Nathu Ram, A.M. - (1.) THE present appeal has been preferred by the Revenue against the order of the CIT(A) for the asst. yr. 1987-88. THE first ground taken up by the Revenue is against allowing the claim of bad debt of Rs. 9,18,750.
(2.) The relevant facts are that Rajasthan Export House, Bombay entered into a contract with a Mauritius based party Salt & Allied Industries Ltd. On 10th August, 1985, for supply of 5,000 MT of salt at the rate of 40 Dollar per MT. Consequently Rajasthan Export House (REH) entered into a contract with the assessee firm on 25 November, 1985 for purchase and supply of 5,000 MT of salt at the rate of 15 Dollar per MT for the purpose of export to Mauritius. The shipment of the salt was effected by the assessee firm on or around 4th January, 1986, as per the terms of the contract. The LC opened in favour of REH could not be negotiated for want of bill of lading. The REH, therefore, could not make any payment to the assessee and the same being irrecoverable the assessee wrote off the said amount as a bad debt and claimed the same as such in the current year. 2.1 The AO having considered the facts and explanation offered has observed that the said contract with REH was not signed by anyone on behalf of REH. Further, the contract of REH with Salt & Allied Industries Ltd. (SAI Ltd.) was not assigned by anyone on behalf of the Mauritius party. The AO has further noted that ship carrying the cargo was at Mangalore port on 25th June, 1986 and caveat was filed by the captain of the ship in the local Court. Though the local Court had not been negotiated and time had expired no action was taken for arresting the ship either by the assessee or REH. The assessee also took no legal action against REH for recovery of the amount. According to the AO considering the above facts and various papers filed a doubt is raised also the genuineness of the transaction. 2.2 The entries on account of the all alleged sale of salt to REH was passed on the last day of the accounting year and accordingly REH was debited on the last day and local sale account was credited on the last day. The AO further noted that the salt exported was packed in 66,667 gani bags. The assessee had not shown any consumption of gani bags for the salt sold. The AO has further noted that there were two concerned SAI Ltd. of which Mr. Serwaz was chairman and SAI Ltd. in which Mr. Serwaz was a partner. Copies of document furnished showed that the salt was despatched as per M. V. Golden Eagle ship but it is not clear whether the despatch was to the company or the firm. 2.3 The AO also noted that the assessee firm is one of the concerns of a bigger group engaged in manufacturing and trading of salt. The AO further noted that on number of occasions a common shipment took place for various concerns of the group and quantity and expenses were apportioned. He also noted that Western India Salt Mfg. Association (WISMA) had as its members related concern of the assessee-firm and one of their partners Shri R. P. Patel was president and employee Shri Contractor was secretary of association. Salt was a canalised export item. WISMA undertook export negotiation with State Trading Corpn. (STC) and it allotted export quota to its members. 2.4 The AO has further pointed out that the assessee-firm failed to produce any evidence to prove the genuineness of the sale and the sale transaction resulted into not only a debt but a bad debt. Accordingly the AO rejected the claim of bad debt placing reliance on the decision of the Hon'ble Madras High Court in the case of TSPLP Chidambaram Chettiar vs. CIT (1967) 63 ITR 181 (Mad), wherein it was held whether a debt is bad is a factual matter and which depends on actual facts relevant thereto and not on the hopes, fears or judgment of the creditor himself. 2.5 As regards the alternate claim of the assessee for allowing the same as a business loss the AO observed that the alleged sale was by pure and simple volition of the assessee. He further referred to the observation made in the case of Allen V. Farqutharsan Bros. & Co. (1932) 17 Tax Cases 59 to the effect that a loss is something different and that is not a thing which he expends or disburses that is a thing which comes upon him ab extra. According to the AO the trading loss has to fall on the assessee without his knowledge or against his will. In this view of the matter the alleged unrecovered sale proceeds were not treated as a trading loss and accordingly alternative claim made was also rejected. On appeal, the first appellate authority treated the transaction of sale of 5,000 MT salt to REH and its shipment to Mauritius party through ship Golden Eagle as genuine in para 4 of his order reproduced hereunder : "I have carefully considered the submissions both oral and written. I have gone through the copies of all the documents, letters etc. which were filed by the appellant before the CIT during the course of assessment proceedings especially the following : (i) Papers relating to the transaction between the appellant and Rajasthan Export House. (ii) Correspondence between WISMA and the Dy. Superintendent of Salt, Salt Test Laboratory, Adipur requesting issue of export worthiness certificate. (iii) Export worthiness certificate issued by the said authority. (iv) Correspondence between