aforesaid finding of the Commissioner (Appeals) and decided against the assessee. To find an answer to the aforesaid question, we have to look at the preamble and various relevant provisions of 1983 Ordinance and also consider the import of the Circular dated 13-1-1971 issued by the Central Board of Direct Taxes u/s 119 of the Act. It will be only after we consider the provisions of the Ordinance and the applicability of the Circular in its true perspective that we shall strive to find an answer to the aforesaid question as to whether the amount in question could be considered to be a bad debt or not.

A bare look at the preamble to the Ordinance clearly suggests that the legislature intended to take over the management of the undertakings of the textile mills with a view to improve the working conditions and that the take-over of the management of the undertakings included the assets, rights and leaseholds, etc., along with the privileges that went with such take-over. Section 7 of the Ordinance, however, clearly provided for the total exclusion of any liability having been incurred by a textile company in relation to the textile undertakings before the appointed date.

Section 7 of the Ordinance reads as follows:

"For the removal of doubts, it is hereby declared that any liability incurred by a textile company in relation to the textile undertakings before the appointed date shall be enforceable against the concerned textile company and not against the Central Government or the Custodian."

When we appreciate the preamble to the Ordinance, in the light of section 3 thereof which relates to the act of taking over of the management of the undertakings and section 7 (supra), we find that the `liabilities'' part remained with the companies whose undertakings had been taken over only with respect to the "management" part.

Viewed thus, we find that the Circular dated 13-1-1971 (supra) issued by the Board of Direct Taxes cannot have any applicability to the facts of the present case, because that Circular at that point of time (as in 1971) dealt with such undertakings of textiles mills, management whereof has been taken over by the textile corporation under the provisions of the Cotton Textiles Companies (Management of Undertakings and Liquidation or Reconstruction) Act, 1976. Two salient features in that Act which were taken note of by the Board in its Circular dated 13-1-1971 related to the question of filing any suit against an erstwhile undertaking without the permission of the Central Government in respect of any liability and the cessation of any such liability in respect of any such undertaking after the coming into force of the Act. In other words, the Act clearly provided that no suit could be filed without the permission of the Central Government in respect of any liability that might have occurred in respect of the undertakings of the mills taken over by the Act and that in any event all such liabilities would have ceased to exist after the coming into force of the Act. A bare look at 1983 Ordinance, however, clearly reveals that identical provisions do not find any place in the Ordinance. Neither is there any prohibition about filing of any suit against the company, whose management has been taken over under the Ordinance nor has any liability, by operation of law, ceased to exist.

Viewed thus, we have no doubt, whatsoever, that the assessee could have proceeded against the Tata Mills for recovering the amounts due to it and if the amounts, despite such proceedings, could not have been recovered, it has the option to apply to the assessing officer in terms of section 36(1)(vii) for such relief as could be found due to it. When we looked at the judgment of the Tribunal, we found that the Tribunal has itself permitted the assessee to take recourse to such action, leaving all such questions open. The Tribunal''s judgment, therefore, cannot be faulted with nor does it call for any interference whatsoever.

We, accordingly, while disposing of the reference answer the question in the affirmative.