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DCIT vs Oman International Bank SAOG
May, 17th 2006

ITAT of Mumbai

DCIT vs Oman International Bank SAOG
I.T.A. No. 7431/Mum/1997 (A.Y. : 1994-95)

And

Spectrum Business Support Ltd. vs DCIT
I.T.A. No. 4961/Mum/2003, Assessment Year : 2000-2001

Shri G.E. Veerabhadrappa, VP, Shri K.C. Singhal, JM and Dr O.K. Narayanan, A.M

17 May 2006

Shri S.L. Jain, Dr. P. Daniel, Shri P.J. Pardiwala for the Appearing Parties

Order

Per : Singhal, J.M. :

The Hon'ble President, ITAT, vide his order dated 19.11.2004, has constituted this Bench for considering the following issues :

"Whether as per existing provisions even after the amendment w.e.f. 01.04.1989, it is obligatory on the part of the assessee to prove that the debt written off by him is indeed a Bad Debt for the purpose of allowance u/s. 36(1)(vii)."

This Bench has been constituted because of cleavage of opinion among the Benches of the Tribunal. The Tribunal in the case of Anil Rastogi, 86 ITD 193 (Mum.) has taken the view that the deduction u/s 36(1)(vii) of the Income Tax Act, 1961 (Act) can be allowed if the assessee writes off the debt as irrecoverable in his books of accounts. According to this decision, it is not necessary for the assessee to demonstrate that the debt has become bad and it is left to the prudence and judgment of the business man to consider it as bad and irrecoverable debt and writing off the same in the books of accounts. On the other hand, the Mumbai Bench of the Tribunal in the case of Netwest Finance Ltd., (ITA No. 1975/Mum/1998) Vide order dated 18.12.2003 has held that even after the amendment, the assessee has to establish that the debt had become bad for claiming deduction U/s 36(1)(vii). This difference of opinion has led to the constitution of this Bench. At this stage, it may also be mentioned that question referred to the Special Bench is purely a legal one and, therefore, it is not necessary for us to narrate the facts of the case before us. Therefore, we would now narrate the respective contentions raised by both the parties.

2. Mr. Daniel, the Learned Special Counsel for the Revenue, has contended before us that no deduction U/s 36(1)(vii) can be allowed unless twin conditions are satisfied namely (i) debt in respect of which the deduction is claimed is a bad debt and (ii) such debt is written off in the accounts of the assessee for the previous year. According to him, the deduction can be allowed to the assessee only when it writes off a bad debt which is irrecoverable but such deduction cannot be allowed when he writes off a good debt. Therefore, it must be shown that the debt has become bad and irrecoverable. Proceeding further, it was submitted that the first and the cardinal principle of interpretation is that where the language used by the Legislature is clear and unambiguous, then the natural meaning should be given to the words used by the Legislature and there is no room for intendment. It is only in the case of ambiguous language that the aids to the interpretation can be invoked. According to him, the language used by the Legislature is quite simple, clear and unambiguous and, therefore, the words "bad" and "irrecoverable" cannot be ignored and proper meaning has to be given to these two words. In support of such prepositions, he relied on the following decisions :

i) Mohammad Ali Khan and Others, 224 ITR 672 (SC)

ii) Padmasundra Rao (deceased) and Others vs States of Tamil Nadu, (2002) 255 ITR 147 (SC)

iii) Guru Devdatta VKSSS Maryadit vs. State of Maharashtra, AIR 2001 SC 1980 (P-11)

iv) Gyrysagau Sehgal vs. CIT, 48 ITR 1 (SC)

v) Tarulata Shyam vs. CIT WB, 108 ITR 345 and

vi) CIT vs. Shahzada Nand and Sons and Ors, 60 ITR 392

Proceeding further, it was submitted by him that meaning and effect of each word should be given while interpreting the provisions of a statute since every word of a statute has to be assumed to have been deliberately and consciously incorporated by the Legislature. Reliance was placed on the judgment of the Hon'ble Punjab and Haryana High Court in the case of Dalmia Biscuits Ltd., 194 ITR 749, judgment of Privy Council in Quebee Railway, Light, Heat and Power Co. vs. Vrandy, AIR, 1920 PC 181, judgment of the Hon'ble Supreme Court in the case of CIT vs Moon Mills Ltd 59 TR 574 (SC). In this connection, he also referred to the dictionary meaning as under:

"Chambers 20th Century Dictionary says
Bad Debt = A debt that cannot be recovered.
Mitra's Legal and Commercial Dictionary says

Bad Debt : A debt becomes bad debt when the Creditor has no reasonable chance of recovering it from the debtor : as held in Deoniti Prasad v. Commissioner of Income tax (AIR 1953 Pat. 360)

The Law Lexicon Ed. Justice Y.V. Chandrachud :

Bad Debt : Debt which cannot reasonably be collected. A debt about which there is no reasonable expectation of recovery; A debt believed to be unrecoverable."

3. In constitution of his above submissions, it was pleaded by him that it is for the assessee to demonstrate that the debt has become bad and irrecoverable since the onus is on the assessee to prove that the conditions for claiming deductions are satisfied. Reliance was placed on the decision of Hon'ble Calcutta High Court in the case of Dunlop India and the case of Hanuman Tubewell, 211 ITR 1047. Further, the Assessing Officer is also not precluded from making enquiry as to whether the debt has become bad since Assessing Officer has to ensure that conditions for claiming deductions are fully satisfied. Proceeding further it was submitted that if the contention of assessee is accepted then it would lead to absurd results and encourage the dishonest assessees in as much as such assessee would be at liberty to evade the tax by writing off a good debt whenever there is a huge profit and offer the same for taxation U/s 41 of the Act in the year of loss. According to him, such erroneous interpretation cannot be accepted since it would frustrate the object of the Legislature. In this connection, he also referred to page - 878 of the "Law and practice of Income Tax Law by Kanga, Palkhiwala and Vyas, the 9th Edition", where the Learned Jurist opined as under :

"Under the amended clause, the requirement of "establishing" that the debt had become bad in the relevant accounting year is dispensed with; all that the assessee has to show is that the bad debt has been written off as irrecoverable. But the subject matter of the clause is still "any bad debt" and "not any debt." The consequences of the amendment are mainly three :

(ii) The assessee cannot arbitrarily, irrationally or malafide treat a good debt as bad and write it off in his accounts.

(iii) Where the assessee has acted bona fide and reasonable, the Assessing Officer cannot substitute his own subjective judgment, but must accept the assessee's decision, as to the quality of the debt.

(iv) The assessee is not obliged to write off and claim the debt in the very year in which it becomes bad. He can write it off and claim it in a subsequent year in which the debt continues to remain bad."

