1996 (11) TMI 46 - HC - Income Tax

Summary

Issues:
The judgment addresses the following two questions referred by the Income-tax Appellate Tribunal, Ahmedabad Bench "A":
1. Whether the Tribunal was correct in holding that an amount of Rs. 73,582 was not a bad and doubtful debt?
2. Whether the Tribunal's finding that the claim of bad and doubtful debt was premature in the assessment year 1973-74 and the debt became bad in the assessment year 1977-78 was perverse and not supported by evidence?

Details:
The assessee, a dealer in cotton, supplied cotton worth Rs. 73,582 to a company in Bombay, which later faced financial difficulties and was taken over by the Central Government. The assessee claimed this amount as a bad debt in the assessment year 1973-74. The Income-tax Officer disallowed the claim, stating that it was not known if the Government had paid any amount to the assessee, hence the debt was not irrecoverable.

The Appellate Assistant Commissioner found that the conditions of section 36(1)(vii) were fulfilled as the chances of recovery were almost nil, and directed to allow the deduction. The Tribunal initially held that the debt became bad only in the accounting year 1977-78, not in 1973-74, based on a letter received by the assessee in 1976 indicating no chance of recovery. A review application was made to correct factual errors in the Tribunal's order.

The Tribunal's corrections clarified that the debt became bad after the company was taken over by the Central Government in 1971 and under the Sick Textile Undertakings Act in 1974. The Tribunal's conclusion was based on the letter received in 1976, indicating no recovery chances. The judgment emphasized that the Department cannot insist on infallible proof of bad debt, and the assessee acted in good faith in writing off the debt.

The judgment highlighted that the assessee's action of claiming the deduction in 1973-74 was justified due to the circumstances, and there was no rational basis to consider the debt bad only after the 1976 letter. Therefore, the Tribunal's decision was deemed incorrect, and the assessee was entitled to the deduction under section 36(1)(vii) for the relevant year.

In conclusion, the first question was answered in favor of the assessee, stating that the amount was indeed a bad debt. The second question was also answered in favor of the assessee, indicating that the claim was not premature and the debt became bad in 1973-74. The reference was disposed of with no costs.