J.S. Khehar, J.

1. Through this reference, the following substantial question of law has been posed for our determination:

Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the claim of the bad debt to the extent of Rs. 1,30,242 was to be allowed as a deduction in the assessment of the assessee.

2. So as to determine the question posed, it would be necessary to delineate the factual background giving rise to the issue.

3. Upto the asst. yr. 1973-74, certain business was carried out by M/s Lal Woollen & Silk Mills as a firm. M/s Lal Woollen & Silk Mills had several branches including M/s Lal Worsted Spinning Mills, M/s Lal Oil & Chemical Mills and M/s H.M. Mehra & Co. The business of M/s Lal Woollen & Silk Mills was taken over by two companies. The respondent assessee was one of the companies, which had taken over the business of M/s Lal Woollen & Silk Mills. The respondent assessee was incorporated on 16th Feb., 1972. It commenced its business on 1st July, 1972.

It is not a matter of dispute that a sum of Rs. 1,30,242 was recoverable by M/s Lal Woollen & Silk Mills. The aforesaid asset of M/s Lal Woollen & Silk Mills is claimed to have fallen to the share of the respondent assessee. This emerges from certain observations made in the order dt. 30th Jan., 1982 passed by the Tribunal, Amritsar Bench, Amritsar. In this behalf, reference may be made to the findings recorded in para 13 thereof. For the asst. yr. 1976-77, after having partly acquired the assets and liabilities of M/s Lal Woollen & Silk Mills, the respondent assessee declared the debts recoverable at the hands of M/s Lal Woollen & Silk Mills amounting to Rs. 1,30,242 as irrecoverable. The same were, therefore, written off as a bad debt during the aforesaid asst. yr. 1976-77 (i.e., previous year 1975-76). The AO accepted the claim of the respondent assessee and allowed deduction of the written off debt vide order dt. 17th Sept., 1979.

4. The respondent assessee preferred an appeal before the CIT(A), Amritsar, against the order of the AO. During the course of appellate proceedings, the issue whether the respondent assessee could claim a deduction on the basis of the bad debt written off was re-examined. The CIT(A), Amritsar, while determining the instant issue, set aside the order passed by the AO. The CIT(A), Amritsar, arrived at the conclusion that the respondent assessee was not entitled to any such deduction. This determination was rendered by the CIT(A), Amritsar, under the mandate of Section 36 of the IT Act, 1961.

5. The respondent assessee preferred an appeal on the aforesaid determination rendered at the hands of the first appellate authority. The Tribunal, Amritsar Bench, Amritsar, accepted the appeal preferred by the respondent assessee. While doing so, the Tribunal relied on the decision rendered by the Andhra Pradesh High Court in CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. : [1976]102ITR604(AP) . In this behalf, the findings recorded by the Tribunal in paras 12 and 13 of its order dt. 30th Jan., 1982, were pointedly brought to our notice during the course of arguments, the same are being extracted hereunder:

12. The learned Counsel for the assessee has submitted that the whole question has been considered by the Andhra Pradesh High Court in the case of CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. : [1976]102ITR604(AP) and by the Allahabad High Court in the case of T.N. Shah (P) Ltd. v. Addl. CIT : [1979]120ITR354(All) and there was no decision of any High Court regarding Section 36 of the IT Act, which might have taken a view different from the above. It was, therefore, contended that the learned CIT(A) has erred in differing from the above High Court decisions and enhancing the assessees income.

13. We have considered the facts of the case and the arguments advanced from both the sides. There is no difference on the facts and it is an admitted position that the enhancement made by the CIT(A) relates to those debts, which had been contracted during the existence of the erstwhile firm which was predecessor in business to the assessee company. The question for consideration is only whether in view of the language of Section 36(2) a debt, which is standing as the debt of the business taken over by the assessee and paid for at the time of the take over of the business as a whole becomes bad in the relevant year can it be allowed as a deduction or it has to be disallowed on the ground that it had not been taken into account in the computation of this particular assessee though it might have been taken in account in the computation of income of this particular business. The whole matter turns on the interpretation of the provisions of Section 36(2) and it cannot be denied that the interpretation placed by the CIT(A) is possible. However, the question of interpretation of the provisions of Section 36(2) had come up for consideration before the Andhra Pradesh High Court in the case of T. Veerabhadra Rao (supra) and after considering the background of the provisions and its language the Court had held that the deduction available under Section 36(2)(i)(b) was not only available to the assessee but it is also available to the succeeding assessee and the person claiming the deduction need not be the same assessee. The Court had further 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 assessed to tax on the income accrued on the debt which was taken over the assessee could write off the debts and claim deduction thereof. In this connection, it was held by their Lordships that the present Act does not make any departure from the law in this respect as was found by the decisions of several High Courts. Their Lordships had also considered the comments of authors Sampath and lyengar and had held that it was not in accordance with the provisions of law. Their Lordships also referred to the position regarding the banking business and held that there should be no difference between this business and the other business in this regard.

