Issue: Whether Bad debt written off in the books of Assessee is allowed as deduction where irrecoverability is not proved?
Section 36(1 )(vii) (relavant wording of the section: 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)
Appeal by Assessee before ITAT: (Relevant Extract)
3**. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance of bad debts written off amounting to Rs.4,49,69,588/-.
3.1 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding the appellant’s claim for bad debts to be premature without appreciating that under the provisions of section 36(1 )(vii) of the Act, a claim for bad debt had to be allowed in the year in which the debt is written off as bad.
Observation by CIT (A) (CIT-A, dismissed the claim of Assessee, Allowed by ITAT)
Bad debts : –
“3.3 I have considered the submission of the appellant. In order to establish a debt to be bad, on balance of probability circumstances must indicate to a reasonable and prudent businessman that the debt is unlikely to be recovered whether or not a debt is bad is a ‘question to be determined objectively. It is sufficient if on a bonafide assessment, if it is presumed that that the debtor is unlikely to make the payment of debt, that the assessee may write off the amount as Irrecoverable in terms of section 36(1 )(vii) read with section 36(2) It is correct that length of time the debt is outstanding would be a matter for critical consideration. Similar consideration would be given to the information available with the debtor as to whether there are financial difficulties and default of the debtor towards other customers or insolvency. If the debt is statute barred or the debtor is untraceable, the factors might be relevant. But the death of the Principal officer of the creditor company, might not be really material. It is correct that the nature of information required to decide whether a debt is bad would depend on the particular circumstances of each case. In the case under appeal, no matter that the case of Grapco has been admitted by the BIFR equally relevant is the issue as to whether there are no assets from which the debt can be recovered in the foreseeable future. The issue is critical in so far as the’ loan advanced by the appellant to Grapco on 27 09.95 was secured against collateral.
3.4 The collateral schedule to the loan agreement contains the details of the following assets which have been pledged against the loan. The assets are (1) Breton – slab polishing machine – 1 No. – Location at Banglore (2) Budiam Brazing tensioning machine – 1 No. – Balasore (3) Budiam Brazing tensioning machine – 1 No. – Banglor
(4) Single head automatic polishing machine – 2 No. – Balasore (5) Circular edge cutting machine – 1 – Balasore (6) Wimac block saw -1 No. – Balasore (7) Wimac block saw – 1 No. – Banglore (8) Hermonite cranes – 2 No. – Orissa (9) Excavator of tata – 2 No. – Orissa (10) Atlas copco portable compressors – 5 No. – Orissa. These assets are by way of creation of security interest in terms of the. agreement whereby the debtor “hereby gives, grants, assigns, hypothecated and charges (by way of first charges as continuing security) to secured party”. In case of default, the secured party (the appel/ant) has the right in terms of clause 9 (b) of the loan agreement to enter the premises where the collateral is kept and to take possession remove the said collateral from the premises and also to effect sales thereof. It has been specifically mentioned that in the case of default, the entry of the premises, removal of collateral from the premises and sale thereof would be with or without legal process. In view of the fact that the loans by the appellant to Grapco was secured, it would be relevant to place in perspective the state and the condition of the collateral, and the appellant’s submission thereon. The appellant has relied on a report from M/s Panda & Associates, CA of Balasore stating therein that 4 types of machine installed in the debtor’s factory at Balasore would not be verified since they were not allowed entry into the factory The report is dated 02.06.2000. Thereafter MIs Fund point said to be service provider for recovery of GE Capital, dues from the party reported vide letter dated 24.02.2003 that on Inspection or Balafore factory, they could locate 2 machines i.e Budiarn Brezing / Tensioning Machine and single head automatic polishing machine. That other assets at Balasore site “have been either transferred to their Bangalore/ Alwar site or have been sold out for payment of dues to other creditors”. The inability of M/s Panda & Associates to conduct an inspection of the collateral despite a clear mandate available in the loan agreement, and the inability of the appellant not to pursue recovery proceeding in respect of 2 assets located at Balasore or to inform the BIFR of the discovery of the said assets have to be weighed in, in view of the fact that the loans to Grapco were not clean but were charged against assets, some of which have been located.
Now the legal remedies available for instituting recovery proceedings against creditors and proceeding to recover the dues are different in case of secured and unsecured creditors. In case of recovery of dues against secured creditors, the recovery procedures under-the Code of Civil Procedure are available for enforcement of contractual rights, mortgage, hypothecation, lien etc. In fact under the Code, there is a right of direct private sale of the secured assets, in case of default. The appellant’s loan agreement in fact contains a clause to that effect.
