IN THE ITAT JODHPUR BENCH
Deputy Commissioner of Income-tax, Central circle-1, Udaipur
IT APPEAL NO. 570 (JODH.) OF 2010
[ASSESSMENT YEAR 2001-02]
JULY 6, 2012
Bhavnesh Saini, Judicial Member
This appeal by the assessee is directed against the order of ld. CIT(A), Central, Jaipur dated 17.09.2010 for the assessment year 2001-02, challenging the disallowance of Rs. 4,22,000/- on account of bad debts.
2. The brief facts of the case are that during the course of search, it was unearthed that the assessee is advancing loan to various persons and these are not disclosed in the regular books of account and consequently in the regular returns. From the scrutiny of seized documents, it was noticed that the assessee has purchased land having registered sale deed value of Rs. 3.5 lakhs but was actually purchased for Rs. 11.5 lakhs and Rs. 8,01,000/- was paid in cash. The assessee prepared the cash book of total transactions till the search period after the search and survey operation and there was deficiency of Rs. 4.65 lakhs for making aforesaid payment same was surrendered. Similarly, there was deficient cash at other point of time in the relevant period making total deficiency of Rs. 6.65 lakhs. Apart from it undisclosed debtors coming from various preceding years were also noticed and as on 31.03.2001 such debtors were to the tune of Rs. 24,82,640/-. As these debtors were appearing beyond the period, for which a notice u/s. 153A can be issued, these were not within the ambit of taxation. The assessee however, included interest of Rs. 1,88,573/- on these debtors. Thus, total undisclosed income should have been Rs. 8,35,250/- but assessee has further reduced his income by writing off loans and advances to the tune of Rs. 4,22,000/-. The AO rejected the claim of assessee of writing off the debts and assessed undisclosed income at Rs. 8,35,250/-, which after including the regular income of Rs. 1,88,573/-, comes to Rs. 10,23,820/-.
3. Before the ld. CIT(A), it was submitted that the AO has not rightly appreciated the provisions of bad debts. After the amendment w.e.f. 1.4.89, it is sufficient if the bad debts or part thereof is written off as irrecoverable in the accounts of the assessee. Circular No. 535 dated 23.01.1990 clearly spells out that it is to eliminate the dispute in the matter of determining the year in which the bad debt is written off as irrecoverable. It was further submitted that in view of the decision in the case of CIT v. Coats of India Ltd.  232 ITR 324, it is sufficient for the debt to be bona fidely bad in law in the eyes of assessee. In the present se, the assessee formed the opinion about these debts becoming irrecoverable and accordingly has written off the same. Accordingly, the AO should have allowed the same. Various other decisions explaining as to what is writing off and other relevant factors were relied upon by the assessee.
3.1. The ld. CIT(A), considering the explanation of the assessee confirmed the addition. His findings in paras 2.3 to 2.5 are reproduced as under :
“2.3. I have considered the arguments of the AR and have perused the assessment order. It may be mentioned that as per section 36(1)(vii) and 36(2), it is undisputed that there are two primary conditions which need to be fulfilled for allowability of any bad debt.
(i) the claim is to be written off as irrecoverable in the accounts of the assessee for the previous year [section 36(1)(vii)] .
(ii) The debts has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written of or of an earlier previous years [36(2)].
The debts out of which certain debts have been shown as written off during the year under consideration, were not reflected in the regular books of account of the appellant. Thus, it is undisputed that these debts have not been taken into in computing the income of the appellant either in this year or in any earlier previous year. Even after the search and seizure action these debts have no where been taken into account in computing the taxable income of the appellant of any previous year as these were stated to be old and beyond time period of notice u/s. 153A. Accordingly, the condition specified in section 36(2) is not at all fulfilled in the case of appellant. Accordingly, all the arguments taken by the appellant, which are mainly in relation to debt being written off in A.Y. 2001-02 and accordingly be allowed, irrespective of the fact that these have actually become bad debts are irrelevant.
2.4 Without prejudice to above, it is useful to refer to below mentioned cases wherein Hon’ble Court has held even after the amendment the onus to prove that debts has really become bad, is on assessee. Accordingly, writing off the debts in particular year will only crystallize the issue of year of allowability of deduction, but primary condition has to be satisfied that the debt has really become bad. It does not mean that first condition of debt becoming really bad is not required to be satisfied by the assessee and AO can enquire into the veracity of the same. In the instant case the appellant has also not been able to fully prove that these debts have become bad.
