1988 (7) TMI 84 - AT - Income Tax

Issues Involved:
1. Depreciation on service line contribution received from consumers prior to April 1961.
2. Bank guarantee commission related to the I.D.B.I. Bills Discounting Scheme.
3. Allowance of bad debts amounting to Rs. 47,79,259.

Issue-wise Detailed Analysis:

1. Depreciation on Service Line Contribution:
The assessee claimed an allowance of Rs. 84,116 as depreciation on service line contribution received from consumers prior to April 1961. The CIT(A) rejected this claim. The Tribunal upheld the CIT(A)'s decision by referring to their previous order dated 21st July 1988 in the assessee's own case for the assessment year 1982-83 in ITA No. 3006/Ahd/1986. Consequently, this ground was rejected.

2. Bank Guarantee Commission:
The assessee claimed an allowance of Rs. 4,60,040 for the bank guarantee commission in connection with the I.D.B.I. Bills Discounting Scheme. The CIT(A) rejected this claim. The Tribunal upheld the CIT(A)'s decision, again referring to their prior order dated 21st July 1988 in the assessee's own case for the assessment year 1982-83 in ITA No. 3006/Ahd/1986. This ground was also rejected.

3. Allowance of Bad Debts:
The primary issue in this appeal was the allowance of bad debts amounting to Rs. 47,79,259. The assessee, a company engaged in the generation and supply of electricity, initially claimed bad debts totaling Rs. 49,34,842, which the ITO rejected on various grounds, including the age and amount of debts and the financial status of the debtors. The CIT(A) accepted the claim for small amounts aggregating Rs. 1,55,582 but rejected the balance claim of Rs. 47,79,259, noting that the debts related to four sick textile mills and one private company, and that no legal steps had been taken for recovery.

The Tribunal examined the facts and submissions. The assessee argued that:
- No such disallowance had been made in the past.
- All conditions for the claim were justified under s. 36(1)(vii) r/w sub-s. (2) of s. 36 of the Act.
- The belief in non-recovery was honest and bona fide, supported by subsequent events.
- The management wrote off the bad debts to reflect the correct state of affairs.
- Legal action was not initiated to avoid further financial loss.
- Most defaulters were "sick mills" taken over by the Gujarat Government, with no revival or recovery except for Monogram Mills Co. Ltd.
- Subsequent recoveries were offered for tax in the relevant year.

The Tribunal noted that the ITO's rejection was based on the assumption that the debtors had considerable assets and that liquidation proceedings were not finalized. The CIT(A) emphasized the lack of legal steps taken and noted the recovery from Monogram Mills Co. Ltd. in April 1986. However, the Tribunal found that the disconnection of power supply was a significant step showing the assessee's intention to recover dues. The Tribunal also noted that the debtors were declared sick units and taken over by the government, challenging the ITO's assumption about their assets.

Citing judgments from the Gujarat High Court and Bombay High Court, the Tribunal emphasized that a bona fide belief and honest judgment at the time of writing off were sufficient to justify the claim. The Tribunal concluded that the assessee's claim was justified, noting that subsequent recoveries were subjected to tax under s. 41(1) of the Act.

Conclusion:
The Tribunal allowed the assessee's claim for bad debts, directing the ITO to allow the necessary relief after revising the correct figures. The appeal was partly allowed.

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