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Issues Involved:
1. Whether the Tribunal was justified in law in deleting the disallowance of the bad debts for the assessment year 1986-87 in respect of two debts, amounting to Rs. 12,439 and Rs. 1,23,277. Summary: Issue: Justification of Tribunal's Deletion of Bad Debts The assessment year involved is 1986-87, with the previous year ending on October 30, 1985. The assessee wrote off sums of Rs. 12,439 and Rs. 1,23,277 payable by Sarada Press, Bhagalpur, and Amit Agencies, Allahabad, respectively, as bad debts and claimed deduction u/s 36(1)(vii) of the Income-tax Act, 1961. The Assessing Officer (AO) requested proof that these sums had become bad debts during the relevant previous year. The assessee provided correspondence with the debtors and argued that due to the smallness of the amounts, legal action was not pursued. The AO found that Sarada Press, Bhagalpur, had promised to start payments from April 1985 but made no payments until October 30, 1985. For Amit Agencies, Allahabad, the AO noted that the debtor had confirmed the balance and made some payments but had dishonored postdated cheques. The AO concluded that the debts had not become bad during the relevant previous year as no legal action was taken. Before the Commissioner of Income-tax (Appeals) [CIT(A)], the assessee argued that the amounts were comparatively small and legal action was not cost-effective. The CIT(A) accepted the assessee's submissions and held that the amounts were bad debts during the relevant previous year. The Tribunal upheld the CIT(A)'s decision, relying on the judgment in Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792, and concluded that the deletion of the bad debts was justified. Legal Interpretation: Section 36(1)(vii) of the Income-tax Act, 1961, requires the assessee to establish that a debt has become a bad debt, meaning worthless. It is not necessary to show failure to recover the debt despite legal action, but a bona fide assessment that realization is not possible is required. The Department cannot insist on demonstrative and infallible proof that the debt has become bad. Court's Analysis: The court noted that the judgment must be based on relevant facts and circumstances showing the debt is irrecoverable from the debtor's perspective, not the assessee's convenience. The Tribunal and CIT(A) erred by considering the feasibility of recovery from the assessee's angle rather than the debtor's. Conclusion: The court answered the question in the negative and in favor of the Department, stating that the evidence did not justify the conclusion that the debts had become bad. The Tribunal's deletion of the disallowance was not justified as there was no material to show that the debts had become irrecoverable or bad. Separate Judgment by Shyamal Kumar Sen J.: Shyamal Kumar Sen J. agreed with the finding but emphasized that it is not necessary to institute recovery proceedings to determine if a debt is bad. The key is whether there was any chance of recovery. In this case, there was no evidence to show that the debts were irrecoverable or that the debtor's liabilities exceeded their assets. The Tribunal's decision lacked justification as there was no material to conclude that the debts had become bad or irrecoverable.
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