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Universal Radiators Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 309 of 1978 (Reference No. 173 of 1978)
Judge
Reported in[1985]153ITR556(Mad)
ActsIncome Tax Act, 1961 - Sections 36, 36(2) and 41(4)
AppellantUniversal Radiators Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateT.V. Balakrishnan, Adv.
Respondent AdvocateJ. Jayaraman and ;Nalini Chidambram, Advs.
Cases ReferredP) and Shah (P) Ltd. v. Addl.
Excerpt:
.....assessment as bad debt in hands of assessee. - - 21,368 as bad and irrecoverable and made a claim for allowance. 2. on appeal by the assessee, the aac took the view that the reopening of the assessment and the reassessment were quite in order having been made as a consequence of information in the possession of the ito and not as a result of a mere change of opinion and that the claim of the assessee for bad debt cannot be allowed, as it had not been taken into account while computing the income of the assessee (for an earlier previous year). the appeal of the assessee was, therefore, dismissed. 3. on further appeal by the assessee to the tribunal contending that the disallowance of the claim for bad debt was on the basis of a mere change of opinion and that as the partnership..........to tax on the income accurued on the debt which was taken over, the assessee could write off the debt and claim deduction therefor. to similar effect is the decision of this court in addl. cit v. s. rm. pl. subramania chettiar : [1979]119itr925(mad) . in that case, one of the questions which came up for consideration was whether a debt due to a firm which was claimed to be a bad debt and written of but which was disallowed by the ito could be the subject-matter of a claim for allowance by the successor-in-interest of the firm. it was held that the successor can claim the benefit of the write-off of the bad debt due to the predecessor and it was not necessary that the assessee who claims the deduction should have actually written off the debt after the business was taken over. in shah.....
Judgment:

Ratnam, J.

1. A partnership, under the name and style of M/s. Universal Radiators, was carrying on business in the manufacture and sale of radiators and in the course of such business, supplied radiators to the Gun Carriage Factory at Jabalpur. Owing to the detection of defects in the goods supplied, the Gun Carriage Factory authorities cut a portion of the amounts specified in the bills and the partnership was not apprised of the cuts. The books of the partnership showed that a sum of Rs. 27,393.75 was due from the Gun Carriage factory as on April 1, 1969. the assessee-company took over the business, assets and liabilities of the partnership and this included the sum of Rs. 27,393.75 due from the Gun Carriage Factory. Out of this sum of Rs. 27,393.75, the assessee realised a sum of Rs. 6,025.50 on May 24, 1970. Thereafter, in spite of repeated requests and reminders, the assessee was unable to realise the balance of Rs. 21,368 and reminders, the assessee was unable to realise the balance of Rs. 21,368 as the Gun Carriage Factory maintained that this amount represented cuts in the bills for the defective goods supplied. The assessee wrote off this amount of Rs. 21,368 as bad and irrecoverable and made a claim for allowance. In the original assessment made, this claim of the assessee was accepted and allowed, but, subsequently, the ITO reopened the assessment and negatived the claim of the assessee on the ground that the debt had not been taken into account while computing the income of the assessee for an earlier previous year and the non-realisation of the debt by the assessee after the take over of the assets and liabilities of the partnership has to be treated only as a capital loss and not a trade debt in the hands of the assessee.

2. On appeal by the assessee, the AAC took the view that the reopening of the assessment and the reassessment were quite in order having been made as a consequence of information in the possession of the ITO and not as a result of a mere change of opinion and that the claim of the assessee for bad debt cannot be allowed, as it had not been taken into account while computing the income of the assessee (for an earlier previous year). The appeal of the assessee was, therefore, dismissed.

3. On further appeal by the assessee to the Tribunal contending that the disallowance of the claim for bad debt was on the basis of a mere change of opinion and that as the partnership business was taken over by the assessee as a going concern with all its assets and liabilities and as the assessee-company as the successor-company had written off the debt as bad and irrecoverable and, therefore, entitled to claim relief for the bad debt so written off, the Tribunal held that the ITO, as a consequence of information in his possession, had reason to believe that the claim for bad debt was wrongly allowed in the original assessment and, therefore, the reopening of the assessment by the ITO was quite in order and that since the bad debt did not consist of a loan advanced in the ordinary course of banking or money-lending business of the assessee and it had not been taken into account in computing the income of the assessee for the accounting year relevant to the assessment year under reference or of an earlier accounting year, the disallowance of the claim for bad debt was quite in order. On these conclusions, the appeal of the assessee was dismissed.

