1985 (4) TMI 82 - AT - Income Tax

Summary

Issues:
1. Whether the debt of Rs. 1,27,500 had become bad and irrecoverable during the relevant year for deduction.
2. Whether the assessee's claim for bad debt should be allowed while computing total income.

Analysis:

Issue 1:
The appeal concerned the claim of the assessee for a bad debt deduction of Rs. 1,27,500 for the assessment year 1980-81. The assessee, a wholesale dealer in cloth and sarafi business, claimed the bad debt consisting of two amounts due from specific parties. The Income Tax Officer (ITO) rejected the claim, stating that the evidence provided by the assessee was insufficient to prove the debtors' inability to pay. The ITO also mentioned the lack of proof regarding the debtors' financial positions. However, the CIT (A) upheld the assessee's claim based on evidence showing legal actions against the debtors by other creditors, indicating their weak financial status. The Revenue appealed this decision.

Issue 2:
During the appeal, the Revenue argued that the debts were written off prematurely, citing legal precedents. The burden of proving the bad debt was on the assessee, and the evidence provided, such as a letter from Maskati Mahajan Association, was considered irrelevant as it related to a period after the accounting year. The assessee's representative countered by emphasizing the weak financial position of the debtors, supported by evidence of legal actions against them and certifications of their financial incapability. The representative also cited legal cases to support the claim that the debts had indeed become bad during the relevant year.

The Tribunal considered the principles laid down in Sarangpur Cotton Mfg. Co. Ltd. vs. CIT to determine the controversy. It was established that the debts were related to the assessee's business, had been considered in previous accounting years, and were written off as irrecoverable. The crucial point to determine was whether the debts had become bad in the relevant year. The Tribunal found that the evidence, including legal actions and certifications of financial incapability, supported the claim that the debts had indeed become bad during the relevant year. The Tribunal upheld the decision of the CIT (A) and dismissed the appeal, allowing the bad debt deduction.

In conclusion, the Tribunal ruled in favor of the assessee, upholding the bad debt deduction claim of Rs. 1,27,500 for the assessment year 1980-81.