1977 (5) TMI 25 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 35,208 claimed by the assessee as bad debt.
2. Whether the amount should be allowed as a trading loss.
3. Compliance with Section 36(2)(1)(a) of the IT Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 35,208 claimed by the assessee as bad debt:

The assessee firm, engaged in the manufacture and export of cycle parts, claimed a sum of Rs. 52,674 as bad debt for the assessment year 1972-73. The Income Tax Officer (ITO) found that Rs. 17,466 had already been realized, leaving a balance of Rs. 35,208. The ITO disallowed the claim on the grounds that the assessee dispatched the goods against the instructions of the State Trading Corporation, the claim to the insurance company was time-barred due to negligence, and no legal steps were taken for enforcement of the claim. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, stating that the property in the goods did not pass to the foreign parties, hence they were not debtors of the assessee, and no bad debt could arise.

2. Whether the amount should be allowed as a trading loss:

The assessee argued that if the amount was not allowed as a bad debt, it should be allowed as a trading loss. The AAC rejected this plea, stating that the loss did not fall during the relevant accounting period for the assessment year 1972-73. The Tribunal, however, noted that the transactions were treated as trading transactions in the past, and the profit from these transactions had already been assessed to tax in the assessment year 1971-72. The Tribunal concluded that the conditions laid down under Section 36(2)(1)(a) of the IT Act, 1961, were satisfied, and the amount should be allowed as a bad debt.

3. Compliance with Section 36(2)(1)(a) of the IT Act, 1961:

The Tribunal observed that the assessee had included the sales covered by the disputed shipments in the total export sales for the assessment year 1971-72, and the profit from these transactions had been accounted for and assessed to tax. The outstanding sale proceeds were shown in the balance sheet under "bills under collection." The Tribunal found that the assessee made all possible efforts to realize the outstanding amount but could not recover it. Filing suits for recovery in foreign countries would have entailed substantial expenditure without much hope of recovery. Therefore, the Tribunal agreed that the assessee, as a prudent businessman, had no alternative but to write off the amount as a bad debt. The Tribunal relied on the decision of the Madras High Court in the case of C.T. Narayanan Chettiar vs. CIT Madras, which stated that once the Department accepted the transactions as genuine, it would be unfair to refuse the benefit of allowance of bad debt on non-realization of the outstanding sale proceeds.

Conclusion:

The Tribunal held that the conditions laid down under Section 36(2)(i) of the IT Act, 1961, were fully satisfied, and the assessee's claim of bad debt in respect of the two items totaling Rs. 29,916 was legitimately allowable as a bad debt. The Tribunal disagreed with the AAC's reasoning that the property in goods did not pass to the foreign parties, as the Department had treated these items as genuine trading transactions in the earlier year. Since the amount was allowed as a bad debt, the Tribunal did not consider it necessary to address the alternative plea of allowing it as a trading loss. The appeal was partly allowed.