2000 P T D 2765

[236 I T R 156]

[Calcutta High Court (India)]

Before Ajoy Nath Ray and Dipak Prakash Kundu, JJ

COMMISSIONER OF INCOME-TAX

Versus

HOWRAH FLOUR MILLS LTD.

Income-tax Reference No. 189 of 1992, decided on 17/12/1998.

(a) Income-tax---

----Bad debt---Year in which debt passed through accounts of assessee need not be immediately preceding accounting year---Debts taken over by third person--Not a factor which would disentitle assessee from claiming it as a bad debt---Indian Income Tax Act, 1961, S.36(1)(vii), (2).

In construing section 36(1)(vii) of the Income Tax Act, 1961, there is no justification for holding that the previous year should be proximate to the earlier previous year when the debt had passed through the revenue accounts. When the statute provides that an earlier previous year will do, any earlier previous year will suffice, unless of course, there are other disentitling factors not connected with the remoteness of the earlier year from the previous year in question.

(b) Income-tax---

----Revision---Appeal to Appellate Tribunal---Appeal from order passed by CIT in revision---Tribunal cannot justify order on grounds other than those mentioned by CIT in his order---Indian Income Tax Act, 1961, Ss.254 & 263.

The Income-tax Appellate Tribunal cannot seek to justify an order passed under section 263 on grounds other than those mentioned by the Commissioner in the revising order itself. Under section 263 of the Act it is only the Commissioner who has been authorised to proceed in the matter, and therefore, it is his satisfaction according to which he may pass necessary orders thereunder in accordance with law. If the grounds, which were available to him at the time of the passing of the order, do not find a mention in his order, appealed against, then it will be deemed that he rejected those grounds for the purpose of any action under section 263(1) of the Act. In this situation, the Tribunal, while hearing an appeal filed by the assessee cannot substitute the grounds, which the Commissioner of Income-tax himself did not think proper to form the basis of his order.

The assessee claimed Rs.46 lakhs as a bad debt in the assessment year 1984-85. Excepting for a very small portion of this sum, which was only of the order of Rs.50,000 and about which there was not much dispute, the rest was a long-standing and old debt. The Income-tax Officer accepted the assessee's claim. The Commissioner of Income-tax, however, set aside the order under section 263. He held that the debt had arisen some time prior to 1966-67 as a result of supplies to eleven parties; that in or about 1167, the debt was taken over by E, and hence after such takeover, the debts could not be treated as trade debts. The Tribunal restored the order of the tax Officer. On a reference:

Held, (i) that the Commissioner of Income-tax proceeded on the basis that the debtor having changed, the debt must also have changed into something other than a trade debt. That the debt had become bad a long time ago, that the assessee was carrying a bad debt in the assessee's books with the dishonest and improper motive of claiming the debt as a bad debt during a year when profits arose, was not a ground for the order of the Commissioner of Income-tax. The Tribunal did not enter into this question and hence it could not be considered by the High Court.

(ii) That the Income-tax Officer had held that the nature of the debt was a trade debt. This finding had not been negatived by the Commissioner of Income-tax. The bad debt passed through the revenue accounts of the assessee at least in the stages of inception. It would not lose its character merely because it was carried in its accounts for seventeen years.

(iii) That the nature and character of the debt did not change by reason of the takeover of the debt by E from the 11 original purchasers. The fact that E had become the debtor and had been accepted as the debtor instead of the 11 original purchasers was found by the Income-tax Officer in the assessment order. The Commissioner did not revise the order on the ground that a takeover of liability was not permitted in the circumstances and there was no debt at all owing to the assessee whether from E or any other party. This point was an absolutely new one and could not be considered by the High Court. The amount was deductible as a bad debt.

Champa Lal Ramsarup (R. B.) v. CIT (1964) 52 ITR 194 (All.); CIT v. Chandrika Educational Trust (1994) 207 ITR 108 (Ker.); CIT (Addl.) v. Ganesh Das (1981) 129 ITR 467 (Ail.); CIT v. Groz-Beckert Saboo Ltd. (1979) 116 ITR 125 (SC); CIT v. Hanuman Das Himatsinhka (1971) 82 ITR 356 (Pat.); CIT v. Jagadhri Electric Supply and Industrial Co. (1983) 140 ITR 490 (P&H); CIT v. Jnhilla Coalfields (P.) Ltd. (1984) 146 ITR 276 (M.P.); CIT v. Sarabhai Sons Ltd. (1983) 143 ITR 473 (Guj.);CIT v. Veerabhadra Rao (T.) Koteswara Rao (K.) & Co. (1985) 155 ITR 152 (SC); Investment Ltd. v. CIT (1970) 77 ITR 533 (SC); Jethabhai Hirji and Jethabhai Ram Das v. CIT (1979) 120 ITR 792 (Bom.); Seth Champa Lal Ram Swarup (R. B.) v. CIT (1968) 68 ITR 181 (SC) and Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) ref.

