prpri Loan Disclosed under VDIS can be claimed as bad debt if same become irrecoverable Loan Disclosed under VDIS can be claimed as bad debt if same become irrecoverable

Case Law Details

Case Name : Commissioner of Income-tax Vs Garden Finance Ltd. (Gujarat High Court)
Appeal Number : Tax Appeal No. 2317 OF 2009
Date of Judgement/Order : 03/08/2012
Related Assessment Year :


Commissioner of Income-tax


Garden Finance Ltd.

TAX APPEAL NO. 2317 OF 2009

AUGUST 3, 2012


J.B. Pardiwala, J.

This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) is at the instance of the Revenue and is directed against an order dated 15th May, 2009, passed by the Income Tax Appellate Tribunal, “D” Bench, Ahmedabad in ITA No. 1070/AHD/2000 for Assessment Year 1996-97.

2. The facts giving rise to filing of this appeal may be summed up thus:

The assessee filed his Return of income declaring nil on 30th November, 1996 for Assessment Year 1996-97 along with Tax Audit Report, as required under Section 44-AB of the Act. The assessment was finalised on 24th March, 1999 under Section 143(3) of the Act, determining the total income at Rs. 5,00,35,628/-, after various additions and disallowance. The first addition was by way of disallowance of bad debts of Rs. 1,52,83,756/-. The assessee company had written off fixed assets of Rs. 1,52,83,756/- which was given on lease. The amount was claimed as deduction under Section 36 of the Act as bad debt and a block of Plant and Machinery had been reduced by that amount. In Assessment Year 1995-96, the assessee gave his Plant and Machinery on lease. In 1995-96 and 1996-97, the assessee claimed depreciation on the same and offered lease rentals received as income. However, in VDIS Scheme, the assessee offered to tax the depreciation claimed in both the years. After VDIS declaration, the assessee offered to tax only the interest component and not the lease rentals. The assessee’s claim was that by making VDIS disclosure, the assessee had converted the amount invested in Plant and Machinery into loans. The assessee prayed that considering the disclosure under VDIS Scheme, the amount which had become irrecoverable be allowed as a bad debt.

3. The Assessing Officer disallowed the claim of the assessee on the following grounds:-

(a)  The assessee has not given any loan to the parties concerned, but had only leased the machinery to them;

(b)  The assessee company failed to prove that any loan was given to the parties by account payee cheque or crossed DD;

(c)  The assessee failed to prove that any amount was paid to the parties;

(d)  No evidence had been led to prove that the debt had actually become bad in F.Y. 1995-96, relevant to A.Y. 1996-97;

(e)  The money advanced was with an intention to make profit by operating agency and hence, the same would be inadmissible as it would be an attempt to acquire the capital asset;

4. The assessee preferred an Appeal No. CAS(1)/181/99-2000 and CIT(A) decided the issue in favour of the assessee on the following grounds:-

(a)  After acceptance of the disclosure in the VDIS Scheme, the amount was accepted as loan by the Department and only interest on the amount was being taxed. Therefore, nothing was left for the assessee to establish that the amount was a loan;

(b)  The assessee had filed criminal proceedings against the parties as the cheque had bounced. There was no other matter pending before the Court regarding the genuineness of the loan;

(c)  The amounts had become bad debt in the hands of the assessee and the assessee had written off the amounts;

5. Aggrieved by the order passed by the Commissioner of Income Tax (Appeals), Surat, the Revenue preferred appeal before the Income Tax Appellate Tribunal. The Tribunal confirmed the order of CIT (Appeals).

6. Being dissatisfied, the Revenue has preferred the present appeal. In this appeal, two substantial questions of law have been proposed:-

(A)  “Whether on the facts and in the circumstances of the case the Appellate Tribunal is justified in law in holding that to allow the claim of bad debts u/s. 36(1)(vii) of the Act only on the ground that the amount had been written off in the books of accounts of the assessee without fulfilling the obligation to prove that the debt had become bad as is the requirement of Section 36(1)(vii)?”

(B)  “Whether on the facts and in the circumstances of the case the Appellate Tribunal is justified in law in holding that the claim of depreciation is allowable following the case of M/s. Unimed Technologies Ltd. though in that case material facts were different, that is the seller and lessee were Electricity Board, Public Sector unit and other party to the transactions that the lessor was finalized after following the public notice, besides no depreciation was claimed by the Electricity Board i.e. the seller (lessee) the facts which were material for determining that the transactions were not sham transactions?”

6. Mrs. Mauna Bhatt, the learned counsel appearing for the Department, submitted that the VDIS Scheme stipulates that the assessee has to pass necessary entries in its books of account to give effect to the VDIS disclosure. According to Mrs. Bhatt, this was not done by the assessee. Section 36, clause (1), sub-clause (vii) prescribes write off only of a bad debt and it does not prescribe write off so far as Plants and Machinery is concerned. As the assessee had not passed necessary accounting entries, the assessee was not entitled to claim deduction on account of bad debt.

Mrs. Bhatt further submitted that no material had been brought on record by the assessee to prove that the debt had actually become bad.

7. On the other hand, Mr. Manish J. Shah, learned counsel appearing for the assessee defended the order passed by the Tribunal submitting that no error much less an error of law could be said to have been committed by the Tribunal and no substantial question of law is involved in the present appeal.

