1. The facts that have arisen in this appeal under section 260A of the Income-tax Act, 1961 (“the IT Act”), are indeed singular and have, therefore, warranted a detailed hearing. The assessee-company is entirely engaged in the business of money-lending by way of inter-corporate deposits (ICDs) and other loans. On a perusal of its profit and loss account the Assessing Officer (“the AO”) noted that the assessee had written off rupees six crores as bad debts—rupees two crores from S. Kumar Nation Wide Foundation Ltd. and rupees four crores from Shithir Housing and Construction P. Ltd. Since the Commissioner of Income-tax (Appeals) had allowed the claim pertaining to the former, we are only concerned with the latter transaction which comprises a loan of rupees two crores extended on December 4, 2002, and another sum of rupees two crores, granted on December 5, 2002, both of which have been written off as bad debts on March 31, 2003, by the assessee in its books of account. Mr. C.S Aggarwal, learned senior counsel appearing for the assessee, has laid emphasis on the fact that it has not been controverted that the assessee has made advances to third parties of monies aggregating approximately to rupees one hundred and twenty two crores, out of which only rupees six crores has been written off.
2. The High Courts of Bombay, Calcutta, Rajasthan, Gujarat, Allahabad and Madras have, in the following cases, taken the view that it is for the assessee concerned to make an honest judgment as to whether a debt is recoverable or not:
Jethabhai Hirji and Jethabhai Ramdas v. CIT, [1979] 120 ITR 792 (Bom); Nandlal Vithaldas v. CIT, [1989] 180 ITR 609 (Bom); CWT v. Shree Bhagpatia Food Industries, [1994] 207 ITR 1045 (Raj); CIT v. Dunlop India Ltd., [1994] 209 ITR 987 (Cal); CIT v. Coates of India Ltd., [1998] 232 ITR 324 (Cal); CIT v. Algemene Bank Netharland, [1994] 73 Taxman 307 (Cal); Sarangpur Cotton Mfg Co. Ltd. v. CIT, [1983] 143 ITR 166 (Guj); Hindustan Commercial Bank Ltd. v. ITO, [1983] 16 TTJ 65 (All); ITO v. Janki Das Laxmi Narain, [1985] 21 TTJ 233 (All); V.D Swami and Co. Ltd. v. Deputy CIT, [1993] 44 ITD 91 (Mad).
3. The assessee has taken the following legal actions against the debtor, namely, Shithir Housing and Construction P. Ltd.:
(a) Issuance of a legal notice.
(b) Filing of a winding-up petition.
(c) Issuance of a legal notice under section 138 of the Negotiable Instruments Act and
(d) Initiation of arbitration proceedings in January, 2003.
(e) Filing a criminal complaint under the Negotiable Instruments Act.
4. The Assessing Officer, however, added back the bad debts amounting to rupees six crores together with interest accrued thereon, holding, inter alia, that their writing off as bad was not predicated on an honest opinion formed by the assessee and further that the provisions could not be used as a carte blanche to treat any debt as bad during the year in which it had become exigible to tax. By the time the matter came up for consideration of the Commissioner of Income-tax (Appeals) prosecution under the Negotiable Instruments Act had also commenced. The Commissioner of Income-tax (Appeals) had expressed the self-evident opinion that the provisions of section 36(1)(vii) read with section 36(2) of the Income-tax Act would come into play only if (1) the amount of loan or part thereof which is claimed as a deduction should be established to have become bad and (2) the amount should be shown to have become irrecoverable and written off in the accounts of the assessee for that accounting year in which the claim for deduction is made. In our opinion a debt becoming “bad” or “irrecoverable” are but two sides of the same coin. The Commissioner of Income-tax (Appeals) had endorsed the reasoning of the Assessing Officer to the effect that the “assessee has merely written off the debts at the end of the year and so that its taxable income gets reduced”. The Commissioner of Income-tax (Appeals) as well as the Assessing Officer were influenced by the fact that there had been no previous dealings between the assessee and Shithir Housing and Construction P. Ltd.; no security was taken for the loan and the sequence of events from the advance of the loan to its writing off did not span across even one year.
5. To the contrary, it appears to us that these factors would be relevant if the stand of the Department is that the transaction itself was sham or false. Once it is accepted that the transaction actually took place, these factors would, in fact quell any doubt that the decision to write off the loan as a bad debt was a consequence of an “honest judgment”. Any prudent person, on learning that an unsecured loan had become perilously irrecoverable, would expeditiously initiate each and every legal remedy available to him, as has been manifested itself in the present case. The Commissioner of Income-tax (Appeals) accepted the assessee's decision to write off as a bad debt the sum of rupees two crores relating to S. Kumar Nation Wide Foundation Ltd., but sustained the addition in respect of Shithir Housing and Construction P. Ltd. The Income-tax Appellate Tribunal, in the impugned order, has deleted the disallowance of the said amount of rupees four crores treating it to be irrecoverable. It further held that since the principal is not recoverable, there is no reason or justification to charge interest on this sum.
6. A conjoint reading of section 36(2) and section 36(1)(vii) makes it clear that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular Number 551, dated January 23, 1990 (see [1990] 183 ITR (St.) 7), the relevant portion of which reads as follows (page 37):
“6.6 The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987, has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee.
6.7 Clauses (iii) and (iv) of sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightaway allowed in the year of write off. The Amending Act, 1987, has, therefore, amended these clauses to withdraw them after the assessment year 1988-89.”
7. The conundrum which has arisen before us had also engaged the attention of the Gujarat High Court in CIT v. Girish Bhagwatprasad, [2002] 256 ITR 772 with which we are in respectful agreement. Our learned brothers had pointedly observed that the genuineness of the claim predicated on section 36(1)(vii) of the Income-tax Act was not in doubt. Where the loan transaction is itself shrouded in uncertainty other provisions of the statute would immediately come into play. Our learned brothers further observed that prior to the amendment from April 1, 1989, the allowance under the said section was confined to debts and loans which had become irrecoverable in the accounting year. Without adverting to the above extracted circular, it was opined that with effect from April 1, 1989, “all that the assessees had to show was that the bad debt was written off as irrecoverable”. One year later an altogether different Bench of the Gujarat High Court had to decide the question of whether it was enough if the assessee writes off the debt as bad in its books of account and whether the assessee-company need not establish the debt to have become bad, in Deputy CIT v. Patidar Ginning and Pressing Co., [1999] 157 CTR 177 (Guj). The appeal of the Revenue was dismissed.
8. It is our view that the Circular Number 551 (see [1990] 183 ITR (St.) 7) leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year, which had generated enormous litigation on the question of allowability of bad debt in a particular year. The circular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as a bad or irrecoverable no sooner it was written off in the books of the assessee concerned.
9. In these circumstances no substantial question of law arises in the present case. Dismissed.