Mullick for the Commissioner.

N. K. Poddar for the Assessee.

JUDGMENT

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Twelve questions have been referred for answering and those are as follows:

"(1) Whether, on the facts and in the circumstances of case and in view of the facts disclosed by the letter of the assessee, dated February 28, 1985, and June 14, 1985, referred to in the order of the Commissioner, the findings of the Tribunal that there is not iota of evidence to support the conclusion of the Commissioner that the directors of the assessee-company were interested in the eleven concerns whose debts were taken over by Eastern Tyre Sales Agency and that the take over was necessitated to avoid the provisions of section 295 of the Companies Act, 1956, is based on any evidence or perverse?

(2) Whether, on the facts and in the circumstances of the case and in view of the fact that the assessee-company was showing these debts, under the head 'Loans and advances' in its books of account from the assessment year -1967-68 to 1984-85 assessment year, the finding of the Tribunal that the assessee-company all along claimed that these were trade debts; is based on any evidence or perverse?

(3) Whether, on the facts and in the circumstances of case and in view of the entries made in the books of account of the assessee from the assessment year 1967-68 to 1984-85, the finding of the Tribunal that the case is on the Commissioner to establish that they were loans and advances and since the Commissioner did not examine the record beyond 1967-78(?); the Tribunal have to' accept the claim of the assessee's counsel that they were trade-debts, is based on any principle of law or perverse?

(4) Whether, on the facts and in the circumstances of the case, the; finding of the Tribunal that the debt in question was a trade debt, is based on any relevant material or perverse?

(5) Whether, on the facts and in the circumstances of the case and in view of the very fact that the paraphernalias of the takeover of the debts of the eleven concerns in which the directors of the assessee were interested by another third party was arranged to avoid the provisions of section 295 of the Companies Act, 1956, which prohibits advancing of direct or indirect loans to concerns in which the directors are interested without the permission of the Government of India, the Tribunal was justified in law in not holding that these debts were nothing but direct/indirect loans and advances capable of attracting the said section 295 of the Companies act, 1956?

(6)??????? Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the relationship of the directors of the assessee-company with the eleven debtors from whom Eastern Tyre Sales Agency took over has not been established, is based on any relevant evidence or perverse?

(7) Whether, on the, facts and in the circumstances of the case, the finding of the Tribunal that the relationship of the directors of the company with the eleven debtors cannot come in the way of writing off the bad debts, is based on any principle of law or

(8) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in not coining to the conclusion that the takeover and the writing off of the debts was engineered by the directors of the company who had interest in the writing off and as such the writing off was not genuine?

(9) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the other allegation of the Commissioner has no basis, is based on any material or perverse?

(10) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessment order was not erroneous?

(11) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding -that the Commissioner's order under section 263 of the Income Tax Act, 1961, was not correctly initiated.

(12) Whether, on the, facts and in the circumstances of the case, the Tribunal was justified in law in not holding that the based debts of Rs.46, 25, 804 was not allowable as a deduction under section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961?"

Although the questions are numerous, as soon as the brief facts are understood, it will be seen that the controversy lies within a very short compass.

The assessment year in question was 1984-85. In that assessment year a certain sum of money in excess of Rs.46 lakhs was claimed by the assessee to be deductible as a bad debt.

Excepting for a very small portion of this sum, which is only of the order of Rs.50,000 and about which there is not much dispute, the rest was a longstanding and old debt.

The Income-tax Officer's first assessment went totally in favour of the assessee regarding the issue of knocking off. The Commissioner of Income-tax by exercising powers of revisions under section 263 of the Income Tax Act, 1961, sought to opine that the assessment was erroneous because the amount in question, representing the bad debt, had never passed through the revenue accounts of the assessee and, therefore, it could not be treated as trade debts. In the revising order the Commissioner set out the facts taken from the assessment order. It is mentioned there that eleven parties had obtained supplies from the assessee some time prior to 1966-67. The names of these eleven purchasers are mentioned, with one mistake in that "Howrah Oil" was mistakenly mentioned as "Howrah Flour".

The Income-tax Officer had placed reliance on two letters of the assessee, dated February 28, 1985, and Tune 14, 1985, giving information.

