COMMISSIONER OF INCOME-TAX VS SANTOSH RICE MILLS
1999 P T D 3560
[230 I T R 813]
[Madhya Pradesh High Court (India)]
Before A. K. Mathur, C J and S. K. Kulshrestha, J
COMMISSIONER OF INCOME-TAX
Versus
SANTOSH RICE MILLS
Miscellaneous Civil Case No.325 of 1990, decided on 15/03/1996.
Income-tax---
----Deduction---Bad debt---Question whether debt is bad is one of fact ---Not open to High Court in a reference to reappreciate evidence ---Assessee supplying goods to a party in Cuttack---Financial position of party weak and, inadvisable for assessee to have further transactions with debtor firm. Assessee receiving a certain amount in full, and final settlement of sums due from firm and writting off balance as bad debt ---I.T.O. disallowing, claim for deduction as bad debt---Transaction took place in ordinary course- of business---I.T.O. failing to examine firm and no material to show that firm in sound financial position---Nothing suspicious about transactions between assessee and firm---Amount written off as bad debt is allowable deduction.
The question whether a debt is bad is one of fact and if there is some evidence to justify the conclusions of the Tribunal, it is not open to the High Court in a reference under section 256 of 'the Income Tax Act, 1961, to reappreciate the evidence.
The assessee, who was supplying goods to a party in Cuttack, noticed that the financial position of the said party had become weak and considered it inadvisable to have further transactions with the said party. On September 27, 1976, the assessee entered into an agreement with the debtor firm whereby the assessee agreed to receive a sum of Rs.12,000 in full and final settlement of the sums due from the firm. This agreement was acted upon and the assessee wrote off the balance of Rs.45,370 as a bad debt in the assessment year 1977-78. The assessee claimed deduction of the amount of Rs.45,370. The Income-tax Officer rejected the claim for deduction on the ground that the same had been written off with an ulterior motive, because the assessee had not taken any legal steps for the recovery of the dues and that the transaction with the firm was not genuine. On appeal, the Commissioner of Income-tax (Appeals) also rejected the claim for deduction. On further appeal, the Tribunal found that the transaction between the assessee and the firm took place in the, ordinary course of the business that the Income-tax Officer failed to examine the firm and had no material before him to show that the firm was in a sound financial position in September 1976, that, therefore, there was nothing suspicious about the transactions between the assessee and the firm and that, therefore, the assessee was entitled to deduction of the bad debt. On a reference:
Heldaffirming the decision of the Tribunal, that the sum of Rs.45,370 was deductible as a bad debt.
Bank of Bihar Ltd. v. CIT (1962) 45 ITR 427 (SC) ref.
Abhay Sapre for the Commissioner.
B. L. Nema for the Assessee.
JUDGMENT
S. K. KULSHRESTHA, J.---The Income-tax Appellate Tribunal, Nagpur Bench, Nagpur, in pursuance of the direction contained in order, dated September 19, 1989, of this Court in M.C.C. No.235 of 1983 on an application having been made to this Court by the Commissioner of Income -tax, Jabalpur, under section 256(2) of the Income Tax Act, 1961, has referred the following question of law for the opinion of this Court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee's claim for deduction of Rs.45,370 as bad debt?"
The respondent was assessed in the assessment year 1977-78, the previous year ending on Diwali 1976. The assessee was supplying goods to one Seema Stores, Cuttack. The assessee noticed that the financial position of the Cuttack party had become rather weak and considered it inadvisable to have further transactions with the said firm. On July 27, 1976; the assessee entered into an agreement with the Cuttack party whereby the assessee agreed to receive a sum of Rs.12,000 in full and final settlement of the sums due from the Cuttack party. This agreement was acted upon and, consequently, the assessee wrote off the balance of Rs.45,370 as bad debt.
The assessee's claim for a revenue deduction in respect of the bad debt of Rs.45,370 was rejected by the Income-tax Officer on the ground that the same had been written off with ulterior motive. The Income-tax Officer was of the opinion that the assessed had not taken any legal steps for the recovery of the dues and the transactions with the Cuttack party was not genuine. The assessee filed an appeal before the Commissioner of Income-tax (Appeals), Jabalpur, but the Commissioner of Income-tax rejected the same.
On an appeal having been filed to the Tribunal, the Tribunal by, its order, dated September 14, 1982, in I.T.A.-No.612 (Nag) of 1981, allowed the assessee's claim. The Revenue filed an application under section 2560) of the Act for reference of the question of law to this High Court which was rejected, but on an application having been filed in this Court under section 256(2) of the Act, a direction was issued to the Tribunal to refer the question of law arising out of the order of the Tribunal and, hence, the above question has been referred.
We have heard counsel for the parties, and perused the record.
In. allowing the claim of the assessed, the Tribunal in its impugned order has made the following observations:
"As submitted by learned counsel for the assessee the narration in the agreement between the assessee and Seema Traders that the loss could be claimed as business loss is of no relevance. It has to be independently examined whether the assessee is entitled to the claim of bad debt. . That there was a party called ' Seema Traders' in Cuttack is not denied. The transactions with it took place in the ordinary course of business. All new assessees are assessed by the survey circle and hence assessment in that circle is not necessarily an indication that the assessee was of such a standing that no prudent man would do business with it. The balance-sheet as on March 31, 1975, of Seema Traders is not an indication of its position as on September, 1970. A party may be sound today but fail tomorrow. The Income-tax Officer has not also examined. Seema Traders, nor has he brought in any Material to show that the Cuttack party was in a sound financial position in September, 1976. It is also not incumbent on the assessee to throw good money after bad, if it feels that going to Court for recovery of sums due would be a waste of time and money. There does not appear to be anything suspicious about the transactions between the assessee and Seema Traders. We therefore, hold that the assessee is entitled to deduct Rs.45,370 as bad debt. The addition made by the Income-tax Officer and sustained by the Commissioner of Income-tax (Appeals) in this behalf is deleted."
From the above-quoted observations of the Tribunal, it is clear that the Tribunal has categorically held that the Income-tax Officer had failed to examine Seema Traders and had no material before him to show that the Cuttack party was in a sound, financial position in September, 1976, and, therefore, there was nothing suspicious about the transactions between Seema Traders and the assessee. We find that the said finding is based on proper appreciation. It is clear that in the absence of any cogent material to indicate to the contrary, there was no reason to assume that the assessee had engaged in any suspicious dealings with the Cuttack party and the Tribunal was, therefore, quite justified in holding that the assessee was entitled to deduct Rs.45,370 as bad debt. The Supreme Court in Bank of Bihar Ltd. v. CIT (1962) 45 ITR 427, has observed that the question,' whether a debt is bad, is one of fact and if there is some evidence to justify the conclusion of the Tribunal it is not open to the High Court in a reference under the Act to re appreciate the evidence. The said observations of their Lordships fully apply to the facts of the present case.
Accordingly, we answer the reference against the Revenue and in favour of the assessee.
M.B.A./3137/FCReference answered.