6. During the course of hearing, learned Counsel for the respondent assessee also invited our attention to the fact that the decision rendered by the Andhra Pradesh High Court (referred to in the foregoing paras) had been affirmed by the Supreme Court in CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. : [1985]155ITR152(SC) . It is, therefore, the contention of learned Counsel for the respondent assessee that a seal of approval has been affixed by the Supreme Court on the determination rendered by the Andhra Pradesh High Court.

7. We have given our thoughtful consideration to the question posed.

8. According to learned Counsel for the applicant Revenue, the answer to the aforesaid question has to evolve from Section 36 of the IT Act, 1961, which envisages the deduction under reference. In this behalf, our pointed attention was invited to Section 36(1)(vii) as well as Section 36(2)(i) of the IT Act, 1961 (hereinafter referred to as the 1961 Act). The aforesaid two provisions relied upon are being extracted hereunder for facility of reference:

36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28:

...

(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:

Provided that in the case of an assessee to which Clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof, exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

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 provision for bad and doubtful debts made in the accounts of the assessee;

(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply:

(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.

9. Undoubtedly, the deduction under reference relates to a written off debt, which had become irrecoverable and had been shown as such by the assessee. The deduction envisaged under Section 36(1)(vii) of the 1961 Act is, however, subject to the provisions of Sub-section (2) of Section 36. Consequently, primarily, the issue under reference calls for an interpretation of Clause (i) of Section 36(2) of the 1961 Act. It is apparent from the plain reading of the aforesaid provision that an assessee is entitled to a deduction equivalent to the amount of a written off debt, under Section 36(1)(vii) of the 1961 Act. The question of applicability of Section 36(1)(vii) of the 1961 Act will, however, arise if the respondent assessee can establish the fulfilment of the ingredients of Section 36(2) of the 1961 Act. A plain reading of Clause (i) of Section 36(2) of the 1961 Act prima facie shows the following essential ingredients thereof:

Firstly, the assessee ought to have depicted the debt under reference as his income during the previous year (during which the deduction is sought) or any other earlier previous year (prior to the year during which the deduction is sought).

Secondly, the assessee ought to have shown the debt as irrecoverable or as a bad debt, and ought to have written off the same during the previous year.

Thirdly, the deduction for such a debt which has been written off, can be claimed in the previous year during which the assessee has written off the debt.

10. It is the vehement contention of learned Counsel for the applicant Revenue that the debt of Rs. 1,30,242 allegedly recoverable by M/s Lal Woollen & Silk Mills, which allegedly fell to the share of the respondent assessee, had never been depicted as the income of the respondent assessee in the accounts of the respondent assessee, either in the previous year during which it was sought to be written off, or in any other previous year prior thereto. It is, therefore, the vehement contention of learned Counsel for the applicant Revenue that one of the essential conditions of deduction having not been met by the respondent assessee, the deduction claimed by the respondent assessee cannot be granted. Insofar as the aforesaid factual position is concerned, the same emerges from the notice issued to the respondent assessee under Section 251(2) of the 1961 Act for enhancement, which reads as under:

While discussing the subject regarding write off of bad debts to the tune of Rs. 89,332, it was found that these debts pertained to the old firm whose business was taken over by the limited company styled Lal Woollen & Silk Mills (P) Ltd. during the accounting period relevant to the asst. yr. 1974-75. It appears that the AO the then ITO, District I(i) allowed a deduction of bad debts totalling Rs. 2,35,226 relating to a Government Department i.e., the Director General Supplies and Disposal and rejected your claim with regard to the further sum of Rs. 89,332. In my opinion the deduction of Rs. 2,35,226 was erroneously allowed by the AO as a bad debt because one of the essential conditions for allowing such a deduction is that the amount should have been taken into account in computing the income of the assessee for that previous year or an earlier previous year or should represent money lent in the ordinary course of business of banking or money-lending carried on by the assessee. In the present case, the sum of Rs. 2,35,226 was not taken into account in computing the income of the assessee namely the limited company. whose assessment is under appeal and could, therefore, not have been allowed a deduction. Consequently I propose to enhance the assessed income by Rs. 2,35,226.