8. So far as the first question proposed is concerned, we find that the Tribunal recorded a finding that the amount written off was a loan advanced during the course of business and that the interest thereon had been taxed as business income by the Department in accordance with the assessee’s declaration under VDIS. The Tribunal also recorded a finding that the certificate accepting the VDIS declaration was issued by the Commissioner after consultation with the Central Board of Direct Taxes and, therefore, the contention on behalf of the Revenue that assessee is not entitled to rely on VDIS declaration would not be tenable in law. The Tribunal found that the condition of the debt having been bad on account of dishonour of cheques from the concerned parties proved that the debt, as a matter of fact, had become bad. We do not find any infirmity in the order of the Tribunal so far as this issue is concerned. We rely on the following observations made by the apex Court in the case of T.R.F. Ltd. v. CIT [2010] 323 ITR 397 :-

“This position in law is well-settled. 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. However, in the present case, the AO has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the AO has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the AO. Hence, the matter is remitted to the AO for denovo consideration of the above-mentioned aspect only and that too only to the extent of the write off.”

9. So far as the second question is concerned, the same is about claim of 100% depreciation on assets installed at Kalyani Seamless Tubes Limited to the tune of Rs. 3,47,439/-. This issue arises in the backdrop of the following factual situation.

9.1 The assessee purchased three assets which were installed in the factory premises of Messrs Kalyani Seamless Tubes Limited since F.Y. 1992-93 and F.Y. 1993-94. A second sale bill was issued by Kalyani Seamless Tubes and payment was made by account payee cheque. However, the equipments were not dismantled for delivery to the assessee. The same continued to be used by Kalyani Seamless Tubes and the assets were shown as leased to Kalyani Seamless Tubes by the assessee.

According to the Revenue, this was a sale and a lease back transaction. The Assessing Officer disallowed the claim of depreciation at the rate of 100% on the following grounds:-

(a)  The assessee never became the owner of these assets as these were not installed in its premises.

(b)  The machinery and equipment purchased by the assessee was in the nature of immovable property and the assessee has not purchased the property through a registered purchase/sale deed.

(c)  Since on these assets, depreciation at the rate of 100% was already allowed in the hands of M/s Kalyani Seamless Tubes Ltd., so as per Section 43(I), the cost of these assets (determined by the assessing officer) was at Rs. 101/- only. The assessee is entitled to depreciation at the rate of 25% on these assets, provided the assessee is the owner and user thereof.

(d)  The claim of depreciation in the case of the assessee is not allowable, as depreciation is not available to the owner of a fraction of an asset.

(e)  The machinery and equipment purchased by the assessee is not an energy saving device, in the absence of necessary details. The certificate issued by a Chartered Accountant (not being a technical person), is not sufficient.

11. In appeal filed by the assessee, CIT(A) held that facts of the case of the assessee were similar to that of Messrs Unimed Technologies Limited, wherein the Appellate Tribunal, Ahmedabad decided the issue in favour of the assessee.

12. The Appellate Tribunal recorded the following factual findings based on the evidence on record:-

“9. We have carefully considered the rival submissions and, perused the material on record. We noted that the CIT(A) while allowing the claim of the assessee has relied on the decision of this Tribunal in the case of M/s. Unimed Technologies Ltd. (ITA No. 2456/Ahd/1998 for AY 1995-96 dated 16.4.1999) in which case also the depreciation was disallowed by the AO on the same basis as has been disallowed in the case of the assessee. The CIT(A) has given clear-cut findings that the transactions entered into by the assessee are not the sham transactions. The assessee has submitted the necessary evidence for the purchase and use of the machineries during the year. The list of the evidences produced by the assessee supporting the transactions entered into are enumerated at page 13 of the order. Even the lessor of the assets is entitled for the deduction of the depreciation in view of the decision of the Hon’ble Supreme Court in the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308 (SC). The objection raised by the AO has been exhaustively dealt with by the CIT(A) as has been reproduced in the preceding paragraphs from the order of the CIT(A). The CIT(A) has given factual findings on each of the issues raised by the AO. No contrary evidences or cogent material supporting case of the AO was brought to our knowledge, rather, the learned DR simply relied on the order of the AO. The finding given in the order of the AO has also been reversed by the CIT(A) by giving exhaustive finding. Under these facts and circumstances, we do not have any other alternative except to agree with the findings given by the CIT(A). In the absence of any material being brought to our knowledge which may warrant our interference in the order of the CIT(A), we confirm the order of the CIT(A) and dismiss Ground Nos. 3 and 4 of the Revenue’s appeal.”

13. The Tribunal, considering the evidence on record, held that the lease transactions were genuine and that the Department failed to adduce any evidence to prove that the transaction was not genuine or was a sham. Therefore, under such circumstances, the contention of Ms. Bhatt that the Tribunal blindly followed the decision in Messrs Unimed Technologies Limited in spite of the facts being different, would not be tenable. We are of the view that this being a pure question of fact, will not give rise to a substantial question of law.

14. In the aforesaid facts and circumstances of the case, whether the transaction of leasing out is genuine or not, is based on appreciation of evidence on record as found by the Tribunal. In absence of any evidence to show anything to the contrary, no legal infirmity exists in the impugned order of the Tribunal so as to give rise to any question of law, much less a substantial question of law as proposed or otherwise. The appeal is accordingly dismissed.

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