4. Proceeding further, it was submitted by him that the issue whether the debt is bad or not, was subject matter of adjudication before the High Courts. Firstly, he referred to Hon'ble Bombay High Court judgment in the case of Jadhavji Narsid and Co. 47 ITR 411, wherein, it has been held that bad debt is a debt of which the chance of recovery is "Nil" and there is no hope of recovering it. Then, he referred to another decision of Hon'ble Bombay High Court in the case of Raja Bahadur Mukundlal Bansilal, 22 ITR 94, for the proposition that debt becomes bad when the creditor has no reasonable expectation of recovering it. Then the referred to the latest decision of the Hon'ble Bombay High Court in the case of General Insurance Corp. of India, 254 ITR 204, where the Hon'ble Bombay High Court considered the provisions effective from 01.04.1989. According to him, it has been held therein that to the extent of exact requirement of writing off the concerned debt as irrecoverable, the law remains the same even after 01.04.1989. He then referred to Hon'ble M.P. High Court judgment in the case of Nand Manohar Agency, 259 ITR 723, for the proposition that a debt has to become irrecoverable. Then he referred to Hon'ble Calcutta High Court judgment in the case of Rallies India Ltd., 246 ITR 170, wherein it was held that claim for deduction on account of bad debt was pre-mature since the assessee had not filed suit for recovery of the amount. In this connection, he also referred to Hon'ble Kerala High Court decision in the case of Travancore Tea Estate Co. Ltd. 197 ITR 528 at Page -536, which has been affirmed by the Hon'ble Supreme Court in 233 ITR 203 and Hon'ble Madras High Court decision in the case of Bhavarlal C. Bafna, 257 ITR 687. He relied on the decision of Delhi Bench of the Tribunal in the case of India Thermit Corp. Ltd., 56 ITD 307, wherein, it has been held that even after the amendment the disallowance U/s 36(1)(vii) could be given only when the bad debt was written off and not when the good debt written off. For this proposition, he also relied on the decision of the Mumbai Bench of the Tribunal in the case of Netwest Finance Ltd. (ITA No. 1975/Mum/1998) dated 18.12.2003. Further reliance was placed on the decision of Mumbai Bench of the Tribunal in the case of R.R. Nabar and Co. (ITA No. 984/Mum/1999) dated 25.03.2004, wherein, it has been held that twin condition must be satisfied namely (i) that the assessee has to actually write off the bad debt, (ii) that the debt written off by the assessee should be bad debt.

5. In view of the above submissions, it was argued by him that the use of the words "bad" and "irrecoverable" cannot be ignored while interpreting the provisions of Section 36(1)(vii) of the Act. If these words are taken into consideration, then, the claim of the assessee cannot be allowed merely on writing off the same in the books of accounts. Thus according to him, the claim can be allowed only where it has been shown that debt has become bad and is written off in the accounts of the assessee as irrecoverable.

6. On the other hand, the Learned Counsel for the assessee Mr. Pardiwala, contended that while interpreting the provisions, one should look into the intention of the Legislature. According to him, if the provisions are amended in order to remove the hardship or mischief of the pre-amended provisions, then the Hyden's Mischief Rule of interpretation should be applied. It was submitted by him that as per the pre-amended provisions, the assessee was required to establish that the debt which was claimed as deduction had become bad during the previous year and the Assessing Officer was empowered in terms of Section 36(2) to allow a deduction in another year if he was of the view that debt had become bad in an earlier or later year. This led to litigation between assessee and the department. Therefore, in order to eliminate such disputes, the provisions were amended with effect from 01.04.1989. In this connection, he also referred to the Circular explaining the provisions of Direct Tax Laws (Amendment) Act, 1987, by which the provisions of Section 36 were amended. Accordingly it was argued by him that now the deduction is allowable in the year in which the amount of a debt is written off in the accounts. Proceeding further, it was submitted that if the view of Revenue is accepted then the consequences would be that assessee would not be able to claim deduction in any subsequent year when, according to Revenue, the debt has become bad as conditions of writing off in that year would not be possible. In this connection, he relied on the decision of the Apex Court in the case of Surat Art Silk Cloth Mfg. Association, 121 ITR 1.

7. Proceeding further, it was submitted by him that words "bad debt" have been used to broadly indicate the nature of allowance. Even if any meaning is to be given to such word, then a debt should be presumed to be bad when it is written off in the books of assessee, as held by the Hon'ble Bombay High Court in the case of Lords Dairy Forum Ltd., 27 ITR 700 at Page - 708. Therefore, it is for the Department to prove to the contrary by leading some evidence. Alternatively, it was agreed by him that assessee is not required to prove beyond doubt that debt has become bad. It is only the honest and bonafide judgment of an assessee which should be considered in determining the question whether a debt is bad or not. Reliance was placed on the various judgments namely -

Jethabhai Hirji and Jethabhai Ramdas, 120 ITR 792 (Bom.), Johila Coalfields (P) Ltd., 146 ITR 276 and Sarangpur Cotton Mfg. Co. Ltd., 143 ITR 166 (Guj.).

8. Proceeding further, it was submitted by him that this issue has been considered by the Tribunal in various cases. Reference was made to these decisions - Paks Trader Center, 53 ITD 313 (Cal.), Pradeshiya Industrial and Investment Corp of India, 544 TTJ 438 (All.), Newdeal Finance and Investment Ltd., 74 ITD 469 (Chennai), Jayant Commerce Ltd., 61 ITD 183 (Cal.), Wipro Information Technology Ltd., 88 TTJ 778, K. Raheja Development Corp. Ltd. (2005) 2 SOT 744 (Bang.), Shobanlal Jain, 79 TTJ 446 (Del.), Vision Products, 84 TTJ 241 (Del.) and Anil H. Rastogi, 86 ITD 193 (TM). All these decisions were referred for the proposition that debt is to be allowed as deduction in the year of writing off in the books of account and assessee is not required to prove that debt has become bad. It was further submitted that decision in the case of Anil Rastogi (supra) is binding as it was a decision of three Members which is akin to Full Bench as held by Hon'ble Delhi High Court in the case of P.C. Puri vs. CIT, 151 584. Lastly, it was submitted by him that decision relied on by the Learned Special Counsel for Revenue are either misplaced or distinguishable. On the other had, the Hon'ble Gujarat High Court decision in the case Girish Bhagwat Prasad, 256 ITR 727 supports the case of assessee.

9. In rejoinder, it was pointed out by Mr. Daniel that Gujarat High Court Judgment relied on by the Learned Counsel for the Assessee has been considered by Mumbai Bench of the Tribunal in R.R. Nabar and Co. (supra) and, therefore, does not help the assessee.

10. Rival contentions have been considered carefully. The question for our consideration is whether for claiming deduction under the amended provisions of section 36(1) (vii) of the Act, mere writing off the debt in the books of accounts is sufficient or the assessee is also required to show that debt has become bad. The answer to this question would depend on the interpretation of the language used by the Legislature. It is the cardinal rule of interpretation that where the language used by the Legislature is clear and unambiguous then the plain and natural meaning of the words should be supplied to the language used and resort to any rule of interpretation to unfold the intention is permissible only where the language is ambiguous. Plethora of decision of the Apex Court are there to support this proposition. The Hon'ble Supreme Court, in the case of Tarulata Shyam vs. CIT WB, 108 ITR 345, approved the observations in the case of Cape Brandy Syndicate vs Inland Revenue Commissioner (1921) 1 KB 64 by observing as under :

"To us, there appears no justification to depart from the normal rule of construction according to which the intention of the legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J. IN Cape Brandy Syndicate v. Inland Revenue Commissioner [1921] 1 KB 64 (KB) at page 71, that

"......in the taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a Tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."

Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear to the judicial mind to be."

In the case of Keshavji and Co. vs. CIT, 183 ITR 1, the Apex Court observed as under :

"As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature"

In the case of Guru Devdatta VKSSS Maryadit vs State of Maharashtra, AIR 2001 SC 1980, their Lordships of the Apex Court held as under:

"It is a cardinal principle of interpretation of statute that the words of a statute must be understood in their natural, ordinary or popular sense and construed according to their grammatical meaning, unless there is something in the context or in the object of the statute to suggest to the contrary. The golden rule is that the words of a statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when the words of the statute are clear, plain and unambiguous, then the Courts are bound to give effect to that meaning irrespective of consequences. It is said that the words themselves best declare the intention of the Law give. The Courts have adhered to the principle that efforts should be made to give meaning to each and every word used by the Legislature and it is not a sound principle of construction to bush aside words in a statute as being inapposite surplus if they can have a proper application in circumstances conceivable within the contemplation of the Statute."

Though there are various judgments upholding the above principle but we may mention that Constitution Bench of the Hon'ble Supreme court in the case of Anjum M.H. Ghaswala and Ors., 252 ITR 1, has endorsed the above view by observing as under:

"This exercise of purposive interpretation by looking into the object and scheme of the Act and the legislative intendment would arise, in our opinion, if the language of the statute is either ambiguous or conflicting or gives a meaning leading to absurdity."

The above judgments make it clear beyond doubt that Courts are not required to look into the object or intention of the Legislature by resorting to aids to interpretation where the language of a provision is clear and unambiguous. Consequently, the meaning of each word used by the Legislature is to be given its plain and natural meaning and no word should be ignored while interpreting a provision of a statute.

11. Now, let us consider the language-employed by the Legislature." Relevant provisions of Section 36(l)(vii) as effective from 1.4.1989 read as under:

"36(l)(vii) 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."

A bare look at the above provisions shows that there is no ambiguity in the language used by the Legislature. Clear and unambiguous words are used in the above provisions. Therefore, in our view, no words used by the Legislature can be considered as superfluous. Each word has to be given its due meaning. The word "debt" is qualified by the word "bad". Therefore, it is not any or every debt which can be written off for claiming deduction. It must be a bad debt. The word "bad" used by the Legislature cannot be ignored. Therefore, before writing off the debt, assessee must form an honest opinion on the basis of material on record that debt has become bad. Consequently, in our humble opinion, mere writing off any debt is not sufficient for claiming deduction U/s 36(l)(vii). The assessee must show, at least prima facie, that debt has become bad. If the contention of assessee's counsel is accepted then it would lead to absurd result in as much as dishonest tax payers would be able to evade the tax by writing off a good debt in the year of profit and subsequently offer the same as income U/s 41(1) in the year of loss. Any interpretation which leads to absurdity or manipulation must be avoided.

12. The submission of assessee's Counsel that the words "bad debt" indicate the nature of allowance only and, therefore, such significance should not be attached to the word "bad" cannot be accepted. Such submission is contrary to the cardinal rule of interpretation discussed by us earlier in as much as it would amount to the deletion of the word "bad" from the language used by the Legislature.

13. At this stage, we may observe that basic idea of allowing any deduction is that true income can be determined only after setting off the expenditure or losses incurred by an assessee against the revenue receipts. The idea behind allowing deduction on account of bad debt is that loss is incurred when a debt becomes bad and irrecoverable. So long as the debt is good, the assessee does not incur any loss and, therefore, question of allowing any deduction in respect of a debt which has not become bad, does not arise. The use of the word "bad" by the Legislature is deliberate and, therefore, such word can not be ignored while interpreting the provisions of Section 36(l)(vii).

14. The contention of Mr. Pardiwala that a debt should be presumed to be bad unless proved otherwise by Revenue where such debt is written off in the books of assessee also cannot be accepted. There cannot be any presumption regarding incurring of loss by assessee since, as per the settled legal position, the onus is on the assessee to prove that conditions for claiming the deduction are fulfilled or that an expenditure or loss has been incurred by him. Reference can be made to the judgment of the Hon'ble Supreme Court in the case of Calcutta Agency Ltd., 19 ITR 191. Even the Hon'ble Bombay High Court in the case of Jethabhai Hirji, 120 ITR 792, has held that the onus to prove a bad debt is on the assessee. If the onus is upon the assessee to prove the factum of loss / bad debt, then question of raising a presumption that debt written off was bad does not arise. Let us also explain through an example - for instance, an assessee dealer in stationery goods sells such goods to Reserve Bank of India for Rs.20.00 lacs and writes off the same, without any reasons, at the end of year. On these facts, can it be presumed that debt was bad. The answer is completely "No" as by no stretch of imagination, it can be said that sum due from Reserve Bank of India is bad. As already stated such contention of assessee, if accepted, would frustrate the object of the Act and encourage dishonest tax payers to evade the tax. Hence, such contention is rejected. Consequently, it has to be held that assessee must demonstrate, prima facie, that debt had become bad before it was written off.

15. At this stage, it may also be mentioned that Finance Act, 2001, has inserted the following Explanation after the proviso to Section 36(l)(vii):

"Explanation - For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provisions for bad and doubtful debts made in the accounts of the assessee."

The above insertion is retrospective effective from 1.4.1989. The Legislature has made it clear that even the doubtful debt can not be written off. Though this Explanation relates to the provisions for bad and doubtful debts, yet it gives clear indication that the word "bad" in Section 36(l)(vii) is of prime importance and can not be ignored. It is only the bad debt, which can be written off and not any debt.

16. The Learned Counsel for the assessee has also sought to apply the Hyden's Mischief Rule and reliance was placed on the judgment of Surat Art Silk Mfg. Association (supra). The said decision of Apex Court does not help the assessee as in that case it was clearly held "The consequences of a suggested construction cannot after the meaning of a statutory provisions where such meaning is plain and unambiguous, but they can certainly help to fix its meaning in case of doubt or ambiguity." We have already observed that language of Section 36(l)(vii) is quite plain and unambiguous. Therefore, the Hyden's Mischief Rule can not be applied.