(i) In the case of M/s. Kashmir Trading Corpn. v. DCIT 291 ITR 228, the Hon’ble Rajasthan High court held that the Tribunal was justified in not allowing the bad debt as the entry of writing off is prima facie evidence of debt having become bad but it is not a conclusive criterion and the onus rests on the assessee to establish that the debt has become bad in the relevant year. Thus only making entry of bad debt in the books of account does not make the debt bad finally but the assessee has to prove that the debt has become really bad in the relevant years.
(ii) Hon’ble Allahabad High court on 05.11.09 in the case of CIT v. M/s. Kohli Brothers Colour Lab (P) Ltd. has held that the AO is empowered to make inquiries regarding the genuineness of the debt claimed as bad and to ensure that the debt written off was indeed a bad debt. The amendment made in section 36(1)(vii) w.e.f. 1.4.89 does not bar the AO from making enquiries to see that the entries are not mere paper work or fake.
2.5 Accordingly in view of all the accounts, the action of the A.O. in disallowing debt of various earlier years, which have not been taken into account in computing the income of the appellant of any earlier previous year (as these are unaccounted), is confirmed.”
4. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and submitted that bad debt was written off as irrecoverable in the accounts of the assessee as found in the second set of accounts at the time of search. Therefore, the assessee is entitled for deduction u/s. 36(1)(vii) of the IT Act. He has also referred to bad debt account, copy of which is filed at page 8 of the paper book in a sum of Rs. 4,22,000/- and also referred to PB-13 in support of the same proposition. In the written submissions, same facts have been reiterated and certain judgments in respect of the proposition have been relied upon. He has also relied upon the following decisions :
(i) All Grow finance & Investment (P) Ltd. v. CIT  338 ITR 496, in which it was held as under :
“Debts in question having been undisputedly advanced in assessee’s ordinary course of money lending business, claim of bad debt was allowable under s. 36(1)(vii) r/w second limb of sub-s. (2) of s. 36.”
(ii) CIT v. Nai Dunia  295 ITR 346, in which it was held as under :
“Question whether a debt has become bad and / or at what point of time being a pure question of fact, appeal against the impugned order of the Tribunal allowing assessee’s claim for bad debt is dismissed as it does not involve a substantial question of law notwithstanding the fact that the Court has admitted the appeal and framed the question.”
(iii) T.R.F. Ltd. v. CIT  323 ITR 397, in which it was held –
“After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in act, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the AO has not examined whether the debt has, in fact, been written off in accounts of the assessee. This exercise has not been undertaken by the AO. Hence, the matter is remitted to the AO for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.”
(iv) CIT v. Star Chemicals (Bombay) (P) Ltd.  313 ITR 126 (Bom.), in which it was held –
“Once the assessee has written off the debt as bad debt, requirement of s. 36(1)(vii) is satisfied and the claim for deduction of bad debt is allowable.”
(v) CIT v. Potential Management Services Ltd. 23 DTR 183 (Cal.) in which it was held –
“Loan given in ordinary course of business of money lending having undoubtedly become bad and written off during the relevant previous year is allowable deduction under s. 36(1)(vii) r/w s. 36(2).”
(vi) CIT v. Realest Builders & Services Ltd.  308 ITR 246 in which it was held that debt actually written off in books is allowable as bad debt.
5. On the other hand, the ld. DR relied upon the orders of the authorities below and submitted that the books of account and other documents incriminating in nature were seized during the course of search and it was found that the transaction of loan and advances have not been recorded in the regular books of account. On the basis of seized material, it was found that the assessee earned undisclosed interest income on which the assessee also made surrender, but without any reason reduced the amount of Rs. 4,22,000/- on account of bad debt which was never recorded in the account books of the assessee. It was, therefore, not written off as irrecoverable in the accounts of the assessee of the previous year. The seized documents cannot be treated as books of account of the assessee. Therefore, the addition has been rightly made by the authorities below.
