S. 271(1)(c): Despite conceding “bad debts”, assessee can raise new plea of “trading loss”

CIT vs. Sumangal Overseas Ltd (Delhi High Court)

The assessee gave advances to its suppliers of which Rs. 2.05 crores was written off as “bad debts”. The AO disallowed the claim on the ground that as the advances had never been treated as income, the conditions of s. 36(1)(vii) & 36(2) were not satisfied. The assessee accepted the disallowance. Penalty u/s 271(1)(c) was levied by relying on Escort Finance 328 ITR 44 (Del) on the ground that in the case of a corporate assessee whose accounts were duly audited by qualified Chartered Accounts, the claim of bona fide mistake is untenable. However, the Tribunal deleted the penalty on the ground that the write off, though not admissible as “bad debts” was allowable as a “trading loss”. On appeal by the department, HELD dismissing the appeal:

In penalty proceedings, it has to be seen whether the claim was bona fide or it was bogus and result of falsehood. On facts, there was no dispute on the genuineness of the advances. A trading loss has a wider connotation than a bad debt. While a bad debt may also be a trading loss, a trading loss need not necessarily be a bad debt. A bad debt may not fall within the purview of s. 36(1)(vii) but may well be regarded as being eligible for deduction as being a “trading loss”. Accordingly, the claim was neither mala fide nor false but was bona fide and made after disclosure of facts CIT vs. Reliance Petroproducts 322 ITR 158 (SC) followed).