You are requested to please file your objections within fifteen days of the receipt of this letter which may be treated as an opportunity notice under Section 251(2).

It is apparent that there was a clear depiction in the notice, which was issued to the respondent assessee, showing that the respondent assessee had never indicated the debt under reference, as its income. The instant factual position also emerges from the order passed by the Tribunal (which has been extracted hereinabove).

11. It is, however, the submission of learned Counsel for the respondent assessee, based on the factual position depicted in para 11 of the order of the Tribunal dt. 30th Jan., 1982, that a sum of Rs. 1,30,242 had already been shown as the income of the respondent assessee. It is the submission of the respondent assessee that the income under reference was shown as the income of M/s Lal Woollen & Silk Mills. And the respondent assessee having purchased the aforesaid interest the same should be treated as the income of the respondent assessee.

12. It is not possible for us to accept the submission of the learned Counsel for the respondent assessee. In fact, the factual position is to the contrary. Nothing has been brought to our notice which could lead to the conclusion that the respondent assessee had shown the debt under reference as its income. In fact no material has been brought to our notice on the basis whereof even such an inference could have been made. In the judgment rendered by the Andhra Pradesh High Court (referred to above), the Tribunal noticed that "the Court had further 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 assessed to tax on the income accrued on the debt which was taken over the assessee could write off the debts and claim deduction thereof." It is, therefore, apparent that in the case relied upon (rendered by the Andhra Pradesh High Court) the assessee under reference had expressly shown the debt due as its income. The payment of tax on the interest payable on the debt by the said assessee also lead to the clear inference that the assessee was reflecting the debt as its income.

13. Insofar as the present case is concerned, there is no material whatsoever on the record of this case to depict that the respondent assessee reflected the debt under reference as its income. It is also not possible for us to accept that the debt income allegedly shown by M/s Lal Woollen & Silk Mills should be treated as the income of the respondent assessee. The respondent assessee is a private limited company and as such, an entity separate and distinct from the erstwhile M/s Lal Woollen & Silk Mills. It is just not acceptable in law to treat the income of M/s Lal Woollen & Silk Mills as the income of the respondent assessee unless it is expressly shown to be so. Even otherwise the respondent assessee did not acquire the entire assets and liabilities of M/s Lal Woollen & Silk Mills. The assets and liabilities of M/s Lal Woollen & Silk Mills were admittedly taken over by two companies. It is not even clear whether or not the debt under reference, in respect whereof the respondent assessee is claiming a deduction, came to the share of the respondent assessee. It is possible to infer that it did not fall in the share of the respondent assessee. Had that been so, it would certainly have been reflected in the income of the respondent assessee. There is also no material whatsoever on the record of this case, on the basis whereof an inference can be drawn that the respondent assessee was treating the aforesaid debt as its income. It is, therefore, apparent that the controversy determined by the Andhra Pradesh High Court (as well as the apex Court) in the judgment referred to hereinabove is clearly distinguishable from the facts and circumstances of the present case.

14. Since we have concluded hereinabove on an analysis of Clause (i) of Section 36(2) of the 1961 Act that all 3 essential ingredients thereof must be fulfilled before an assessee can claim a deduction. And since, we are satisfied that in the present case, the respondent assessee did not fulfill one of the aforestated mandatory conditions, namely, the debt in question was never reflected in the accounts of respondent assessee as its income, the respondent assessee would not be entitled to a deduction on the basis of its having written off the debt under reference.

15. For the reasons recorded hereinabove, the reference made to this Court (as has been noticed in the opening para of this order) is answered in favour of the applicant Revenue and against the respondent assessee.

Disposed of accordingly.