I agree with the views of the A.O. that from the report of the CA and the collection agent, there is no clear finding that the hypothecated assets were not with Grapco. Even when the collection agents would locate two of the machines at Grapco premises at Balasorem such communication was not acted upon by the appellant in order to enforce recovery by sale o such asset as per the loan agreement with Grapco. I agree with the views of the A.O. that only when the proceedings in BIFR are concluded in the case of Grapco and from whatever recoverable asses, the dues are ascertained and apportioned among lenders to Grapco then only the bad debts of the appellant could be said to have been rationally quantified with certitude. Till the finalization of the proceedings at the BIFR the bad debts claims of the appellant against dues of Grapco are premature. The addition is sustained ground No.3 is dismissed.”
Finding and Decision by Honorable ITAT:
ii) Bad Debts: A.R. submitted that bad debts had been written off by assessee in its books of accounts and, therefore, its case was squarely covered by the order of Hon’ble Supreme Court in the case of TRF Ltd. Vs CIT 323 ITR 397 placed at paper book 39 of compilation of judgements. Ld. A.R. further relied upon the case law of Auto Meters Ltd. 292 ITR 345 decided by Hon’ble Delhi High Court placed a paper book pages 42-43. Inviting our attention to A.O.’s objection in disallowing the write off of bad debts, Ld. A.R. submitted that the A.O. had disallowed the claim holding that loan given by assessee has not fully become irrecoverable as the loanee was not declared BIFR Company and the case was pending with BIFR. Ld. A.R. submitted that the A.O. had held that till the final conclusion was pending before BIFR there was chance that assessee could get a part of amount and therefore, loan cannot be said to have become irrecoverable. In this respect, Ld. A.R. submitted that Hon’ble Supreme Court in the case law of TRF Ltd. has clearly held that the bad debt claim is available to an assessee when he writes off in its books of accounts therefore, as the assessee had written off the claim in its books of account, the claim of deduction is in accordance with law.
Ld. D.R. on the other hand submitted that the A.O. has passed a detailed order in this respect and Ld. CIT(A) has also upheld the same holding that the loan of assessee was a secured loan and there was a chance of recovery of at least partial amount and therefore, loss on account of bad debts was not ascertained. In view of the fact that debt had not become bad, therefore, he highly placed reliance on the orders of authorities below.
We have heard rival parties and have gone through the material placed on record. From the facts of the case, we observe that the assessee is a NBFC and advancing loans is one of the main objects of the company and the assessee had advanced loan to one of its customers namely Grapco Industries in ordinary course of money lending business and it is also a fact that the amount recoverable form the loanee has been written off in the books of accounts of assessee. It is also observed that the assessee had classified the loan recoverable from Grapco Ltd. as a non performing asset as per RBI norms as noted at para 5.3 of A.O.’s order. The A.O. and Ld. CIT(A) has not allowed the claim of assessee holding that deduction is allowed in respect of bad debts which is written off as irrecoverable in the accounts and not in respect of any debt which may be written off in its accounts. Both the authorities below has held that primary condition for allowing the bad debt is that it should have become bad and only then it can be written off as irrecoverable. Ld. CIT(A) has held that only when proceedings in BIFR are concluded in the case of Grapco and after recovering whatever is recovered , the dues of assessee can be ascertained. However from the order of Hon’ble Supreme Court in the case of TRF Ltd. VSs CIT 323 ITR 397 placed at paper book page 38-40, we find that Hon’ble Apex Court has held that for a claim of bad debt, the assessee has to only establish that debt has been written off and it was not necessary to establish that debt has become irrecoverable. Admittedly, the debt has been written off as noted in the assessment order itself and the loan was given in ordinary course of regular business activities of the assessee. Therefore, as per the Hon’ble Supreme Court decision, the action of writing off of debt was sufficient to claim the loss. In the judgements relied upon by Ld. A.R.,
the Hon’ble Supreme Court had remitted back the claim of bad debt to A.O. as in that case, the facts of writing off of debt was not examined by A.O. However, in the present case, the debt has actually been written off therefore, relying upon the ratio of judgement of Hon’ble Supreme Court, we hold that the claim of assessee in respect of bad debt written off is allowable and in view of the same, we allow ground No.3 of appea
As we can find, that the CIT (A)/Revenue has tried to establish that the debts was recoverable, based on the facts/records available. Howver going by the words of section 36 (1) (vii), the section does not cast any obligation to prove the irrecoverability of the Dbet.
There was no merit in going the details analysis of the debts nature i.e. recoverable or irrecoverable.
The only expectation is actual writing of the Debts in books of Account.
The decision of the case is based on the verdict by Apex Court of India in the case of TRF Limited Vs CIT, [323 ITR 397 (SC)] Where Honorable Court has held that, “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.”
Here the verdict of Apex Court squarely applicable and hence, the claim of Bad Debts Written off in the books is allowed.
**Note clause Nos of order reproduced for easy reference