I.T.As. Nos. 1104/KB, 113/KB and 114/KB of 2005, decided on 27th February, 2007. VS I.T.As. Nos. 1104/KB, 113/KB and 114/KB of 2005, decided on 27th February, 2007., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1529 (2007)

(a) Income-tax---

----Remand of order---Order of First Appellate Authority was remanded by the Appellate Tribunal to pass speaking order after considering all the relevant facts of the case as he had not discussed any of the issues raised in detail on behalf of the assessee and without discussing issues raised before him and the order was without any basis.

(b) Income Tax Ordinance (XXXI of 1979)---

----S.23(1)(x)---Deductions---Written off bad debts---Disallowance of the claim of written off bad debts on the ground that recovery efforts had not been exhausted and the claim was premature and the Assessing Officer had the authority to determine which of the bad debts was not recoverable---Validity---Bad debts were actually written off on the pleas that the same was not recoverable---Assessee was the best Judge to determine as to what part of its bad debts required writing off and the assessee could not write off debt only to save taxes, as in this way, he loses more than he appears to gain---Provisions of law existed wherein it had been provided that if such written off bad debts were subsequently received, then same could be added in taxable income---No justification was available for disallowing the claim filed by the assessee---Appeal was allowed by the Appellate Tribunal specifically for the reason that Appellate Tribunal had upheld remanding back of the case with specific direction that actual written off contained in the provision should be examined and allowed, but Assessing Officer as well as First Appellate Authority had not given observation that the claim in this respect was not regarding actually written off bad debts.

277 ITR 338; 67 Tax 155; 20 Tax 88; 1975 PTD (Trib.) 63; 1991 PTD 569; 1980 PTD (Trib.) 46; 1986 PTD 2; I.T.A. No.108/KB of 2004 and 2006 PTD (Trib.) 1291 ref.

Irfan Sadaat for Appellant.

Dr. M. Ali Khan, D.R. for Respondent.

ORDER

Through these three appeals, the appellant has objected to the three separate impugned orders of the learned C.I.T.(A), two for the assessment year 1999-00. One is against the impugned order dated 12-12-2005 regarding order passed by the Taxation Officer under section 221 of the Income Tax Ordinance, 2001. First we take this appeal for which, on behalf of appellant, following grounds have been framed:

(2)??????? That the learned C.I.T (A) has erred in confirming the action of the learned Taxation Officer (T.O.) is without jurisdiction and tantamount to change in opinion. It is contended that the action is illegal and uncalled for.

(3)??????? That the learned C.I.T.(A) has erred in confirming the action of the learned T.O. erroneously dilated upon the issues which have already been settled by the learned C.I.T.(A) and his predecessor. It is contended that the action is arbitrary and without any legal basis.

(4)??????? That the learned C.I.T.(A) has erred in confirming the action of the learned T.O. who allocated financial charges against exempt income of the appellant. It is contended that the action is arbitrary and without any legal basis.

(5)??????? That the learned C.I.T.(A) has erred in confirming the action of the learned T.O. who taken the exempt income of the appellant at Rs.60,636,053 instead of correct amount of Rs.114,716,608. It is contended that the` action is arbitrary and without any legal basis.

While perusal of the impugned order of the learned C.I.T.(A), we have found that he has reproduced grounds of appeal, written arguments submitted by the appellant from pages 1 to 5 and has then concluded case with the following observations:---

"I have considered the written submissions and have also gone through the impugned record.

The arguments of Taxation Officer as jotted down in the impugned order carry weight. Hence, the action of T.O. is confirmed. So far as ground No.4 regarding allocating financial charges against exempt income are concerned. The action of T.O. is correct, hence no interference is called for. Regarding ground No.5 in taking incorrect figure of exempt income by Taxation Officer is concerned, the A.R. of the appellant do not submit any evidence, hence the action of Taxation Officer is confirmed".

After considering the above said order of the learned C.I.T.(A), we are of the view that he has not discussed any of the issues raised in detail on behalf of the assessee and without discussing issues raised before him, has passed the above said order without any basis. The impugned order of the learned C.I.T.(A) dated 12-12-2005 for the assessment year 1999-00 is, therefore, remanded back to the learned C.I.T.(A) to pass speaking order after considering all the relevant facts of the case.

Regarding the remaining two appeals, one is for the assessment year 1999-00 against impugned order of the learned C.I.T.(A) dated 8-6-2005 and the other against the impugned order dated 12-12-2005 for the assessment year 2000-01. Through these two appeals, the appellant has objected the confirmation of action of Taxation Officer disallowing bad debts written off for both the years.