4. At the instance of the assessee, the Tribunal has referred the following two questions of law under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as the Act) :

'(1) Whether the Tribunal was right in law in holding that the Income-tax Officer had jurisdiction to reopen the assessment

(2) If the answer to the first question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to deduct the sum of Rs. 21,368 as bad debt during the previous year relevant to the assessment year 1971-72 ?'

5. Regarding the first question relating to the jurisdiction of the ITO to reopen the assessment, it is seen from paragraph 7 of the order of the Tribunal that the question was not argued before it. Nevertheless, the Tribunal agreed with the AAC that the reopening of the assessment was as a consequence of information in the possession of the ITO, which led him to entertain the belief that the deduction has been wrongly allowed in the original assessment. Indeed, a perusal of the order of the AAC shows that originally while allowing the deduction, the ITO had not applied his mind at all to the question whether the bad debt under consideration was eligible at all for deduction. Inasmuch as the finding arrived at by the AAC was not seriously challenged by then assessee before the Tribunal, we are of the view that the Tribunal was quite justified in holding that the ITO had jurisdiction to reopen the assessment in the circumstances of this case. We, accordingly, answer question No. 1 in the affirmative and against the assessee.

6. The learned counsel for the assessee next contended that even assuming that question No. 1 is answered against the assessee, yet the view taken by the authorities below for the disallowance of the claim for bad debt written off made by the assessee is erroneous in law, especially when the tribunal had rested its conclusion mainly on the ground that the assessee who claimed the benefit of the allowance for bad debt was not the same as the assessee who had incurred the debt. Strong reliance, in this connection, was placed by the learned counsel for the assessee on the decisions in CIT v. Veerabhadra Rao, k. Koteeswara Rao and Co. : [1976]102ITR604(AP) , Addl. CIT v. S. Ram. Pl. Subramania Chettiar : [1979]119ITR925(Mad) , Shah (P) Ltd. v. Addl. CIT : [1979]120ITR354(All) , Krishnamurthy and Son v. CIT (Tax Case No. 658 of 1976, dated March 25, 1981) [since reported in : [1985]152ITR640(Mad) and Dharmalinga Mudaliar v. CIT (Tax Case No. 617 of 1977, dated January 17, 1983) [since reported in : [1985]152ITR588(Mad) .

7. On the other hand, the learned counsel for the Revenue maintained that if the allowance for the bad debt is to be made available in the hands of an assessee different from the one who had incurred it, it would be difficult to work out the provisions of s. 41(4) of the Act especially when it is found that a bad debt had been allowed in an earlier assessment in the hands of the assessee and it had been later recovered by a different or successor-assessee. Reliance, in this connection, was placed by the learned counsel for the Revenue on the decision in CIT v. Kaimal : [1980]123ITR755(Mad) .

8. There was no dispute before us that the assessee carried on the same business and was assessed to tax on the income referable to the realisation made by the assessee out of the debt of Rs. 27,393.75 taken over by it from the erstwhile firm. The Tribunal had mainly proceeded on the ground that owing to the take-over of the business assets and liabilities of the erstwhile partnership, M/s. Universal Radiators by the assessee-company, there was a change in the assessee and, therefore, the successor cannot claim the benefit of the write-off and allowance with reference to a bad debt incurred by the predecessor but taken over by the successor, namely, the assessee. Whatever might have been the position under the Indian I.T. Act, 1922, under the relevant provisions of s. 36 of the 1961 Act, this question had arisen in a series of decisions of this court as well as other courts and the view has been uniformly expressed that the successor can have the benefit of allowance for the write-off of a bad debt relating to the business of the predecessor which business was taken over by the successor.

9. We may make a brief reference to those cases. In CIT v. Veerabhadra Rao, Koteeswara Rao and Co. : [1976]102ITR604(AP) , the successor-firm after having taken over the assets and liabilities of the predecessor-firm continued the business and the question arose whether the successor-firm could write off a debt due to the presedessor-firm and claim deduction under s. 36(2)(i)(b) of the Act. The Andhra Pradesh High Court held that since the assessee had taken over the assets and liabilities of the predecessor-firm and since the successor-firm continued the business, and was even the assesseed to tax on the income accurued on the debt which was taken over, the assessee could write off the debt and claim deduction therefor. To similar effect is the decision of this court in Addl. CIT v. S. Rm. Pl. Subramania Chettiar : [1979]119ITR925(Mad) . In that case, one of the questions which came up for consideration was whether a debt due to a firm which was claimed to be a bad debt and written of but which was disallowed by the ITO could be the subject-matter of a claim for allowance by the successor-in-interest of the firm. It was held that the successor can claim the benefit of the write-off of the bad debt due to the predecessor and it was not necessary that the assessee who claims the deduction should have actually written off the debt after the business was taken over. In shah (P) Ltd. v. Addl. CIT : [1979]120ITR354(All) , the Allahabad High Court in dealing with the question whether the very same assessee alone will be entitled to the benefit of the write-off of the bad debt and the successor cannot also project such a claim, pointed out that the emphasis is not on the assessee being the original creditor but the taking into account of the debt in computing the income of the same business. In doing so, the court observed as follows (p. 357) :