17. Even assuming that Hyden's Mischief Rule is applicable for interpreting the amended provisions of Section 36(l)(vii), we are of the view that such rule cannot be applied to the interpretation of the words "any bad debt or part thereof" in as much as there was no mischief in this regard. The mischief, if any, related to the year in which debt was established to have become bad and also written off as irrecoverable in the accounts for that previous year. This is apparent from the language used by the legislature prior to 1.4.1989 which provided any debt or part thereof which is established to have become bad in the previous year" So if the assessee had written off the debt in one year but assessee was not able to prove that it had also become bad in that year, the Assessing Officer could disallow the same. Consequently, it could not be allowed in subsequent year, as it could not be written off in such year. Reference can be made to judgment of the Hon'ble Supreme Court in the case of R.B. Seth Champalal Ram Swarup vs CIT, 68 ITR 181 (SC), wherein it was held that claim of bad debt could not be allowed as such debt had become bad in earlier years. This legal position created hardship to the honest taxpayers. In order to avoid this hardship that Section 36(l)(vii) was amended with effect from 1.4.1989. Now, after the amendment, the assessee is not required to prove that debt has become bad in the year of write off. If the debt had become bad in earlier years but could not be claimed as deduction, the same can be allowed in other year in which such bad debt is written off. So after the amendment, the assessee is relived of proving the factum of debt becoming bad in the year of write off. But this does not mean that assessee is relieved of proving that debt has become bad. The year in which debt has become bad is no more relevant after the amendment. Therefore, Hyden's Mischief Rule is applicable to the later part of the provisions of Section 36(l)(vii) and not to the first part. The assessee is still required to prove that a debt in respect of which the claim is made has become bad whether in the year of write off or in any of the earlier years.

18. The contention of assessee's counsel that if Revenue's contention is accepted would create great hardship to assessee as it would not be able to write off in subsequent years cannot be accepted for two reasons - (i) the hardship is self created by assessee by writing off a debt which was not bad and (ii) the hardship, if any, has to be remedied by Legislature and not by Court as held by the Apex Court in the case of Taarulata Shyam (supra).

19. The above discussion would be incomplete unless we express our opinion on the question as to when a debt can be said to be bad. The question whether a debt has become bad or not, is a question of fact and, therefore, answer of the same would depend on the facts and circumstances of each case. Various High Courts have considered such issues and decided the same on the facts of the case before them. In our opinion, a debt can be said to be bad when the material on record shows that there is no possibility of recovery. No doubt, the onus is on the assessee but the assessee is not required to prove beyond doubt that no recovery is possible. If there are some materials on record on the basis of which a prudent businessman may form an honest or bonafide belief that there is no possibility of recovery, that would be sufficient for writing off the same as bad debt. The crucial observations have been made by the Hon'ble Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas, 120 ITR 792. The same are being reproduced for the benefit of this order:

"As to when a debt becomes bad depends upon the circumstances and the materials brought on record and there is no general rule or universal test which will apply to all cases and in all circumstances. The department cannot insist on demonstrative proof of the fact which must satisfy the test of infallibility. All that is required is an honest judgment on 'the part of the assessee at the time when he makes the write-off. A debt cannot be written off as bad and irrecoverable if on the material available it could be shown that there was a possibility of recovering the same. That a company has not yet gone into liquidation will not by itself establish such a possibility. That the assessee wrote off the debt at a particular point of time or in a particular year is not conclusive of the matter, but is not wholly or totally irrelevant. This will be a material circumstance unless it can be shown or established from the materials on record that the write-off was not proper or bonafide. That this was so can be established even by reference to the subsequent conduct of the assessee from which it is possible to infer definitely that the assessee still considered the debt or at least a part thereof as recoverable or regarded the debtor as financially solvent. The fact that the assessee had not taken steps by way of legal proceedings against the debtor would not automatically justify the finding that he was not entitled to write off the amount of bad debt. Nor would the fact that an assessee, subsequent to the write-off a debt, continued legal proceedings against the debtor necessarily land to the conclusion that the write-off was improper or lacked bona fides. These would be factors to be taken into account in order to arrive at a proper determination of the question. Mere notices served for winding up a debtor company or lunching criminal prosecution or including other authorities to launch criminal prosecution against the debtor-company or its directors cannot be regarded as equivalent to taking steps for recovery of the amount. "

Similar views has also been expressed by the Hon'ble Gujarat High Court and the case of Kamla Cotton Co. vs CIT, 226 ITR 605, Hon'ble Madras Court of Devi Films Ltd., 49 ITR 874, Calcutta, Hon'ble High Court in Dunlop India Ltd., 209 ITR 987. Not only we are bound by the decision of the Hon'ble Bombay High Court, but in our opinion also the view taken by the Hon'ble Bombay High Court is most reasonable view on this aspect of the matter. So, whenever such issue comes before the Bench, the above observation of the Hon'ble Bombay High Court would be a guiding factor in adjudicating the matter.

20. Before parting with this order, we would like to deal with the objection of Mr. Pardiwala that order of the Tribunal in the case of Anil Rastogi (supra) is binding on this Bench as Third Member opinion is equivalent to decision of Special Bench. We are unable to agree with the contention. Special Bench decision is collective decision which has always more weightage than separate opinions given by different Members at different point of time. Similarly, as per the provisions of Act, Third Member expresses his opinion which is binding on the regular Bench which decides the case finally. Such final order is of two Members only. Therefore, in our humble opinion, such decisions by Bench of two Members, though guided by third Member opinion, cannot be binding on Special Bench. The judgment of the Hon'ble High Court relied on by him is persuasive only and not binding on us in view of the decision of the Hon'ble Bombay High Court in the case of Thana Electricity Supply Ltd., 206 ITR 727. For the reasons mentioned above, we are not persuaded by the view of the Hon'ble Delhi High Court. Even presuming that Third Member view is akin to decision of Three Members, still the Co-ordinate Bench of three Members can deviate from such decision where the Third Member had expressed his opinion without reference to settled legal position expressed by the Hon'ble Supreme Court as held in the case of Union of India vs Ragubir Singh, 178 ITR 548 (SC) (Constitution Bench). The cardinal rule of interpretation, as discussed by us, was neither raised by any party nor considered by the Bench in the case of Anil Rastogi (supra). The said Bench had completely ignored the effect of the word "bad" which, in our opinion, could not be done in view of the cardinal rule of interpretation. Hence, the said decision can not bind the Special Bench.

21. In view of the above discussions, it is held that mere writing off the debt is not sufficient for claiming deduction U/s 36(l)(vii) of the act effective from 1.4.1989. In addition, the assessee is also under obligation to show, at least prima-facie, that the debt has become bad. Whether a debt has become bad or not would depend on the facts of each case. The observations of the Hon'ble Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas, 120 ITR 792, would be a guiding factor for determining such question of fact.

23. The matter will now go to the regular Bench for decision on merits.

Per G.E. Veerabhadrappa (VP) and Dr. O.K. Narayanan (AM) :

24. We have had the privilege of going through the order proposed by our esteemed brother, Shri K.C.Singhal, the learned Judicial Member. We have also had discussions and deliberations on the issue before us. Inspite of our best efforts, we are unable to convince the learned Judicial Member on our reasoning and are also unable to be convinced by his reasoning and conclusion thereon. We, therefore, record our dissent in the following manner.

