Only actual Bad debts are allowed as deduction and not doubtful debts

Arvind Shukla, Adv. for the Applicant. Smt. Pinki Mahawar, D.R. for the Respondent.

ORDER

Sunil Kumar Yadav, Judicial Member – This Miscellaneous Application is preferred on behalf of the assessee against the order of the Tribunal dated 14.11.2014 seeking rectification in the order of the Tribunal on the ground that the Tribunal has not appreciated the claim raised by the assessee for bad and doubtful debts under section 36(1)(vii) of the Income-tax Act, 1961 (hereinafter called in short “the Act”).

2. It was further contended that the assessee-company has made a provision for bad and doubtful debts to arise sale of power@ 15% of the incremental basis and this policy has already been approved by the Board of Directors and as per provisions of section 36(1)(vii) of the Act, any bad debts are part thereof, which is written off as irrecoverable in the account of the assessee, should be allowed. It was further contended that as per guidelines of the Electricity Board to make provisions @ 15% of the doubtful debts due from the consumer and the said dues to be credited in the account code No. 79.460 under the head bad and doubtful debts provided for dues from consumer and debited in the account code No. 79.410 bad debts written off dues from consumer. Copies of the group code No. 79.460 and 79.410 were also filed before the Tribunal. The Tribunal has not considered the provisions of section 36(1)(vii) of the Act and mentioned in its order that the provisions for bad and doubtful debts cannot be allowed. He has also placed reliance upon the judgment of the Hon’ble Apex Court in the case ofCIT v. Abdullabhai Abdulkadar [1961] 41 ITR 545, in which it has been held that the business of trading debts should spring directly from carrying on of a business or trade and should be incidental to it and it cannot justify any loss sustained by the assessee even if it has some connection with his business. He further placed reliance upon other judgments of the Hon’ble Apex Court. It was further contended that there is an error apparent in the order of the Tribunal, which calls for rectification.

3. The ld. D.R. has strongly opposed the Miscellaneous Application with the submission that the Tribunal has carefully examined the issue in the light of assessee’s contentions. The Tribunal has consciously dealt with the issue in the light of the provisions of section 36(1)(vii) of the Act. The Tribunal has given a categorical finding that the provisions of section 36(1)(vii) of the Act cannot be invoked for allowing the provisions for bad and doubtful debts. Since the Tribunal has given a specific finding, the findings of the Tribunal cannot be reviewed under the garb of rectification.

4. Having carefully examined the order of the Tribunal vis-à-vis the Miscellaneous Application, we find that the issue before the Tribunal was whether the provisions for bad and doubtful debts can be allowed under section 36(1)(vii) of the Act on the basis of approval of the Board of Directors of the assessee-company. The Tribunal has examined this issue in para 9 of its order and has given a categorical finding that the assessee has claimed deduction for bad and doubtful debts under section 36(1)(vii) of the Act; whereas this section deals with only actual claim of deduction. Since the Tribunal has taken into account all the arguments of the assessee while adjudicating the issue, we find no error apparent in the order of the Tribunal. The Tribunal has given a categorical finding that the provisions for bad and doubtful debts cannot be claimed under section 36(1)(vii) of the Act, as it deals with actual claim of deduction. The Tribunal has also taken cognizance of the provisions of clause (vii)(a) of section 36(1) of the Act, which deals with the issue of claim of provision for bad and doubtful debts made by the Scheduled Bank, non-Scheduled Bank or Corporation Bank, etc. Therefore, it cannot be said that the Tribunal has not dealt with the issue in the light of assessee’s contentions. Since the Tribunal has taken a particular view in the light of assessee’s contentions, the findings of the Tribunal cannot be reviewed under the garb of rectification.

5. The scope of provisions of section 254(2) is very limited and only those errors which are apparent or arithmetical can only be rectified. The scope of provisions of section 254(2) of the Act has been repeatedly examined by the Hon’ble Apex Court and various High Courts and it was held that the Tribunal can rectify only those mistakes which are arithmetical or clerical or apparent in its order. The Tribunal has no jurisdiction to review its own order in the grab of rectification. It was also held that if the Tribunal commits an error of judgement, that error cannot be rectified under the provisions of section 254(2) of the Act as the Tribunal is not empowered by the statute to review its own order.

6. In the case of CIT v. Vardhman Spg. [1997] 226 ITR 296 their Lordships of the Punjab and Haryana High Court have held in specific terms that “the Appellate Tribunal is creation of statutes and it can exercise only those powers which have been conferred upon it. The only power conferred on the Tribunal u/s 254(2) of the IT. Act, 1961 is to rectify any mistake apparent from record. The jurisdiction to review or modify orders passed by the authorities under the Act cannot be interfered with on the basis of supposed inherent rights. U/s 254(1) of the Act, the Appellate Tribunal, after hearing the contesting parties, can pass such order as it deems fit. Sec. 254(2) of the Act specifically empowers the Appellate Tribunal at any time within four years of the date of an order to amend any order passed by it u/s 254(1) of the Act with a view to rectify any mistake apparent from record either suo moto or on an application made. What can be rectified under this section is a mistake which is apparent and patent. The mistake has to be such for which no elaborate reasons or inquiry is necessary. Where two opinions are possible, then it cannot be said to be an error apparent on the face of the record”.