The Income-tax Officer accepted the assessee's case that these eleven purchasers gave rise to the debt in the first place. Thus, on the basis of the Income-tax Officer's finding, the debts would no doubt have been trade debts, if the eleven purchasers had remained the debtors.

However, some time in or about 1967 the debts of Rs.46 lakhs and odd of these eleven parties were taken over by one Eastern Tyre Sales Agency. This tyre sales agency continued to be the debtor of the assessee for 17 long years before the debt was sought to be deducted as a bad one.

The Commissioner said as follows:

"This would mean that tree original debtors of the assessee-company had a 'Tisfied their trade, debts and the takeover of such debts by Eastern Tyres Sales Agency cannot be treated as a trade debt in its hands."

It is on this sole point, as we read the order in revision, that the assessee's claim for bad debt was sought to be declared as erroneous in law and prejudicial to the interests of the Revenue.

The assessee went up to the Tribunal. The Tribunal found in favour of the assessee. Thereafter, the questions have been referred to us, however, at the instance of the Commissioner itself.

The case of the assessee has been argued by Mr, Poddar and the Department's case has been argued by Mr. Mullick. Mr. Mullick has emphasised that for the purpose of a bad debt to be successfully claimed by the assessee the relevant conditions under section 36 have to be satisfied. That section, at the material time read in its material parts as follows:

We have taken the quotation from the material section at that time as set out in the case of a Supreme Court decision in 'T', Veerabhadra Rao (1985) 155 ITR 152 (page 155):

"Clause (vii) of subsection (1) of section 36 of the Income Tax Act, 1961, provides:

'36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- .....

(vii) subject to the provisions of subsection (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year.'

Subsection (2) of section 36 declares:

(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply:

(i) no such deduction shall be allowed unless such debt or part thereof--

(a) has been taken into account in computing the income of the assessee of that previous year, or of an earlier previous year, or represents money lent in the ordinary course of the business of banking-or money-lending which is carried on by the assessee, and

(b) has been written off as irrecoverable in the accounts of the assessee for the previous year'."

Mr. Mullick emphasised that the debt must be one, which has become irrecoverable or bad in the previous year. Mr Mullick's submission was that the debt of Eastern Tyre being 17 years old, it could not be held that the debt had become a bad debt only after 17 years and in the assessment year in question. He said that the assessee had to show that the debt was a good, one prior to the previous year in question and this, the assessee had failed to establish. Mr. Mullick relied in this regard on the case of Champa Lal, first decided by the Allahabad High Court in R. B. Champa Lal Ramsarup v. CIT (1964) 52 ITR 194, and then the decision was affirmed by the Supreme Court in R. B. Seth Champa Lal Ram Swarup v. CIT (1968) 68 ITR 181. The Allahabad High Court did opine that the assessee has to show the debt to be a good one prior to the previous year in question. The Supreme Court opined that in the case before it, the Tribunal was justified in not treating the debt as a bad debt because there were materials before the Tribunal showing that the debt had already become bad prior to the commencement of the previous year in question.

Mr. Poddar gave us several cases on several points, and in regard to how a debt can be appropriately claimed by the assessee to be bad, he particularly relied on the case of Johilla Coalfiedls (P.) Ltd. a decision of the Madhya Pradesh High Court, reported at (1984) 146 ITR 276, he also gave the case of Jetha Bhai Hirji and Jetha Bhai Ram Das in this regard, a Bombay High Court decision reported at (1979) 120 ITR 792, and placed several portions from the said judgment. He emphasised that the assessee is entitled to make a claim for a bad debt when the judgment is formed honestly.

Mr. Mullick gave us other cases also which show that the opinion of the assessee by itself is not conclusive as to whether a debt has become a bad debt in a particular previous year or not.

Although this point was argued at length, we are, of the opinion that it is neither just nor right in law for us to enter into this question at this stage.

The order of the revising Commissioner never entered into this question. The Commissioner proceeded on the basis that the debtor having changed, the debt must also have changed into something other than a trade debt. That the debt had become bad a long time ago, that the assessee was carrying a bad debt in the assessee's books with the dishonest and improper motive of claiming the debt as a bad debt during a year the assessee's profit should rise, this suspicion and these hunches do not form part of the arguments before and the decisions of the authorities as are recorded in our paper book.