25. We agree with the discussions in the proposed order as regards the question before us, the arguments that are advanced by the parties who appeared before us and we also agree with his view that whether the debt is actually become bad or not would entirely depend upon the facts of each case. But we do not agree with him that post 1989 amendment the assessee is further required to show that the debt written off by him is indeed a bad debt for the purpose of allowance under section 36(l)(vii) of the Act.

26. This provisions relating to bad debts as are in shape today have an interesting history and are to be deliberated upon before we draw into any meaningful conclusion of what they intend after the amendment with effect from 1-4-1989. For a long time, the assessee in business had a choice as regards the method of accounting, either to follow cash system, or mercantile system. When the cash system of accounting is followed revenue is not realized till the realization takes place in cash. In other words, if the goods are sold on credit it will not be regarded as sale and accounted till the cash is actually realized. In that situation the question of claiming any bad debt or allowing the same as deduction did not arise. The dispute of the type before us arose only when the assessee chose to maintain method of accounting on mercantile basis where the assessee has to account for the credit sales as revenue receipts he was faced with incidental losses of business in the form of non realization of such credit sales. The accountants started writing off such unrealizables as bad debts to the profit and loss account.

27. The claim for deduction of bad debts so written off was considered even when there was no provision in the I.T.Act specifically granting such deduction. In CIT v Chitnavias (1932) 6 ITC 453, Privy Council observed "Although the Act nowhere in terms authorizes the deduction of the bad debts of a business, such a deduction is necessarily allowable. What are chargeable to Income-tax in respect of a business are the profits and gains of a year' and in assessing the amounts of profits and gains of a year account must necessarily be taken of all losses incurred. Otherwise you would not arrive at the true profits and gains."

28. For the first time specific provisions were made regarding deduction of the write off of bad debt in the year 1939 by the Income-tax (Amendment) Act 1939, which introduced provisions of section 10(2)(xi) '"to the 1922 Act, which read as under:

"(xi) when the assessee's account in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer (now Assessing Officer) may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee:

Provided that if the amount ultimately recovered on any such debt or loan is greater than the difference between the whole debt or loan and the amount so allowed, the excess shall be deemed to be a profit of the year in which it is recovered, and if less, the deficiency shall be deemed to be a business expense of that year...."

29. Under the 1922 Act though a debt was a bad debt, the Assessing Officer could refuse to grant allowance therefore, on the ground that the debt in question had become bad in an earlier year. In such an event the assessee found himself unable to ask for relief in respect of the bad debt in the earlier year. The Assessing Officer could also refuse to grant the allowance on the ground that the debt had not yet become bad in the accounting year and that the assessee's claim was premature; and, when such later year arrived, though the assessee could repeat his claim, it was possible for the Assessing Officer to hold in such later year, though inconsistently, that the debt had already become bad in an earlier year, and he could therefore, refuse to grant relief in such later year. The decisions on the subject were not uniform leading to inconsistent treatment by different Assessing Officers. The result was that the assessee was put to a great hardship, inasmuch as he was denied the relief altogether. Attempts were made from time to time to reduce this hardship, wherein the Assessing Officer is required under the provisions of section 155 of the Act to make amendments on his decision on the bad -debt and also to make necessary corrections and adjustments.

30. The 1961 Act, which consolidated the law on the subject, indicated the following provisions in section 36(l)(vii) of the Act.

"(vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year was allowable as a deduction in computing the income chargeable to tax under the head "profits and gains of business or profession"."

The allowance of deduction u/s. 36(l)(vii) also depended upon the condition spelt out in section 36(2) of the Act. The provisions of section 36(2) of the Act have also been amended by the Direct Tax Laws (Amendment) Act 1986 w.e.f. 01-04-1989. However, we are not seriously concerned with the amendment in section 36(2) of the Act. However, litigations and controversies as also hardships to the assessees continued on various points even the post 1961 period. Therefore, the Direct Tax Laws (Amendment) Act 1987 w.e.f. A.Y. 1989-90 has further liberalized the requirement of writing off of debts by an assessee by altogether doing away with the condition precedent of the satisfaction of the Assessing Officer in writing off a bad debt, which used to lead to enormous litigations. The amendment provisions provide that a claim of bad debt will be allowed in the year in which such bad debt has been written off as irrecoverable in the accounts of the assessee for the previous year. The amended clause w e f 1-4-1989 now reads as under :

"(vii) 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...."

31. A comparison of these provisions shows that in pre-amended provision the assessee was required to establish that the debt in question has become bad in the previous year. In the post amended period it is sufficient if the bad debt or part thereof is written off as irrecoverable in the accounts of the assessee. What is the effect of substitution made by the Direct Tax Laws (Amendment) 1987 in the matter of deductibility of a bad debt is the core issue. In our view the law has done away with the onerous obligation on the part of the assessee to establish that the debt has become bad in the previous year. Now the requirement is only the write off of such debt as irrecoverable in the accounts of the assessee.

32. The Central Board of Direct Taxes in its circular No.551 dated 23-01-1990- (183 1TR (St) 37) has explained the object and the ambit of the amendment in the following manner:

"6.0 Amendments to section 36 (1) (vii) and 36 (2) to rationalise provisions regarding allowability of bad debts - The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debt. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for the bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee."

33. Prior to the amendment explained above, an assessee had to establish that the debt has become bad during the previous year and the assessing officer may allow or disallow the claim in terms of section 36(2) on the basis of his observation whether the debt has become bad during the said previous year or not. In other words, irrespective of the write off claimed by the assessee, the deduction was still dependent on the finding of the assessing officer that in which previous year the debt has become bad and based on which the assessing officer could allow the deduction either in an earlier assessment year or in a later assessment year which is different from the assessment year in which the assessee has written off the debt as bad debt. As explained by the above circular, the amendment has been brought, to do away with all the complications involved in determining the issue of deductibility of bad debts u/s 36(l)(vii). The amendment decided the year in which the deduction has to be allowed; as the year in which the assessee has written off the debt as bad debt in the books of account. The amendment has also done away with the requirement of establishing that the debt has become bad. This is clear from the circular of the Board where it is stated that the amendment has been brought to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions. Even after the amendment, if the assessee is again called upon to establish that the debt has become bad, the true spirit of the amendment will not be fulfilled. The intent and purpose of the amendment is to avoid litigations and do away with all sorts of disputes regarding the allowability of bad debts as a deduction in computing the income of an assessee. The dispute regarding the year in which the debt has to be allowed as a deduction has been resolved by the clear statement of the amended law that the deduction shall be allowed in the year in which the debt has been written off as irrecoverable. It is very important to note that the earlier expression "any debt, or part therefore which is established to have become a bad debt in the previous year" has been conspicuously omitted by the amendment and substituted by the expression "written off as irrecoverable". The words of the law are clear and the intent and purpose of the amendment are manifest. The earlier rule of establishing that the debt has become bad is omitted from the provisions of law. Therefore, there is no occasion or provocation to consider whether the assessee has again to establish that the debt has become bad. In fact, there is no provocation at all to go to that extent of discussion because the amendment has omitted the expression "debt which is established to have become a bad debt". We are of the view that when the amendment has been brought to cure a defect and the amendment has omitted the expression which has made way for such defect there is no reason to ponder over the past and to decide the matter still under the law stood prior to the amendment.

