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Issues Involved:
1. Whether the Tribunal was correct in holding that the bad debts were not written off as required by Section 36 of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Whether the Tribunal was correct in holding that the bad debts were not written off as required by Section 36 of the Income-tax Act, 1961. Facts: The assessee-firm, engaged in the manufacture of tins and ghamelas, claimed bad debt allowances for the assessment years 1967-68 and 1969-70. For the year 1967-68, Rs. 54,145 was due from Mansukhlal Nathulal, who became insolvent. The assessee wrote off this amount by debiting it to the profit and loss account and crediting it to the bad debt reserve account without making any entry in the debtor's account. For the year 1969-70, Rs. 10,807 was due from Tapu Karsan and was similarly written off. The ITO disallowed these claims, stating that the debts were not written off in the debtor's accounts, while the AAC allowed the claims, finding the debts genuinely bad. Tribunal's Findings: The Tribunal identified four conditions for allowing a bad debt under Section 36: 1. The debt should be related to the business carried on by the assessee in the relevant accounting year. 2. The debt must have been taken into account in computing the income of the assessee or should represent money lent in the ordinary course of business. 3. The debt must be established to have become bad in the accounting year. 4. The debt must be written off as irrecoverable in the accounts of the assessee for that accounting year. The Tribunal found that the first three conditions were met but held against the assessee on the fourth condition, stating that merely transferring the amount to the bad debt reserve account was insufficient for writing off the debt as irrecoverable. Legal Arguments: The assessee contended that the Tribunal erred in its interpretation of Section 36(2)(i)(b) and that the entries made in the account books were sufficient to show the debts as irrecoverable. The revenue argued that the Tribunal was correct in its view that the accounts of the concerned debtors were not squared off, and thus the debts were not written off as irrecoverable. Court's Analysis: The court examined the statutory provisions of Section 36(1)(vii) and Section 36(2)(i)(b) of the Income-tax Act, 1961, and compared them with the corresponding provisions in the Indian I.T. Act, 1922. The court noted that while the scheme of the two Acts differed, the language regarding the writing off of debts as irrecoverable was similar. The court highlighted that the assessee's method of accounting, which involved debiting the profit and loss account and crediting the bad debt reserve account, was sufficient to demonstrate that the debts were written off as irrecoverable. The court referred to various dictionary definitions and accounting practices to support this view. Precedents: The court relied on the decision in CIT v. Jwala Prasad Tiwari [1953] 24 ITR 537, where the Bombay High Court held that debiting the profit and loss account and crediting a suspense account was sufficient for writing off a debt as irrecoverable. The court also referred to the Supreme Court decision in Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1, which held that the absence of entries in the books of account did not preclude the ITO from estimating the debts as irrecoverable. Conclusion: The court concluded that the assessee had complied with the requirements of Section 36(2)(i)(b) by making the necessary entries in the profit and loss account and the bad debt reserve account. Therefore, the Tribunal's decision was incorrect. Judgment: The question referred to the court was answered in the negative, in favor of the assessee and against the revenue. The Commissioner was ordered to pay the costs of the assessee.
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