WISMA and the State Trading Corpn. of India Ltd. (v) Notice of readiness of the vessel Golden Eagle issued by Velji P. & Sons (Agencies) to the appellant. (vi) Correspondence between WISMA and the State Trading Corpn. of India Ltd. to endorse the letters of credit. (vii) Correspondence between the State Trading Corpn. of India Ltd. and Bank of Baroda, Bombay. (viii) Correspondence between the appellant and the Bank of Baroda, Bombay. (ix) Correspondence between the WISMA and the State Trading Corpn. of India Ltd. informing that the matter was referred to Mulla & Mulla. (x) Correspondence between the appellant and Rajasthan Export House requiring payment. (xi) Copies of notice issued by the appellant's Advocate to Rajasthan Export House. (xii) Copy of B Bench's letter dt. 19th September, 1986, addressed to Rajasthan Export House. (xiii) Copy of letter dt. 9th October, 1986, addressed by Mulla & Mulla to Rajasthan Export House. The above documents established that the transaction involving sale of 5,000 MT of salt was not only between the appellant and Rajasthan Export House but so many other authorities and parties were involved namely State Trading Corpn. of India Ltd. WISMA, Salt Test Laboratory, Adipur, Bank of Baroda, Bombay, Velji P & Sons (Agencies), Shri Murari R. Sharma, appellant's advocate, Mulla & Mulla, etc. In view of the voluminous documentary evidence available on record I fail to understand as to how even a suspicion could be cast on the genuineness of the transaction which resulted in debts of Rs. 9,18,750 to the appellant. In the assessment order the Asstt. CIT has stated that 'looking at the invoices for this alleged shipment it is seen that alleged salt is shown to have been packed in 66,667 gunny bags'. According to the Asstt. CIT answer No. 3 of the appellant's submission dt. 20th October, 1989, did not reflect consumption of those gunny bags. Shri Choksi has pointed out that in the statement filed in response to answer No. 3 the figure of 66,667 gunny bags remained to be typed out. He pointed out that the total No. 3,81,313 in that statement included the figure of 66,667 gunny bags but it remained to be typed out inadvertently. In other words, his submission was that without the figure of 66,667 the total would not have been 3,81,313 but would have been less by 66,667 gunny bags. I have myself verified the said statement and find that what Shri Choksi says is correct. I am satisfied that there was absolutely no justification for the Asstt. CIT to cast any suspicion on the genuineness of the transaction and his observations that the transaction was not genuine beyond typing out some papers were uncalled for". Further the learned CIT(A) considered the allowability of the bad debt claim of the assessee in paras 5 and 6 of his order and having regard to the facts and submissions made on behalf of the assessee he allowed the bad debt claim with the following observations : "I have carefully considered the submissions both oral and written. I agree that the entire trend of the judiciary relating to admissibility of bad debt has changed so as to say that bad debt shall be allowed in the year itself in which it is written off as irrecoverable by the assessee. Not only that legislature has also amended the relevant law relating to admissibility of the bad debt. CBDT Circular No. 551 dt. 23rd January, 1990 explaining provisions of the Direct Tax Laws (Amendment) Act, 1987, has taken note of the unnecessary litigation on the question of allowability of bad debt in a particular year. It is true that the said CBDT circular would be applicable to a subsequent assessment year but would not mean that the objects to achieve the same in subsequent assessment year cannot be considered in the asst. yr. 1987-88, under appeal. On facts also the debt had become irrecoverable. The appellant had given legal notices to Rajasthan Export House but with no process. Even the cheque issued by Rajasthan Export House bounced. I am, therefore, of the view that it would be in the interest of justice considering the CBDT circular No. 551 and the fact, that the impugned amount is allowed as bad debt in the accounting period relevant to asst. yr. 1987-88, under appeal. I put a specific query to Shri Choksi as to whether any amount had been recovered by the time of hearing of appeal and he informed that not a single paise was recovered. Considering the entirety of facts, therefore, I direct the Asstt. CIT to allow the impugned amount of bad debt". The CIT(A) considered the alternative claim of the assessee for treating the said amount as a business loss in para 7 of his order and for the reasons discussed therein the said claim was not accepted. The Revenue has challenged the aforesaid finding of the CIT(A) of accepting the bad debt claim before us.
(3.) THE learned Departmental Representative heavily relied upon the order of the AO and narrating the facts submitted that the sale of salt and its shipment to Mauritius has not been established and proved by any positive evidence and as such there was no question of allowing any bad debt on that account. THE first appellate authority has allowed the claim without appreciating the facts and material available on records and accordingly the finding given by the first appellate authority deserves to be vacated.;