'If in a given case, the income of a business is computed by taking into account certain debts, it does not appear reasonable that, in the absence of any statutory prohibition, allowance on account of the debt having become bad should be denied only because the assessee's identity has changed, though the identity of the business continues.'

10. We are of the view that the aforesaid observations squarely apply to the facts of the present case. Again in krishnamurthy and son v. CIT (Tax Case No. 658 of 1976, dated March 25, 1981), Balasubrahmanyan J., after exhaustively dealing with all aspects relating to the write-off of a bad debt and the claim for allowance based on such write-off, relied on CIT v. Veerabhadra Rao Koteeswara Rao & Co. : [1976]102ITR604(AP) and Shah (P) Ltd. v. Addl. CIT : [1979]120ITR354(All) to conclude that in cases where there is a continuity of the business in which the debt had originally been incurred irrespective of whether there has been a change in the person carrying on the business, a bad debt may have to be allowed in view of the provisions of s. 36(2)(i)(a) of the Act. This also supports the case of the assessee. Dharmalinga Mudaliar v. CIT (Tax Case No. 617 of 1977, dated January 17, 1983), since reported in : [1985]152ITR588(Mad) , also dealt with the construction of s. 36(2)(i)(a) of the Act and, on the facts, the court disallowed the claim for allowance of a bad debt not only as a matter of interpretation of s. 36(2)(i)(a) of the Act, but also on the ground that the debt was not incurred in the course of the business of the assessee. However, while doing so, the principles governing the allowance of a bad debt written off in accordance with s. 36(2)(i)(a) of the Act as laid down in the decision referred to earlier were reiterated. In view of these decisions and on the facts and circumstances of this case, we are of the view that the assessee can claim the benefit of the write-off a bad debt incurred by its predecessors-in-interest.

11. We may now refer to the decision of this court in CIT v. Kaimal : [1980]123ITR755(Mad) , relied upon by the Revenue. We are of the view that it did not decide the question of write-off and the allowance of bad debt in the hands of the successor-assessee of a business. In that case, a bad debt was written off, regarding which an allowance was also granted in a prior year of assessment but the debt was subsequently recovered. When the allowance was granted, the business was being carried on by a firm. That was subsequently dissolved. A new partnership came into existence which collected the debt written off earlier as a bad debt and in respect of which an allowance had already been granted. In this situation, s. 41(4) of the Act was sought to be applied for the purpose of bringing to charge the debt realised by the successor-firm. The question before this court was whether the officer was entitled to do so. Section 41(4) of the Act was considered by this court as a charging provision by itself, which can be applied only to the identical assessee in whose earlier assessment, the write-off and allowance had been made and granted. In so holding, the emphasis laid on behalf of the department that the charge can be laid on whomsoever was in a position to realise the bad debt, irrespective of whether the allowance for bad debt had been made in the same assessee's case or a different assessee, was repelled on the reasoning that it is the identity of the assessee who enjoyed the benefits of the allowance that has to be established for invoking this provision. This decision dealt with the nature of the liability sought to be fastened on a taxpayer by reason of recovery of debt written off and allowed as a bad debt in a prior year and cannot, therefore, be pressed into service. Under s. 41(4) of the Act, there is no scope for any enquiry with reference to the allowance of the bad debt having been properly made in the earlier assessment. The only consideration under s. 41(4) of the Act appears to be the recovery of a debt in the relevant previous year allowed in an earlier assessment as bad debt in the hands of the assessee. The provisions of the Act granting allowances and deductions are independent and operate in their own spheres, even though some of the provisions in the same Act operate by way of counter-balancing provisions. We find substantial support for this reasoning in Krishnamurthy and son v. CIT (Tax Case No. 658 of 1976, dated March 25, 1981 - since reported in : [1985]152ITR640(Mad) , with which we respectfully agree. We hold that the decision in CIT v. Kaimal : [1980]123ITR755(Mad) , cannot be pressed into service by the revenue to negative the claim of the assessee. We, therefore, answer the second question in the negative and in favour of the assessee. The assessee will be entitled to the costs of this reference. Counsel's fee Rs. 500.


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