2000 PLP 2765 (PTD)

(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

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.