CA Sandeep Kanoi
In this case During scrutiny assessment proceedings, the Assessing Officer inter alia disallowed writing off of bad debts of M/s. Kinetic Motor Co. Ltd. amounting to Rs.1,27,58,427/- as the same was Group Concern and AO further claimed that The debts have been written off as bad debts only to suppress the income. It is the strategy of the group to reduce the income of the profit making group companies and thereby reducing the incidence of tax.
CIT (A) allowed the claim of the assessee and revenue preferred Appeal against the Order of CIT(A) with ITAT.
The ld. AR submitted that for claiming writing off of bad debts, the assessee has to only write off the bad debts in its books of account. It is for the assessee, not the Department to see whether the debts have become bad and irrecoverable. In support of his submissions, the ld. AR placed reliance on the judgment of the Hon’ble Supreme Court of India in the case of TRF Limited Vs. CIT reported as 323 ITR 397 (SC). The ld. AR further submitted that Kinetic Motor Co. is one of the group concerns and is a loss making company. The assessee could not recover debts from the said company, as the company was in financial crisis and even in future there was no chance to recover any amount whatsoever from the said company. The ld. AR placed on record the list of creditors of Kinetic Motor Co. Ltd. with which the said company had made one time settlement.
The main contention of the Department is that the assessee has written off the debts of Kinetic Motor Co. Ltd. a group concern, to reduce the profits of the assessee company and thereby reducing the tax liability.
Revenue in its appeal has not challenged the finding of fact given by the Commissioner of Income Tax (Appeals) with respect to precarious financial position of the debtor company and that it had entered into one time settlement with its various creditors including Banks.
Held by ITAT
A perusal of the facts clearly shows that Kinetic Motor Co. Ltd. was in financial distress and it could pay only part of its debts. Since, the assessee in its books of account had written off bad debts, the assessee was not required to establish that debts were in fact irrecoverable. The Hon’ble Supreme Court of India in the case of TRF Limited Vs. CIT (supra) has held that after the amendment of section 36(1)(vii) of the Act w.e.f. 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.
The ld. DR placed reliance on the decision of Bangalore Bench of the Tribunal in the case of Embassy Classic P. Ltd. Vs. ACIT (supra) wherein the Co-ordinate Bench of the Tribunal after considering the judgment of Hon’ble Supreme Court of India in the case of TRF Limited CIT (supra) has distinguish the same. In the said case the assessee had written off bad debts in the books of account. However, the amount was recovered by the assessee before filing of the return itself. Thus, at the time of filing of return of income, no debt was due. The Tribunal observed that the assessee cannot convert any live amount into a bad debt only on the basis of the technical rule of writing off. It was not a case of bad debt but a case of delayed payment. It was in backdrop of these facts the Tribunal held, that the judgment of Hon’ble Supreme Court of India in the case of TRF Limited Vs. CIT (supra) will not apply. We find that the facts in the present case are entirely at variance. Therefore, the decision of Bangalore Bench of the Tribunal in the case of Embassy Classic P. Ltd. Vs. ACIT (supra) will have no application in the facts and circumstances of the present case.
The ld. DR has also placed reliance on the decision of Hon’ble Madras High Court in the case of South India Surgical Co. Ltd. Vs. ACIT (supra). In the said case the assessee had written of the debts due from the Government as bad debts. The Hon’ble High Court held that it would be preposterous to consider that the Government was not in a position to discharge its acknowledged debt. It might be due to certain fund-flow problem and priority between different needs and there is postponement in discharging certain liability by the Government. There was no negation of claim nor has any Government hospital written that they would not pay any of these amounts. In the light of these facts the Hon’ble High Court disallowed the claim of assessee in writing off of bad debts. In the present case the debtor company had entered into one time settlement not only with the assessee company but with various other creditors, including banks. Moreover, it is not a case where the amount is due from Government or any instrumentality of the Government. Therefore, the ratio laid down by the Hon’ble Madras High Court in the case of South India Surgical Co. Ltd. Vs. ACIT (supra) would not apply in the facts and circumstances of the present case.
One of the arguments raised by the ld. DR was that the assessee and the debtor company are the part of same group, writing off of bad debts is a colourable device to set off the profits of one group company from the loss of other group companies. We are not convinced with the proposition put forth by the ld. DR. Both the companies i.e. the assessee as well as Kinetic Motor Co. Ltd. are separate legal entities and the assessee have been able to show that Kinetic Motor Co. Ltd. is a loss making company. Thus, we reject this contention of the ld. DR being devoid of merit.
We do not find any infirmity in the order of Commissioner of Income Tax (Appeals) in allowing the claim of assessee.