34. The apprehension expressed by the learned standing counsel for the Revenue was that if the assessee was permitted to stake a claim for deduction on the basis of writing off a debt as bad, then the assessee can write off any debt as bad and claim deduction in the year in which it has high amount of profit and can offer the bad debt as income u/s 41(1) in an assessment year in which the assessee has suffered loss. The apprehension is only a remote possibility or a hypothesis. The Supreme Court in the case of Addl CIT,. vs Surat Art Silk Cloth Manufacturers Association 121 ITR 1 has held that the consequences of a suggested construction cannot alter the meaning of a statutory provision where such a meaning is plain and unambiguous but they can certainly help to fix its meaning in the case of doubt or ambiguity. The above observation of the Supreme Court has been reiterated by the court in the case of CIT vs JT Gotla in 156 ITR 323.

35. Another argument made out by the Revenue is that what is to be written off as irrecoverable is "bad debt or part thereof and not "any debt or part thereof. According to the Revenue, the presence of the adjective "bad" requires that the assessee should establish that the debt written off as irrecoverable is in fact "bad". In our opinion, the adjective "bad" is prefixed to the word "debt" only to focus in a broad manner the nature of the deduction entitled for u/s 36(l)(vii). It is obvious that a debt which has not become bad is not entitled for deduction. Therefore, there is no justification in using the expression "any debt or part thereof written off as irrecoverable to justify the deduction. If so, would be surprisingly a wrong expression. A debt which is not bad is not allowed as a deduction at all. Any debt or part thereof which is not bad cannot be claimed as a deduction even if written off as irrecoverable. Therefore, it has become necessary for the legislature to qualify the debt which would be entitled for deduction in computing the taxable income. It is for that purpose of identifying or qualifying the debt that the adjective "bad" has been prefixed to the word "debt" in section 36(l)(vii). The presence of the expression "bad" does not lay down any rule of evidence or onus of proof. The expression "bad debt" always goes along with the second limb of the provision that is "writing off as irrecoverable". Therefore, the presence of the expression "bad" has to be read in the normal sense without attributing any unintended implication and, therefore, it is to be held that the expression "bad debt" does not mean that the assessee should establish that the debt has become bad. On the other hand, it only qualifies that debt which is entitled to be deducted if written off as irrecoverable.

36. The act of writing off a debt as irrecoverable in the accounts of the assessee is deemed to be discharging the onus of the assessee in holding a debt as bad. When the statute has provided the mode of discharging the onus of proof by writing off the debt as bad debt, it is not incumbent on the Revenue to call for further evidence. The rule regarding the deductibility of bad debt provided in section 36(l)(vii) after the amendment is a statutory rule by itself and, therefore, there is no need for insisting any other proof. The Statutory rule itself declares the rule of deduction of bad debt. If it is again necessary to prove by demonstrative proof that the debt has become bad, then there is no necessity to insert a statutory rule. The onus of proving the debt as bad debt has been prescribed by the statutory rule. Once that statutory rule is satisfied by following the prescribed method no further obligations remain on the assessee to be discharged.

37. The Hon'ble High Court of Bombay in the case of Lords dairy Farm Ltd vs CIT 27 ITR 700 has observed that when a business man writes off an amount, there is prima facie evidence that the amount is irrecoverable. It is for the Revenue to rebut the prima facie inference by citing circumstances or leading evidences to rebut the stand of the "bad" has been prefixed to the word "debt" in section 36(l)(vii). The presence of the expression "bad" does not lay down any rule of evidence or onus of proof. The expression "bad debt" always goes along with the second limb of the provision that is "writing off as irrecoverable". Therefore, the presence of the expression "bad" has to be read in the normal sense without attributing any unintended implication and, therefore, it is to be held that the expression "bad debt" does not mean that the assessee should establish that the debt has become bad. On the other hand, it only qualifies that debt which is entitled to be deducted if written off as irrecoverable.

36. The act of writing off a debt as irrecoverable in the accounts of the assessee is deemed to be discharging the onus of the assessee in holding a debt as bad. When the statute has provided the mode of discharging the onus of proof by writing off the debt as bad debt, it is not incumbent on the Revenue to call for further evidence. The rule regarding the deductibility of bad debt provided in section 36(l)(vii) after the amendment is a statutory rule by itself and, therefore, there is no need for insisting any other proof. The Statutory rule itself declares the rule of deduction of bad debt. If it is again necessary to prove by demonstrative proof that the debt has become bad, then there is no necessity to insert a statutory rule. The onus of proving the debt as bad debt has been prescribed by the statutory rule. Once that statutory rule is satisfied by following the prescribed method no further obligations remain on the assessee to be discharged.

37. The Hon'ble High Court of Bombay in the case of Lords dairy Farm Ltd vs CIT 27 ITR 700 has observed that when a business man writes off an amount, there is prima facie evidence that the amount is irrecoverable. It is for the Revenue to rebut the prima facie inference by citing circumstances or leading evidences to rebut the stand of the assessee to prove that the debt was in fact not bad. This position has been reiterated again by the Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas 120 ITR 792. The Madhya Pradesh High Court in CIT vs Johilla Coal Fields Pvt Ltd 136 ITR 276 and the Gujarat High Court in CIT vs Saranpur Cotton Mills 143 ITR 166 have taken analogous view. The scope and extent of the provisions of law contained in section 36(l)(vii) after the crucial amendment have been considered by various benches of the Income-tax Appellate Tribunal in a series of appeals. The issue was considered for the first time by ITAT, Calcutta Bench "D" in the case of DCIT vs Paks Trade Centre 53 ITD 313. The argument raised before the Tribunal was that the expression "bad debts" still remained in the provisions of law contained in section 36(l)(vii) even after the amendment, it is for the assessee to prove that the debt has become bad. The Tribunal after considering the intent and scope of the amendment and the relevant circular issued by the CBDT held that the deduction could not be allowed in any other year other than the year of write off and the Tribunal accepted the contention of the assessee that it is sufficient on the part of the assessee to claim deduction to write off the debt as irrecoverable in the books of account during the relevant previous year. The Allahabad Bench of ITAT adopted an analoguous view while deciding the issue in the case of Pradeshiya Industrial and Investment Corporation of UP Ltd 54 TTJ 438. The Tribunal stated therein that what is necessary is to write off the debts as irrecoverable in the books of account of the assessee. Again, the ITAT, Calcutta Bench "B" in the case of Jayanti Commerce Ltd vs ACIT 61 ITD 183 held that the only pre-condition for writing off a debt is that the assessee should bonafidely believe that the debts are not recoverable and no other evidence is called for. The ITAT, Bangalore Bench in the case of Wipro Information Technology Ltd vs DCIT 88 TTJ 778 held the same view that It is the objective satisfaction of the assessee what is to be considered in determining whether a debt written off as bad is in fact bad or not and assessee need not have to prove that the debt has become bad in the relevant previous year of write off. The Tribunal held therein that if the assessee is still required to prove that the debt is bad even though it is written off the same in the accounts, then the controversy whether the debt has become bad or not in the relevant previous year would still continue and the effect of the amendment would be nullified. This principle has been reiterated by the ITAT, Bangalore Bench in the case of K Raheja Development Corporation Ltd vs ACIT 2 SOT 744 and held that if and when the assessee wrote off the debt it was under a bonafide belief that the debt was bad and the amount written off has to be allowed as a deduction. The Delhi Benches of the Tribunal in the cases of Shobanlal Jain vs ACIT 79 TTJ 446 and DCIT vs Cat Vision Products Ltd 84 TTJ 241 have adopted a similar view. The ITAT, Chennai Bench "A" in the case of New Deal Finance and Investment Ltd vs DCIT 74 ITD 469 has followed the same view taken by the Tribunal discussed hitherto. The Tribunal held therein that the best judge to decide as to whether a debt ought to be written off or not is the assessee and not the assessing officer. The Tribunal observed that once an assessee is satisfied that the debt has become "bad and it has passed the necessary entries in the books to write off the debt in its profit and loss account, then the assessee could not be called upon to prove that the debt has become bad.