7. In the case of CIT v. Suman Tea & Plywood Industries (P.) Ltd. [1997] 226 ITR 34 their Lordships of Calcutta High Court have expressed similar observations after holding that “under section 254(2) of the Income- tax Act, an order, which has been passed by the Tribunal reaches finality the moment the same is passed; cannot be touched thereafter. By section 254(2) of the Act, the Tribunal, however, has been authorized to rectify mistakes in its orders, which are apparent on the face of the records. The expression mistake apparent on the record’ means a mistake either clerical or grammatical or arithmetical or of like nature, which can be detected without there being any necessity to re-argue the matter or to re-appraise the fact as appearing from the records.” In another case CIT v. Gokul Chand Agarwal [1993] 202 ITR 14  their Lordships of Calcutta High Court have also held that section 254(2) of the Income-tax Act, 1961 empowers the Tribunal to amend its order passed u/s 254(1) to rectify any mistake apparent from the record either suo moto or on an application. If in its order there is no mistake which is patent and obvious on the basis of the record, the exercise of the jurisdiction by the Tribunal u/s 254(2) will be illegal and improper. An oversight of the fact cannot constitute an apparent mistake rectifiable under section 254(2). This might, at the worst, lead to perversity of the order for which the remedy available to the assessee is not under section 254(2) but a reference proceedings u/s 256. The normal rule is that the remedy by way of review is a creature of the statute and unless clothed with such power by the statute, no authority can exercise the power.

8. The Hon’ble High Court of Allahabad in the case of CIT v. ITAT [1997] 143 CTR 446 has held that “sub-section (1) of section 254 confers ample powers on the Tribunal to pass such orders in any appeal filed before it as it thinks fit. Sub-section (2) of section 254 postulates that the Tribunal may amend any order passed by it under sub-sec. (1) of section 254 with a view to rectifying any mistake apparent from the record. The power of the Tribunal conferred by sub-section (2) of section 254 for rectifying any mistake apparent from the record cannot be exercised by the Tribunal to recall any order passed by it under section 254(2). Further, reviewing and recalling an order is one thing and rectifying a mistake in the order which is apparent from the record is quite another. In the absence of any statutory provision for review by Tribunal, the order passed by the Tribunal cannot be recalled or reviewed under section 254(2) of the Act.” The provisions of section 254 were also examined by the Hon’ble High Court of M.P. in the case of Prakash Chand Mehta v. CIT [1996] 220 ITR 277 in which their Lordship have held that scope of section 254(2) of the Income-tax Act is very limited and it is only the apparent error which can be rectified.

9. Their Lordships of the Apex court in the case of T.S. Balaram, ITO v. Volkart Bros. [1971] 82 ITR 50 have held that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from record. Their Lordships have further held that if a statement of any person has been recorded without producing him in the witness box, the authorities should not act upon that statement without affording the assessee an opportunity to cross-examine the witness, but that is a matter not for rectification but it is a matter relating to the merits of the case as to whether the Tribunal has gone wrong in not considering the affidavit of a particular person and has acted upon the statement of the same person which was recorded by the ITO without being permitted to cross examine by the assessee. This is not a matter in which the apparent error is involved but it is a matter more of merit and cannot be rectified within the scope of rectification. The powers of the Tribunal while making a rectification were again examined by the Apex Court in the case of CIT v. Hero Cycles (P.) Ltd. [1997] 228 ITR 463 271 in which their Lordships have held that rectification can only be made when a glaring mistake of fact or law committed by the officer passing the order becomes apparent from record. Rectification is not possible if the question is debatable. Moreover, a point which was not examined on facts or in law cannot be dealt with as mistake apparent from record. In the case of ITO v. ITAT[1998] 229 ITR 651 their Lordships of Patna High Court have also expressed a similar observation after holding that section 254(2) of the Act empowers the Tribunal to amend any order passed by it under sub-section (1) with a view to rectifying a mistake from record. However, section 254(2) does not authorize the Tribunal to review its order or to sit in appeal over its earlier order. If it is done, it would amount to an amendment of an earlier order with a view to rectify a mistake apparent from record, but it would be an order passed on reappraisal of the material facts and circumstances and on a fresh application of the legal position which is not permissible within the scope of section 254(2) of the Act.

10. In the case of Ms. Deeksha Suri v. ITAT [1998] 232 ITR 395  their Lordships of Delhi High Court have held in specific terms that “the Income- tax Appellate Tribunal is a creature of the statute. It has not been vested with the review jurisdiction by the statute creating it. The Tribunal does not have any power to review its own judgements or orders. The grounds on which the courts may open or vacate their judgements are generally matters which render the judgement void or which are specified in the statutes authorizing such sections. The language of section 254(2) of the Income-tax Act, 1961 is clear. The foundation for the exercising the jurisdiction is “with a view to rectify any mistake apparent on the record” and the object is achieved by “amending any order passed by it”. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent on the record”.

11. Similar views have also been expressed by the Guwahati High Court in the case of CIT v. Prahlad Rai Todi [2001] 251 ITR 833 by holding that “A bare look at section 254(2) will show that this section gives the power to rectify any mistake apparent from the record and not to amend any order passed by it and to make such amendment if the mistake is brought to its notice by the Assessing Officer or the assessee. So, when we speak of amendment or rectifying the mistake the earlier order can never be recalled by the Tribunal. The earlier order must hold the field and the mistake can be rectified or amended can be made to the order. The Tribunal cannot, in law and facts, recall and destroy its final order as a whole with a view to rectify the same order under section 254(2) of the Act. The action of the Tribunal actually amounts to review of its earlier order and that power to review is not available to the Tribunal.”

12. We, therefore, find no merit in this Miscellaneous Application of the assessee, as no error apparent in the order of the Tribunal is pointed out. The ld. counsel for the assessee has tried to dispute the findings of the Tribunal and seeking a review of the order of the Tribunal which is not permissible under section 254(2) of the Act and we accordingly reject the Miscellaneous Application.

13. In the result, Miscellaneous Application of the assessee stands dismissed.