1984 (9) TMI 75 - AT - Income Tax

Summary

Issues Involved:
1. Whether the Commissioner (Appeals) erred in holding that the writing off of bad debts of Rs. 28,077 was premature.

Issue-wise Detailed Analysis:

1. Whether the Commissioner (Appeals) erred in holding that the writing off of bad debts of Rs. 28,077 was premature:

Facts and Background:
The assessee had an outstanding balance of Rs. 49,920 from Dwarkaprasad Bhojnagarwala at the beginning of Samvat Year 2035 and made sales of Rs. 85,012 during the year. Payments were received, but three drafts totaling Rs. 19,659 were dishonored. The assessee, upon inquiry, learned that Dwarkaprasad Bhojnagarwala had ceased operations and was insolvent, leading to the write-off of the debt as bad. The Income Tax Officer (ITO) disagreed, stating that the debt could not be written off based on information from a third party without further inquiry. The Commissioner (Appeals) upheld the ITO's view, deeming the write-off premature.

Appellant's Argument:
The assessee argued that inquiries revealed Dwarkaprasad Bhojnagarwala had gone into insolvency, with no hope of recovery. The assessee had not recovered any further amounts and provided account copies to support the claim. The departmental representative countered that new credits were received from the same party and that the write-off was based on insufficient evidence.

Tribunal's Observations:
The Tribunal noted the opening balance of Rs. 49,920 and payments of Rs. 1,06,856 received during the year. The write-off was based solely on a letter from General Cloth Stores, without further inquiry into the debtor's partners or assets. Given the significant dealings and payments received, the Tribunal found no infirmity in the Commissioner (Appeals)'s order, deeming the write-off premature.

Separate Judgment by Accountant Member:
The Accountant Member disagreed, emphasizing that the assessee had taken reasonable steps to ascertain the debtor's financial position. The dishonored drafts and communications from Calcutta firms indicated insolvency, justifying the write-off. The Accountant Member cited the Gujarat High Court's principle that a businessman's decision to write off a debt is prima facie evidence of irrecoverability, unless rebutted by the department. As no collusion was alleged, the write-off was deemed valid.

Third Member's Opinion:
The Third Member reviewed the facts, noting the dishonored drafts and communications indicating insolvency. The Third Member agreed with the Accountant Member, stating that the assessee had taken reasonable steps and that it was not necessary to initiate legal steps or establish the debtor's whereabouts to claim a bad debt. The write-off was justified based on the evidence and the prudent business judgment of the assessee.

Conclusion:
The Third Member concluded that the bad debt of Rs. 28,077 was allowable, agreeing with the Accountant Member. The matter was referred back to the original Bench for proper disposal.