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Commissioner Of Income Tax v. United Bank Of India.
Structured Summary of the Provided Opinion
Factual and Procedural Background
This is a reference under s. 256(1) of the Income-tax Act, 1961 for the assessment year 1979-80. The assessee is a banking company that claimed deductions for bad debts aggregating Rs. 27,78,823, including two specific items: Rs. 13,83,000 due by Ahmedabad Laxmi Cotton Mills Ltd. and Rs. 8,14,547 due by India Paper Pulp Co. Ltd.
The Assessing Officer (IAC/Asst.) disallowed the claim on the ground that the assessee did not square up the individual debtor accounts but instead credited the amounts to a "Bad Debts Suspense Account" and debited the profit & loss account, and because formal board approval for writing off the debts was given in March 1979 after the close of the accounting year (calendar year 1978). The assessee appealed to the CIT(A), who allowed the claim. The Revenue appealed to the Tribunal, which upheld the CIT(A) (following the Gujarat High Court decision in Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj)). The question was referred to the Court under s. 256(1).
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the bad debts had been written off as irrecoverable in the accounts of the assessee for the assessment year 1979-80 as required under s. 36(2)(i) of the Income-tax Act, 1961?
- Whether the fact that the formal approval of the board of directors to write off the debts was given after the close of the accounting period (i.e., in March 1979) prevents the assessee from claiming the deduction for the year in which the debts became bad (calendar year 1978)?
Arguments of the Parties
Revenue's Arguments
- The learned counsel for the Revenue contended that until the board of directors gave approval, the Bank could not legitimately have written off the amounts; because the board's approval was given in March 1979 (after the close of the accounting period), the assessee was not entitled to the deduction in the year under reference.
- The Revenue relied upon the principle (as illustrated by a cited authority) that when an accrual or liability arises only on the passing of a corporate resolution, the income or expense is to be treated as arising in the year when the resolution is passed.
Assessee's Position (as recorded)
No counsel appeared for the assessee (the bank) at the hearing before the Court. The opinion therefore does not contain a detailed presentation of the bank's oral submissions before this Court. However, the record shows that the assessee had prepared accounting entries in the profit & loss account and related entries to a bad debt reserve/suspense account for the year 1978, and placed recommendations before the board which were later approved in March 1979.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj) | Used by the Tribunal as authority supporting the treatment that the debts were properly written off by the assessee. | The Tribunal followed this decision and held that the debts were properly written off; the Court records that the Tribunal relied on this precedent in upholding the CIT(A)'s order. |
| CIT vs. Karamchand Premchand Ltd. (1985) 152 ITR 94 (Guj) | Establishes that remuneration (or an obligation) which accrues only on the passing of a company resolution must be treated as arising in the accounting year in which the resolution is passed. | The Revenue relied on this decision to argue that board approval in a subsequent year required treating the write-off as arising in that subsequent year. The Court considered this decision but held it inapplicable to the facts of the present case and rejected the Revenue's reliance upon it. |
Court's Reasoning and Analysis
The Court reviewed the documentary record and the orders of the authorities below. The Court set out the factual findings recorded by the Tribunal and contained in the record:
- The Rs. 13,83,000 claim related to unrealisable interest charged between 12th August 1977 and 18th January 1978 in respect of Ahmedabad Laxmi Cotton Mills Ltd., arising because a scheme of amalgamation (approved by the High Court) provided that no interest would be payable to the bank for the period from closure to the scheme's operation date (18th January 1978).
- To facilitate reopening the mill and secure recovery of principal, the bank agreed to the special condition of the amalgamation scheme and had to write off the unrealisable interest in its 1978 accounts; a formal recommendation and resolution to write off the amount were placed before the board.
- In the case of India Paper Pulp Co. Ltd., the bank placed a similar note and recommendation (dated 15th March 1979) seeking approval to write off Rs. 8,14,547.51 from the profit & loss account for the year 1978, with board approval ultimately recorded on 29th March 1979.
- The Tribunal found as fact that the assessee had posted entries in the profit & loss account and corresponding entries in a bad debt reserve account for the relevant year, and considered that such accounting treatment satisfied the statutory requirement of writing off an irrecoverable debt.
On the legal analysis, the Court considered and rejected the Revenue's contention that the write-off could not be claimed for the earlier year because formal board approval was granted after the year-end. The Court distinguished the Revenue's cited authority (Karamchand Premchand Ltd.), holding that it was not applicable to these facts. The Court explained that:
- Companies often finalise accounts after a particular date; they are entitled to finalise accounts later and, where appropriate, to make such finalisation retrospective to the relevant accounting date.
- In the present case, the relevant accounting entries had been made reflecting the debts as bad in light of the surrounding facts (including the scheme of amalgamation and the consequential unrecoverability of interest), and a recommendation to write off those amounts was placed before the board.
- Because the process of preparing and finalising accounts necessarily involves steps that may conclude after the accounting date, the Court accepted that obtaining board approval after the accounting year-end does not automatically prevent treating the write-off as effective for the earlier year where the entries and the subsequent resolution relate back to that year.