38. As seen from the decisions mentioned in paragraphs above, the consistent view taken by the Tribunal is that the amendment has diluted the rigours of the test of proof in matters of establishing the debt as bad debt and consequent claiming of deduction by incorporating a statutory rule that the claim could be made by the assessee and assessing officer has to allow the claim in the year in which it has been claimed on the basis of the writing off the debt in the books of account. The parity / compatibility between the writing off the debt as irrecoverable in the books of account and the claim of deduction as bad debt to be allowed in the hands of the assessee, has been made out by recognisizing both, to be the events of the very same previous year.

39. The above consistent view taken by the various benches of the Tribunal has been later confirmed by the Third Member decision of ITAT, Mumbai Bench "B" in the case of ITO vs Anil H Rastogi in 86 ITD 193 (Mum)(TM). In that case, the assessee, an individual was engaged in the business of trading in optical frames and lenses and he was also doing money lending business. The assessee had advanced a certain sum to one 'S' in the relevant previous year. At the time of closing his books of account, the assessee written off the said advance as an irrecoverable debt and claimed it as a bad debt. The assessing officer, however, added back said amount on the ground that the assessee had written off the debt within a very short period. On appeal, the Commissioner of Income-tax (Appeals) deleted the disallowance on the ground that after the amendment to section 36(l)(vii), there was no need for the assessee to establish as to what steps had been taken for recovery and writing it off as irrecoverable debt was sufficient. On appeal filed by the Revenue, the Accountant Member- upheld the finding of the CIT(A) while the Judicial Member held that even after the amendment, it was necessary for the assessee to prove that the debt has become bad in the year in which it was written off. On a difference of opinion, the Third Member, who was Vice President as well as Judicial Member agreed with the view taken by the Accountant Member and held that there is no obligation for the assessee to place demonstrative proof for establishing it as bad, if he has taken steps to write it off in the previous year, left to his prudence and it is sufficient compliance for claiming debt as bad debt u/s 36(l)(vii). The Third Member has held as follows:

It is clear from the substitution itself before the amendment by the Finance Act, 1987 with effect from 01-04-1989 in section 36(l)(vii), the words used were "any debt, or part thereof, which is established to have become a bad debt in the previous year". The words "any debt, or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year" have been inserted by the amendment. It is clear from the substitution itself that the intention of the legislature was to leave it to the prudence of the business man to judge himself as to whether a particular debt has become irrecoverable or not. Previously, the words used were "any debt, or part thereof, which is established to have become bad". It was significant in the sense that it was obligatory for the assessee to prove or show with demonstration that such debt had become bad. By taking away the words "which is established to have become bad", . the intention of the legislature is clear that it did not want to burden the assessee to prove that debt has become bad. It is left to the prudence and judgement of the businessman to consider it as a bad and irrecoverable debt and write off the same in his books of account. If he writes it off as irrecoverable in his accounts of the previous year, it is sufficient compliance for claiming debt as bad debt under section 36(l)(vii). The onus is of course on the assessee to show that he has written off the debt which is permissible under the amended provisions.

40. The Third Member decision mentioned above places the dispute at rest. In fact, the Third Member decision of the Tribunal in the case of ITO vs Anil H Rastogi (supra) is de facto the decision of a larger Bench. The Delhi High Court in the case of PC Puri vs CIT 151 ITR 584 has observed as follows:

"There is no difference, really speaking, between a Full Bench of three judges sitting together and this method of referring to the third judge in the case of a difference of opinion between the two judges. Whether the first method is adopted or the second, "opinion of the majority" will be decisive. In this case, there is a formal reference to a third judge to ascertain his opinion. He is the deciding voice. He turns the scales. The third judge is the Full Bench. Not alone. But along with the two others, who first heard the case. Whether the three judges sit at the same time or at different times - two at one time and the third hearing the matter later on a difference of opinion - does not make- much difference."

41. If the above principle laid down by the Delhi High Court is to be followed, the majority decision handed out in the case of ITO vs Anil H Rastogi is a decision to be reckoned by the Special Bench in adjudicating this issue.

42. The Revenue has placed heavy reliance on the decision of the Bombay High Court in the case of CIT vs General Insurance Corporation of India (No.2) 254 ITR 204. In fact the said decision of the Bombay High Court does not go to help the case of Revenue. The court has made it clear at the outset itself that the question as to whether the debt has become irrecoverable has not been raised in the appeal before it. The only dispute raised before the court was whether assessee has complied with the statutory conditions for writing off the debts. So far as the requirement of writing off is concerned, the court observed that the language used in the Indian Income tax Act, 1922 and Income-tax Act, 1961 is identical. The court observed that if the debit entries posted by the assessee indicated that bad debt has been written off as irrecoverable in the account of the assessee, then the statutory condition stands fully complied with. That if the assessee has posted entries in the profit and loss account and the corresponding entries are posted in the bad debt reserve account, it would be sufficient compliance of the statutory provisions of the requirement for writing off as irrecoverable the concerned debt in the books of the assessee. In that case, the assessee had posted entries in the profit and loss account and had made corresponding entries in the bad debt reserve, account. The dispute was regarding the mode of writing off the bad debt as irrecoverable in the books. of account of the assessee. In that case, the passing of corresponding entries in the bad debt reserve account has been held by the High Court as full compliance with the requirement of provisions of section 36(l)(vii). On page 209, the observation made by the High Court has titled towards the argument made by the assessee. in the present case. In placetum 'D' and 'E', the court has held as follows:

"......... In the case of Vithaldas H Dhanjibhai Bardanwala v. CIT (1981) 130 ITR 95, the Division Bench of the Gujarat High Court has held that under section 36 of the Act, before any claim for allowance for a bad debt is held established by the Assessing Officer, it must appear that the concerned bad debt was written off as irrecoverable in the account books of the assessee. This requirement is a condition for the grant of claim for bad debt allowance. To that extent, there is a departure from the earlier Act."