6. We have considered the rival submissions and the material on record. The deduction u/s. 36(1)(vii) of the IT Act could have been allowed in favour of the assessee “subject to the provisions of sub-section (2), the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year”. Section 36(2)(i) also provides that no such bad debt deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year, in which the amount of such bad debt or part thereof is written off or of earlier previous year or represents money lent in the ordinary course of business of banking or money lending, which is carried on by the assessee. Therefore, the essential feature for claiming deduction on account of bad debt has been that such bad debt is written off as irrecoverable in the accounts of the assessee for the previous year and such business was conducted by the assessee in ordinary course of business. There is no dispute about the legal proposition as have been propounded by various High Court and Supreme Court in the cases referred to above. In these judgments also, the debts in question were undisputedly advanced in assessee’s ordinary course of money lending business and the amounts were written off in the accounts of the assessee. However, the AO has specifically noted in the assessment order that during the course of search conducted on 02.12.2004, books of account and other incriminating documents were seized. The assessee was required to file the return u/s. 153A of the Act which was filed on 01.08.2005 at Rs. 6,01,823/-. The same undisclosed income comprised interest income from undisclosed debtors at Rs. 4,13,250/-. However, in the original return of income filed on 08.08.2001 u/s. 139(1), the assessee declared income of Rs. 1,88,573/-. Thus, no income on account of undisclosed interest from debtors was shown in the original return of income. The assessee on the basis of the seized documents submitted that certain loans and advances have not been recorded in the regular books of account. On tally programme of accounting, cash book and ledger was prepared on the basis of the information and data available, which was found during the course of search and it was found that the assessee earned undisclosed interest income from the unrecorded loans and advances. Such facts were not recorded in the regular books of account. Since such loans and advances were not recorded in the regular books of account on which the assessee earned interest, it was found that no such entries were recorded in the relevant financial year prior to the search. The assessee on the basis of incriminating material found during the course of search surrendered undisclosed income on account of interest, which should have been at Rs. 8,35,250/-, but the assessee made an alternate claim of bad debt of Rs. 4,22,000/-. The AO gave specific notice to the assessee as to why such a claim of bad debt should not be disallowed because there is not writing off of any bad debt in the accounts of the assessee for any previous year and on the basis of the seized material and records, documents were prepared to see as to how much undisclosed interest has been earned by the assessee. The reply of the assessee is noted in the assessment order, in which the assessee briefly explained that the amount is written off as irrecoverable in the accounts of the assessee which is attached with the return of income. It was also explained that two sets of accounts of regular business and irregular transactions have been maintained. Therefore, the assessee is entitled for deduction. Plea of the assessee was not accepted because the seized documents found during the course of search could not be treated as regular books of account and on the basis of the seized material, cash book and ledger was prepared to find out the quantum of undisclosed income. The facts recorded by the AO in the assessment order have not been disputed by the ld. Counsel for the assessee during the course of arguments. It is, therefore, clear that whatever books of account maintained by the assessee in the regular course of business did not have mention of any loan and advance. Therefore, there is no question of taking the same figures in the accounts of the assessee maintained in the ordinary course of business of money lending. The assessee filed return of income originally at a meager income u/s. 139(1) of the IT Act and it was only when the search was conducted later on 02.12.2004, the undisclosed income was unearthed by the department. On the basis of the seized material, quantum of undisclosed income was determined and according to the reply of assessee, the assessee made a claim of bad debt as per the accounts prepared on the basis of the seized material. Therefore, the same could not be treated that the assessee has written off the bad debt as irrecoverable in the accounts maintained for previous year in the ordinary course of business. The assessment is framed u/s. 153A of the IT Act, which is specifically meant for computation of undisclosed income, which is found during the course of search. The assessee in order to circumvent the provisions of law have tried to reduce the amount in question out of total undisclosed income determined in the course of search by claiming a bad debt which was never claimed in the regular books of account or in the original return of income filed u/s. 139(1) of the IT Act. The claim of the assessee is, thus, not supported by the provisions of law and the seized material could not be considered as books of account maintained by the assessee in the regular course of business. Since, as per section 153A of the Act, the assessment is to be framed on conducting the search in the case of assessee to compute income of the assessee for the block period. Therefore, the assessee cannot be allowed to flout the provisions of law by making wrong claim. Thus, the condition of section 36(1)(vii) have not been satisfied in this case. The authorities below, therefore, on proper appreciation of facts and the material on record have rightly not allowed the claim of the assessee of bad debt. Considering the peculiar facts of the case as noted above, the decisions cited by the ld. Counsel for the assessee would not apply to the case of the assessee. Accordingly, we do not find any merit in the appeal of the assessee. The same is, accordingly, dismissed.
7. In the result, the appeal of the assessee is dismissed.