- The Tribunal's factual finding that the entries were recorded in the profit & loss account (with corresponding entries in the bad debt reserve/suspense account) was treated as sufficient compliance with the statutory requirement for writing off an irrecoverable debt for the year in question.
On this basis the Court concluded that the Revenue's objection — that approval was not obtained before the close of the accounting year — lacked force in the circumstances of the case.
Holding and Implications
Primary Holding: The Court answered the referred question in the affirmative and in favour of the assessee: the debts in question were properly written off in the assessee's accounts for the year relied upon and were allowable as bad debts for the assessment year in reference.
Direct consequences:
- The two challenged amounts (Rs. 13,83,000 in respect of Ahmedabad Laxmi Cotton Mills Ltd. and Rs. 8,14,547 in respect of India Paper Pulp Co. Ltd.) were held to be written off in the relevant year and allowed as bad debts for the assessment year in question.
- The Revenue's contention that board approval given after the accounting year prevented the deduction was rejected on the facts and reasoning recorded by the Court.
- There was no order as to costs.
Broader implications: The opinion confines its ruling to the facts of the case; it does not purport to lay down a broader principle beyond its application to situations where accounting entries reflecting write-offs are made for a particular accounting year and are subsequently approved by the board with retrospective effect. The Court expressly found that the cited authority relied upon by the Revenue did not apply to these facts.
Administrative note from the record: The opinion records at the end "BHAGABATI PRASAD BANERJEE, J.: I agree." No further orders were made.
:
In this reference under s. 256(1) of the IT Act, 1961, the following question has been referred to this Court for the asst. yr. 1979-80 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the bad debts had been written off as irrecoverable in the accounts of the assessee for the asst. yr. 1979-80 as required under s. 36(2)(i) of the IT Act, 1961 ?"
2. Shortly stated the facts are the assessee, a banking company, claimed the following bad debts :
(i) Rs. 13,83,000 due by Ahmedabad Laxmi Cotton Mills Ltd.
(ii) Rs. 8,14,547 due by India Paper Pulp Co. Ltd.
3. The IAC (Asst.) noticed that the assessee did not square up the accounts and debtors by crediting the said amounts to their accounts and instead the assessee credited the said amounts of debts to the "Bad Debts Suspense Account" and debited to the profit & loss account. This according to the IAC (Asst.) did not amount to writing off in the accounts of the assessee for the previous year within the meaning of s. 36(2)(i) of the Act. He also noticed that the approval of the board of directors for writing off these debts was given in March, 1979, when the previous year had already ended on December, 1978. According to him the amounts in question were not written off in the accounts of the assessee for the calendar year 1978. Hence, the claim was not allowed.
4. The assessee went in appeal before the CIT(A) who held that the assessee was entitled to the claim of these bad debts. The Revenue then came in appeal before the Tribunal. The Tribunal, following the judgment of the Gujarat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj), held that the said debts were properly written off by the assessee. Thus, the Tribunal upheld the order of the CIT(A).
5. Be it recorded that at the hearing before us no one appeared for the bank. The learned counsel for the Revenue contended that, until the approval of the board was accorded, the Bank could not have written off the amounts in question. Since the approval came later in March, 1979, after the close of the accounting period, the assessee is not entitled to the deduction claimed in this year under reference.
6. We have gone through the orders passed by the authorities below.
7. The amount of Rs. 13,83,000 in the case of Ahmedabad Laxmi Cotton Mills Co. Ltd. represents unrealisable interest charged from 12th August, 1977 to 18th January, 1978. The company approached the Government of India to get it amalgamated with Arvind Mills Ltd. The latter company, with the approval of the Gujarat High Court, got the permission to get the possession of Ahmedabad Laxmi Cotton Mills Co. Ltd. One of the clauses of the scheme of merger of the debtor-company with Arvind Mills Ltd. is that no interest would be payable to the assessee-bank for the period from the date of closure of the debtor company, i.e., from 12th August, 1977 to the date on which the scheme became finally operative. The scheme became operative from 18th January, 1978.
8. In these circumstances and with a view to reopening the closed mill and thereby securing the principal to the extent of rupees two and half crores, the bank had to agree to the proposal of the company and accordingly had to write off from the accounts of 1978 a sum of Rs. 13.83 lacs in respect of the unrealisable interest charged on the account of Ahmedabad Laxmi Cotton Mills Ltd. in terms of the special condition of scheme of amalgamation of Ahmedabad Laxmi Cotton Mills Company Ltd. with Arvind Mills Ltd. with the approval of the board of directors of the bank.
9. In this connection, the concerned officer of the Bank placed a note dt. 19th March, 1979 along with a resolution before the board of directors for its approval. Para 4 of the said note reads as under :
"In the circumstances we recommend that the amount of Rs. 13.80 lacs, being the interest charged but not recoverable as mentioned hereinabove, be written off from 1978 accounts of the bank. The Board is requested to approve our recommendation and to pass the following resolution :
Resolved that the recommendation of the Dy. Chief Officer (R&C) in his note dt. 19th March, 1979 for writing off from 1978 accounts a sum of Rs. 13.83 lacs in respect of the unrealisable interest charged in the account of Ahmedabad Laxmi Cotton Mills Ltd. in terms of a specified condition of the scheme of amalgamation of Ahmedabad Laxmi Cotton Mills Ltd. with Arvind Mills Ltd. be and is hereby approved."
