Thirumbadi Rubber Co. Ltd. vs Deputy Commissioner of Income Tax (Assessment) and Another

C.N. Ramachandran Nair, J.—This is an appeal filed by the asses-see u/s 260A of the Income Tax Act, 1961, against the Order of the Appellate Tribunal confirming disallowance of capital loss in respect of an amount advanced by the assessee to M/s. Fort William Company Limited, Calcutta, and written off in the accounts relevant to the assessment year 1989-90 on account of the borrower-company being declared a sick industry. Even though three questions are raised by the assessee, the only issue to be decided is whether there is a capital loss in respect of debt written off by the assessee that was due from a sick industry under rehabilitation by the orders of the Board for Industrial and Financial Reconstruction. The appellant-assessee had advanced an amount of Rs. 3.5 lakhs to Fort William Company Ltd., Calcutta, and interest received on the deposit was being returned and tax assessed as income from other sources. However, the borrower-company had become sick and it was referred to the Board for Industrial and Financial Reconstruction for rehabilitation. Even though the Board for Industrial and Financial Reconstruction is stated to have issued final proceeding on rehabilitation vide Order dated November 28, 1989, the assessee wrote off the amount due to it from the sick industry as a bad debt in the previous year relevant to the assessment year 1989-90. First the assessee claimed deduction of bad debt u/s 36(1)(vii) of the Income Tax Act for the assessment year 1989-90, which was disallowed. Even though an appeal was filed against disallowance of bad debt for the assessment year 1989-90, the assessee withdrew the appeal and did not pursue the matter. However, based on the Board for Industrial and Financial Reconstruction Order issued on November 8, 1989, the assessee claimed the amount written off in the preceding year as a capital loss to the assessee for the assessment year 1990-91. The Assessing Officer disallowed the claim on the ground that there is no transfer of a capital asset entitling the assessee for capital loss. However, the Commissioner of Income Tax (Appeals) taking into account the fact that the Board for Industrial and Financial Reconstruction has issued final orders on November 8, 1989, i.e., during the accounting year relevant to the assessment year 1990-91, held that there is extinguishment of right to recover the debt due from the sick industry and so much so, there is a transfer of capital asset within the meaning of Section 2(47) of the Income Tax Act and allowed the appeal. The Department filed appeal against the Order of the Commissioner (Appeals) and the Tribunal allowed the Department-appeal holding that there is no transfer of capital asset on the facts of the case.

2 .We heard learned counsel appearing for the assessee, Sri Balachandran and Sri P. K. R. Menon, senior counsel appearing for the Income Tax Department. We find from the Order of the Tribunal that the Department has conceded the advance made, i.e., debt due from the sick industry, to the appellant as a capital asset. In view of the concession made by the Department, the Tribunal proceeded on the assumption that the debt due to the assessee from the sick industry was a capital asset. Senior counsel appearing for the respondents contended that the Department committed a mistake in conceding the issue and according to him, the debt due to the assessee and written off by it is not a "capital asset" within the meaning of that term contained u/s 2(14) of the Income Tax Act. We also feel there is some substance in this contention. However, we do not think it necessary nor is possible for us to decide an issue in an appeal not arising from the Order of the Tribunal. Moreover, there is no need to call upon the Tribunal to render a decision on this issue because we are agreeing with the findings of the Tribunal on other aspects. Therefore, this issue is left open for the Department to decide when occasion arises again.

Learned counsel for the assessee contended that there is a transfer of the capital asset inasmuch as there is extinguishment of the right of the assessee to recover the loan amount due from the sick industry pursuant to the Order of the Board for Industrial and Financial Reconstruction. According to him, even after the Order in rehabilitation, there is no provision made in the rehabilitation scheme for repayment of the amounts by the sick industry. Therefore, according to him, for all practical purposes the amount is lost to the assessee and the assessee rightly wrote it off. Counsel further contended that even though the write off is in the immediately preceding accounting year, the assessee is entitled to take a capital loss in the year in which extinguishment of right is occasioned which is on account of the Order of the Board for Industrial and Financial Reconstruction dated November 8, 1989. Counsel also relied on the decision of the Supreme Court in CIT v. Mrs. Grace Collis [2001] 248 ITR 323 wherein the Supreme Court has considered extinguishment of transfer of asset in the form of shares of an amalgamating company when consequent upon amalgamation there is a reduction in value of share and issue of shares of lower value by the amalgamated company. He has drawn our attention to the findings of the Supreme Court wherein they have disapproved their earlier decision in Vania Silk Mills (P) Ltd. Vs. Commissioner of Income Tax, Ahmedabad [OVERRULED], relied on by the Tribunal. Amalgamation is specifically covered by Chapter IV-E of the Income Tax Act dealing with capital gains and so much so, the facts are not in any way comparable with the facts in this case. Even though the Supreme Court has disapproved their earlier judgment in Vania Silk Mills (P) Ltd. Vs. Commissioner of Income Tax, Ahmedabad [OVERRULED], , we do not think the decision above referred will help the petitioner to get relief in this case. In the first place, after writing off the amount as a bad debt in the immediately preceding year, i.e., in the accounting year relevant to the assessment year 1989-90, there is no asset remaining with the assessee to be transferred or available for extinguishment. Moreover, the finding of the Tribunal is that no extinguishment claimed by the petitioner has happened on account of the Order of the Board for Industrial and Financial Reconstruction wherein the Board for Industrial and Financial Reconstruction has only deferred payment of interest by the rehabilitated sick industry to creditors like the assessee. So much so, the Board for Industrial and Financial Reconstruction Order has not caused any extinguishment of right of the assessee. So much so we are of the opinion that the Tribunal rightly reversed the Order of the Commissioner of Income Tax (Appeals) by holding that there is no extinguishment of the capital asset during the previous year relevant to the assessment year 1990-91. Even though we have not seen a copy of the Board for Industrial and Financial Reconstruction order, going by the operative portion of the Order of the Board for Industrial and Financial Reconstruction extracted in para. 5 of the Tribunal''s Order we are convinced that under the rehabilitation scheme debts due to creditors from the sick industry rehabilitated are kept intact. We therefore find no merit in the appeal. The appeal is dismissed.