Mr. Poddar gave two very apposite cases, one of the Punjab and Haryana High Court and another of the Kerala High-Court following the earlier one, where it has been opined that the Income-tax Appellate Tribunal cannot seek to justify an order passed under section 263 on grounds other than<those mentioned by the Commissioner in the revising order itself. We can do no better than to quote a passage from the judgment of J. V. Gupta, J., given in the case of CIT v. Jagadhri Electric Supply and Industrial Co. (1983) 140 ITR 490 (P & H). The quotation is from the bottom of page 502 and goes on to page 503, which is as follows:

"At the time of the hearing, if the assessee can satisfy the Tribunal that the grounds for decision given in the order by the Commissioner are wrong on facts or are not tenable in law, that Tribunal has no option, but to accept the appeal and to set aside the order of the Commissioner. The Tribunal cannot uphold the order of the Commissioner on any other ground, which, in its opinion, was available to the Commissioner as well. If the Tribunal is allowed to find out the ground available to the Commissioner to pass an order under section 263(1) of the Act, then it will amount to a sharing of the exclusive jurisdiction vested in the Commissioner, which is not warranted under the Act. It is all the more so, because the Revenue has not been given any right of appeal under the Act against an order of the Commissioner under section 263(1) of the Act. In case he proceeds thereunder after hearing the assessee in pursuance of the notice given by him, then the appeal field by the assessee under section 253(1)(c) of the Act cannot be treated on the same footing as an appeal against the order of the Appellate Assistant Commissioner passed in assessment proceedings, where both the parties have been given the right of appeal. In this view of the matter, the argument raised on behalf of the Revenue, that, in appeal, the Tribunal may uphold the order appealed against on the grounds other than those taken by the Commissioner in his den, is not tenable. Under section 263 of the Act it is only the Commissioner who has been authorised to proceed in the matter, and, therefore, it is his satisfaction according to which he may pass necessary orders thereunder in accordance with law. If the grounds, which were available to him at the time of the passing of the order, do not find a mention in his order, appealed against, then it will be deemed that he rejected those grounds for the purpose of any action under section 263(1) of the Act. In this situation, the Tribunal, while hearing an appeal filed by the assessee, cannot substitute the grounds which the Commissioner himself did not think proper to form the basis of his order."

With respect, the reasoning in the above passage is so clear and persuasive that the Kerala High Court also set out the passage in the case of CIT v. Chandrika Educational Trust (1994) 207 ITR 108 (see pages 120 and 121).

We respectfully adopt the reasoning given in the Punjab and Haryana High Court and we are also of the same view. In our opinion also, an assessee by filing an appeal from an adverse order under section 263, does not cause a reopening of his assessment order wholesale and in all respects. All that the assessee does is that it challenges the order of revision passed under section 263, which means the assessee challenges the ground on which the Commissioner has opined the Income-tax Officer's order to be erroneous (in law). In the instant case, the debt having become barred a long time ago was never a matter on which the Commissioner had passed any revising order under section, 263. The Tribunal did not enter into this question in this form either. We also do not enter into this question as it would not be right to do so.

The second point urged by Mr. Mullick was that the debt must have been taken into account for the purpose of assessment either in the previous year or in any earlier previous year. He submitted that if the earlier previous year is '17 years away then the provision cannot apply.

This was an argument of the first impression. No cases were cited. It was said that unless there is reasonable proximity to the previous year in question it would not be a proper construction to allow the deduction section to apply nonetheless from the remote years when a debt might have formed part of the revenue account of the assessee.

We do not find that in construing the section there is any justification for holding that the previous year should be proximate to the earlier previous year when the debt had passed through the revenue accounts. If we were to hold otherwise, we would have to lay down how proximate the earlier years should be. Should it be one year or five years or 10 years or more? This sort of rule of thumb based on policies and administrative decisions is not taken by Courts of law but by the Legislatures. When the statute clearly provides that an earlier previous year will do, in our opinion any earlier previous year will suffice unless of course there are other disentitling factors not connected with the remoteness of earlier year from the previous year in question.

The Tribunal has opined that although for 17 years the debt was shown in the assessee's accounts as a sundry debt, yet it is a mistake and it should be taken as a trade debt.

Mr. Poddar gave us cases where it has been held that the manner in which an entry is shown in the books of the assessee is not finally determinative of the actual nature of the said transactions. He gave us the case of Sultej Cotton Mills, a Supreme Court decision reported as (1979) 116 ITR 1. the case of Investment Limited v. CIT (1970) 77 ITR 533 and the case of CIT v. Groz-Eackert Saboo Ltd. (1979) 116 ITR 125, the latter two also decisions of the Supreme Court.