10. In respect of India Paper Pulp Co. Ltd., the assessee has claimed deduction of Rs. 8,14,543 which is included in the aggregate claim of Rs. 27,78,823. The assessee had claimed another amount of Rs. 6 lacs in respect of the same debtor which is not included in the figure of Rs. 27,78,823. In connection with the sum of Rs. 8,14,518 the concerned officer of the bank placed before the board of directors a note with the following recommendation :
"Recommendation;
In view of the foregoing, we recommend that an amount of Rs. 8,14,547.51 be written off from our profit & loss a/c for the year 1978. If our recommendation is approved, the Board may kindly adopt the following resolution :
Resolved that the recommendation of the Dy. Chief Officer (R&C) in his note dt. 15th March, 1979 for writing off an amount of Rs. 8,14,547.51 from 1978 account on account of write back of interest charged in the account of India Paper Pulp Co. Ltd. caused by restructuring of different accounts and charging of concessional rates of interest with retrospective effect from 1st April, 1977 be and is hereby approved."
11. It is stated that the approval of the board of directors was obtained on 29th March, 1979.
12. It is not disputed that those debts have become bad, but the only question was whether this should be allowed in the year under reference or not. According to the Tribunal, the approval of the board of directors for writing off the debts is an internal matter of the assessee-company and question as to whether the debts became bad in the previous year would not depend on the said approval. The Tribunal, therefore, held as follows :
"Approval of the board of directors for writing off the debt can be obtained only after due processing of the said debt. It, therefore, cannot be normally expected that the approval of the board of directors should be obtained before the close of the previous year in which the debt has become bad. On the facts of this case, it has been questioned that the said debts in fact became bad in the instant previous year. We, therefore, find no force in the objection of the Department that approval of the board of directors was not obtained before the close of accounting year."
13. The Tribunal found as a fact that the assessee-bank had posted the entires in the profit and loss account and corresponding entries in the bad debt reserve account. According to the Tribunal, that would be sufficient compliance with the statutory requirement for writing off an irrecoverable debt. The Tribunal, therefore, held that the aforesaid two amounts should be allowed as had debts.
14. Our attention has been drawn to the decision of the Gujarat High Court in the case of CIT vs. Karamchand Premchand Ltd. (1985) 152 ITR 94 (Guj). In that case the assessee-company claimed deduction of an amount paid as remuneration to three of its directors. The directors had been rendering extra services for a long time but had not received any remuneration. At a general meeting held in September, 1967 the shareholders of the assessee-company passed a resolution authorising remuneration to the directors. Subsequently, the resolution was amended in January, 1968 and it was decided to pay an amount of Rs. 5,14,157 by way of remuneration to the aforesaid three directors for the year of account ended on 31st March, 1967. There the Gujarat High Court held that the remuneration accrued to the directors not by reason of services rendered by them but only on account of the resolution passed by the company. Therefore, even if related to services rendered in earlier years, it had to be treated as income arising in the accounting year in which the resolution was passed and consequently the expenditure could also be claimed in that year. The amount of Rs. 5,14,157 was held to be allowable in the asst. yr. 1968-69. Mr. Mitra, the learned counsel for the Revenue, therefore, contended that, as in the instant case the approval of the board of directors was accorded in the subsequent assessment year, the bad debt could not be allowed in the year under reference. We are, however, unable to accept this contention. Firstly, the case of Karamchand Premchand Ltd. (supra) has no application to the facts of this case. The accounts of the company are generally made up for every year after a particular date at a later point of time. A company is entitled in law to finalise later as to what was the position of its accounts as upto a particular date. A company can similarly finalise its accounts for various purposes at a later date with retrospective effect. In the accounts necessary entries were made for writing the debt as bad in the light of the facts and circumstances of the case. Recommendation was moved by the concerned branch of the bank, to write off the amounts in dispute which was forwarded to the board of directors for approval. The board of directors accepted and approved the recommendation and adopted resolution to that effect. In view of the process involved in the preparation of accounts, until the recommendation is accepted and resolution passed by the directors, the accounts do not become final. In such a case the approval of the board of directors could not have been obtained before the close of the accounting year. It is only when such resolution is passed the accounts become final. The resolution approving and accepting the recommendation relating to the treatment of certain items, must be related back to the date upto which the accounts are finalised and such determination or approval must be treated as being effective from that date. By being retrospectively effective, the nature and character of the entires have not been changed.
15. For the forgoing reasons, we are unable to accept the contention of the Revenue and we answer the question in the affirmative and in favour of the assessee. There will be no order as to costs.
BHAGABATI PRASAD BANERJEE, J. :
I agree.
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