Mr. Irfan Sadaat, Advocate has appeared on behalf of the appellant and has contended that the assessee, in this case, is a Public Limited Company shares of which are quoted at Stock Exchange. Taxation Officer has disallowed the claim of written off bad debts against which, appellant filed appeal before learned C.I.T.(A), who remanded back the case to the Taxation Officer. Cross appeals were filed by both the parties before this Tribunal and this Tribunal vide order dated 30-4-2001 upheld the setting aside of the issue of bad debts with the direction that actual write off contained in the provision should be examined and allowed. The Taxation Officer allowed the claim of the assessee except regarding three parties which are now the subject-matter of appeals. The Taxation Officer has disallowed the claim for these three parties for the reason that recovery efforts have not been exhausted and the claim of the assessee company is premature. While on behalf of the appellant, it has been contended that company has filed suits before Hon'ble High Court for recovery of bad debts, but as all these three companies are under liquidation and are being wound up, there is neither any possibility of recovery of the amount nor there is any hope for recovery. It has been contended that complete details in this regard were given to the Taxation Officer, which have been acknowledged in the assessment order. It has further been contended that the claim being only 0.18% & 0.77% of the entire turnover, being reasonable, should have been allowed. The learned counsel for the appellant in this regard has placed before us the following reported decision:---

(1) 277 ITR 338; (2) 67 Tax 155; (3) 20 Tax 88; (4) 1975 PTD (Trib.) 63; (5) 1991 PTD 569; (6) 1980 PTD (Trib.) 46 and (7) 1986 PTD 2 (Karachi High Court).

In these cases, it has been held that the amount written off, if not recoverable, the claim in this respect should be not disallowed. The learned counsel has also placed before us unreported decision of this Tribunal dated 9-6-2005 in I.T.A. No.108/KB of 2004 and the reported decision of this Tribunal 2006 PTD (Trib.) 1291 of which, author of that decision is the Judicial Member of this Bench wherein placing reliance on the decisions of the Hon'ble High Court as well as this Tribunal, the claim of written off bad debts has been allowed.

On the other hand, learned D.R. is supporting the impugned orders of the Officers below. He has contended that under sec?tion 23(1)(x), authority lies with the DCIT to determine which of the bad debts is not recoverable and in this case, DCIT has not allowed the claim, as the recovery efforts in this case has not been exhausted and the claim in this respect is premature.

We have heard the learned representatives from both the sides and have also perused impugned orders of the learned C.I.T.(A) and the assessment orders:??? .

We are of the view that in computing the income under the head "Income from business or profession", Taxation Officer under the repealed Ordinance, 1979 had to make allowances and deductions, which in the instant case are in respect of bad debts. We are of the view that in sub-clause (x) of subsection (1) of section 23 of the repealed Ordinance, 1979, it has been specifically legislated that "In respect of bad debts, such amount if not exceeding the amount actually written off by the assessee, as may be determined by the DCIT to be irrecoverable". We are of the view that through this section, DCIT has to determine in respect of bad debts to the extent of amount not exceeding the amount actually written of by the assessee. In the present case, on behalf of the appellant, all the details regarding three parties have been given. Regarding Mohib Textile Mills Ltd, it has been explained that at the time of executing the lease, it was highly reputable textile industry. But the lessee over-expanded its operation with the help of higher borrowing from different multinational banks and financial institutions. The lessee was unable to control the expanded operations. Over-borrowing coupled with the textile crises led to the closure of the company hence resulting in non-payment of the lease rentals of the assessee company. Suit of recovery was filed and was decreed in favour of the assessee company, but as the lessee company being wounded up and liquidator was appointed by the Court, the claim has been filed with the liquidator. It has been pointed out on behalf of the appellant that liquidation proceedings is a lengthy and viewing the number of creditors involved, therefore, partial write off to an extent of Rs.7,874,965, which would be in addition to the write off of Rs.55,50,000 already made in the previous years of the claim. Likewise, regarding Zamco Rubber Industries, which, was engaged in manufacture of rubber lining and parts for automobile and communication industry, which had paid 1/3rd of its receivable and was unable to pay thereafter due to huge stuck up receivables in the local market. The appellant company filed litigation suit. The case has been decreed in favour of the assessee, but as over due period exceeds three years, the appellant company has claimed it for write off. Likewise, the third party "Chaudhry Group", which was engaged in manufacturing of cables and relied solely on supplies to WAPDA. Business with WAPDA culminated and the group faced heavy losses. Huge borrowings and concentration of business with one customer led to the closure of factory. The companies have been wound up by a Court order and therefore partial write off for overdue period being crossed three years has been claimed on behalf of the assessee.

After considering these facts and circumstances of the case, we are of the view that as the appellant has claimed bad debts actually written off on the plea that the same is not recoverable, we are of the view that there are dozens of judgments wherein it has been held that the assessee is the best judge to determine as to what part of its bad debts requires writing off and the assessee cannot write off debt only to save taxes, as in this way, he loses more than he appeared to gain. As there are provisions of law wherein it has been provided that if such written off bad debts are subsequently received, then can be added in income are taxable. We, therefore, find no justification for disallowing the claim filed by the assessee. Appeals on the issue of bad debts for both the years under review are, therefore, allowed, specifically for the reason that this Tribunal has upheld remanding back of the case with specific direction that actual write off contained in the provision should be examined and allowed, but the DCTT as well as learned C.I.T.(A) have not given observation that the claim in this respect is not regarding actually written off bad debts.

Both the appeals regarding issue of bad debts for the assessment years 1999-00 and 2000-01 are allowed, while appeal for the assessment year 1999-00 regarding issue of rectification under section 221 of the Income Tax Ordinance, 2001 is remanded back to the learned C.I.T.(A) with the above said observations.

C.M.A./36/Tax(Trib.)?????????????????????????????????????????????????????????????? Order accordingly.