Again, the showing of the debt as a sundry debt in the assessee's accounts was not the reason for revising under section 263. At least it was not the prominent reason. It was mentioned in para.2 there, more as discussion. In any event, if the Income-tax Officer's description of the 11 original purchasers is not upset by the order under section 263, and it is not so upset, then the nature and character of the debt, in, its origin was no doubt a trade debt. Thus, the bad debt passed through the revenue accounts of the assessee at least in the stages of inception. We, therefore, are of the opinion that the assessee cannot lose its case here because of even 17 long years of mistake made in its accounts.

Strangely, the real point on which section 263 revision was made, was hardly a matter pressed by the Department before us. It went on arguing on other points, rather than this all important and basic point. -Mr. Poddar submitted that even if the debtor has changed, yet the creditor assessee has not changed when the 11 purchasers managed to pass their liability on to Eastern Tyre Sales. Thus, the debt remained a trade debt within the meaning of section 36(2). Mr. Poddar argued that the words "such debts" occurring in section 36(2)(i) will cover the debt sought to be deducted in the instant case. He- gave us several cases where other High Courts have opined that in cases of such takeover of debts, where the real character of the debt does not change, deduction would be permissible. He gave us the case of Johilla Coal Fields (P.) Ltd. (1984) 146 ITR 276 (MP), CIT v. Hanuman Das Himatsinhk (1971) 82 ITR. 356 (Patna), Addl. CIT v. Ganesh Das (1981) 129 ITR 467 (All.), and also the aforesaid Supreme Court case of CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. (1985) 155 ITR 152, although in the case before the Supreme Court their Lordships were concerned not with the change of the debtor, but with the change of the assessee, one assessee having contracted the trade credit or trade debt and another assessee having claimed it as bad later on.

Mr. Poddar further argued that when different High Courts have taken views by reason of which a change of debtor is not held to 6hange the nature and character of the debt, we should follow the same view unless very good reasons persuade us to decide otherwise. He submitted that the Income? tax Act is an all-India Act and no fewer than three High Courts favoured the view, which is in favour of the assessee in these circumstances. He relied on the case of the Gujarat High Court in the case of CIT v. Sara Bhai Sons Ltd. and also gave us the case reported at (1983) 143 ITR 473, which is also a Gujarat High Court case. We are of the opinion that this is a very sound policy and as such we opine that the nature and character of the debt did not change by reason of the takeover of the debt by Eastern Tyres from the 11 original purchasers. Mr. Mullick commenced and concluded his arguments by submitting that an assignment of a liability is not contemplated under the Contract Act. Thus, the debt of the 11 persons could never be passed on to Eastern Tyres. If the debt could not be passed on, there was no debt, which the assessee could knock off as a bad debt.

That Eastern Tyres had become the debtor and had been accepted as the debtor instead of the 11 original purchasers as found by, the Income-tax Officer in the assessment order. The Commissioner did not revise the order on the ground that 'h takeover of liability is not permitted in the circumstances and there was no debt at all owing to the assessee whether from Eastern Tyres and Sales or any other party. This point comes absolutely as a new one and we do not feel free to embark on the new and novel question at this stagy whether an assignment of liability by the 11 purchasers was possible, or whether such shift of liability would be possible only on a tripartite novation of the contract as between the assessee, the 11 purchasers of goods and Eastern Tyres and Sales. Were we to embark on this fresh territory we would be following a course, which, if followed, 'will never permit a litigation to finish.

For these reasons we are of the opinion that the assessee should succeed in this reference.

Answer to question No. 1:

Not perverse, based on evidence. Answer to question No:2:

Not perverse, based on evidence. Answer to question No. 3:

Not perverse, the Tribunal correctly took the debts as trade debts on the basis of the Income-tax Officer's satisfaction.

Answer to question No. 4:

Not perverse, based on relevant material.

?Answer to question No.5:

The question of loans between inter-connected undertakings was not a subject of the revisional order under section 263 and, as such, the Tribunal's order is riot bad in this regard.

Answer to question No.6:

Based on relevant evidence, not perverse.

Answer to question No.7:

Not perverse, based on law and legal possibility.

Answer to question No.8:

A question of fact as to non-genuineness does, not arise in the circumstances as the Income-tax Officer had accepted the writing of as genuine.

Answer to question No.9:

Not perverse, based on the material of the Income-tax Officer's favourable first order.

Answer to question No. 10:

The Tribunal was justified in law.

Answer to question No. 11:

The Tribunal was correct as the Commissioner had no basis to treat the nature and character of the debt as having changed by reason of change of the personality of the debtor.

Answer to question No. 12:

The Tribunal was fully justified.

Copies of the dictated order may issue on the usual under?takings.

M.B.A./4122/FC???????????????????????????????????????????????????????????????????????????????? Order accordingly.