43. Before parting with, we may record that we have a serious reservation on the line of discussions and conclusions in paragraph 20 of the order of the learned Judicial Member. At page 744 of the judgment in CIT v. Thane Electricity Supply Ltd. (206 ITR 727) the opinion of the High Court was that the decision of one High Court is not binding on another High Court. The High Court appreciated the possibility of conflict of opinion between two different High Courts on the same questions of law and, therefore, the Legislature has provided for a clear mandate in section 260 of the Act to refer questions of law in case of such conflicts. The High Court further observed that it will amount to abdication of its duty by the High Court to give "its decision" on the point of law referred to it if it were only to follow the decision of another High Court In this context their Lordships of the Bombay High Court observed that the decision of one High Court is not binding on another High Court. But when it came to the other proposition of law, their Lordships have reiterated the proposition laid down by them which is reported at page 738 of the same judgment. It is recorded in that proposition that a decision of a High Court outside its territorial jurisdiction may at best have only persuasive effect. The decisions of the Gujarat High Court and Delhi High Court, which have been relied upon by us elsewhere in this order, have been considered in that spirit only, within the framework of the principle laid down by the Jurisdictional "High Court in CIT v. Thane Electricity Supply Ltd. (supra). The Third Member decision in the case of Anil Rastogi is as good as a Special Bench decision within the territorial jurisdiction of the Bombay High Court as there being no contrary view expressed by the Bombay High Court on the issue in question. It will be laying down a wrong precedent if the Third Member decision in the case of Anil Rastogi is slighted by any other Division Bench as not being bound.

44. In our view, the sanctity of the Third Member decision and the Special Bench decision is of the same nature as viewed by the Delhi High Court in the case of PC Puri vs CIT (supra). Even on this issue there is no biding precedent of the Jurisdictional High Court, it may be stated.

45. Yet another important factor, which has bothered our mind is the facts in the case of Oman International Bank. In this case, the facts show that the assessee chose to write off a bad debt of Rs.4,59,60,393 in terms of section 36(l)(vii) of the Act. The Assessing Officer disallowed a sum of Rs.92,96,000 representing debts written off in respect of amounts due from Mysore Timber Mart of Rs.81,44,000 and Overseas Commercial P. Ltd. of Rs. 11,52,000. In so far as debt due from Mysore Timber Mart is concerned the assessee bank had sanctioned credit facility in February 1990 and to secure itself had also obtained a hypothecation of certain current assets. In order to enforce the recovery, the assessee bank had sold Umber logs, which were hypothecated with itself, and adjusted the sale proceeds against the amount due to it. The debt thereafter remaining outstanding was written off in the previous year relevant to the assessment year 1994-95 as a bad debt. At the same time, the assessee bank filed a suit for the recovery of the same. Similarly, the assessee bank had sanctioned temporary overdraft to Overseas Commercial P. Ltd. in April 1991, which remained unpaid inspite of continuous follow-up action. The bank has not obtained any sort of security in respect of the overdraft facility extended in the course of its banking business. The assessee bank had written it off in the previous year relevant to the assessment year under consideration. It must be appreciated that these amounts were written off in the books of account after due approval of the competent officials of the assessee bank. All these indicate the bona fide decision on the part of the bank to treat the amounts as irrecoverable. In fact, the records show that the assessee was not able to recover anything out of the disputed amounts till the appeal was decided by the CIT(A). It is not the case of the department that the assessee had recovered any money out of these disputed amounts despite the write off in the year 1994. The bona fides of the assessee in the facts and circumstances of the case can never be questioned without bringing any material to show that the write off was mala fide with an intention to have tax advantage. The Assessing Officer made no attempts in these directions. The requirement on the part of the assessee to prove that the debt has really become bad will only annex an obligation which is not spelt out in the so-called clear provisions of the amendment brought out w.e.f. 1.4.1989. The accounts of the assessee are subject to audit which means that the board, general body of share holders and the statutory auditors have confirmed that the decision to write off is bona fide charge on the profit and loss account. There is no qualification in the auditors report to say that the write off was not a business consideration, which only strengthened that what has been written off to the profit and loss account is a bad debt and can be duly established so with all the attended circumstances. Asking for any demonstrative evidence or proof will only seem to be doing violence to the provisions contained in the Act and wanting the assessee to do the same Act, which were specifically omitted to be done by the Amending Act.

46. We may further examine the issue from another angle. If for any reason the revenue's contentions were to be accepted that the write off is not bona fide and the debt has not become bad in the previous year in which the debt is so written off, the assessee will only get denied its rightful deduction in the year of write off and in any subsequent year when the department reaches the conclusion that the debt has actually gone bad, he will loose the deductibility of the same forever because even the amendment in section 36(2)(iii) and (iv) which required the rectification u/s. 155 of the Act are not applicable to the post amended period. In other words, the assessee loses the deduction itself. That is not the intention of the rationalization of the provisions of section 36(l)(vii) of the Act. That will only mean putting additional burden and conditions, which are not spelt out in the amendment.

47. The apprehension of the revenue that this sort of write off will only result in good debts being written off as bad is unfounded. Whenever there is a recovery of the amounts so written off, the revenue has always the means to bring it to tax u/s.41 of the Act, whereas the assessee were to lose the deduction if to follow the line of arguments of the revenue. This must be kept in mind before our conclusion.

48. Now coming to the expression "bad debt" in section 36(1)(vii), it may be pointed out that strict proof of establishing the debt to have become bad is unnecessary if we were to look to the plain meaning of the term "bad debt". According to Chambers 20th Century Dictionary a bad debt means a debt that cannot be recovered. According to Mitra's Legal and Commercial Dictionary a debt becomes bad when the creditor has no reasonable chance of recovering it from the debtor. In The Law Lexicon, the definition is that a debt that is not reasonably collected, a debt about which there is no reasonable expectation of recovery, a debt believed to be unrecoverable. It is within the personal knowledge of the businessman whether a debt has become bad or not. His decision as long as it is bona fide cannot be disputed by demanding from him a demonstrative proof to establish that the debt has actually become bad. The write off of a bad debt, according to us, is a prima facie evidence, on the part of the assessee with whom the information rests, and is a sufficient requirement of the amended provision.

49. In the light of majority view the question is answered in negative and in favour of the assessee.

50. The matter will now go to the regular Bench for passing order in conformity with the majority decision on the question referred to the Special Bench. The other disputes in the case of Spectrum Business Support Ltd. shall also be decided on merits.

 
 
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