1996 (9) TMI 180 - AT - Income Tax

Assessing Officer, Assessment Year, Bad Debt, Export Business, Financial Year, Foreign Company, In Part, Income Tax Act, Sale Proceeds

Issues Involved:
1. Whether the debt claimed by the assessee as bad debt was genuinely irrecoverable in the financial year 1985-86.
2. Whether the write-off of the bad debt without prior approval from the Reserve Bank of India (RBI) was valid under the Foreign Exchange Regulation Act (FERA) and Exchange Control Manual.
3. Whether the conditions prescribed under section 36(2) of the Income-tax Act, 1961, were fulfilled for claiming the bad debt deduction.
4. Whether the deduction under section 80HHC affected the assessee's claim for the bad debt deduction.

Issue-wise Detailed Analysis:

1. Whether the debt claimed by the assessee as bad debt was genuinely irrecoverable in the financial year 1985-86:
The assessee claimed a bad debt of Rs. 11,46,432, which was disallowed by the Assessing Officer due to lack of evidence proving the debt became irrecoverable during the financial year. The CIT(A) upheld this disallowance, noting that the RBI approval for the write-off was still pending. The Tribunal, however, considered the evidence provided by the assessee, including the German High Court's decision dated 21-3-1986, which confirmed the debt's irrecoverability. The Tribunal concluded that the debt genuinely became irrecoverable in the financial year 1985-86, as the legal battle had ended unfavorably for the assessee, and no further recovery was possible.

2. Whether the write-off of the bad debt without prior approval from the Reserve Bank of India (RBI) was valid under the Foreign Exchange Regulation Act (FERA) and Exchange Control Manual:
The Tribunal examined the requirements under FERA and the Exchange Control Manual, which necessitate obtaining RBI approval for writing off unrealized export bills. The approval from RBI, granted on 30-3-1993, was considered a subsequent event confirming the debt's irrecoverability. The Tribunal noted that the approval process involves proving the genuineness of the loss, which the assessee had successfully done. The Tribunal concluded that the prior approval from RBI was not a precondition for writing off the debt as bad under the Income-tax Act, 1961, and the subsequent approval supported the assessee's claim.

3. Whether the conditions prescribed under section 36(2) of the Income-tax Act, 1961, were fulfilled for claiming the bad debt deduction:
The Tribunal analyzed the conditions under section 36(2), which include:
- The debt should be related to the business carried on by the assessee.
- The debt should have been taken into account in computing the income of the assessee in the relevant or earlier years.
- The debt should have become bad in the year under consideration.
- The debt should be written off as irrecoverable in the accounts of the assessee for the relevant accounting year.

The Tribunal found that all these conditions were met. The debt was related to the assessee's business, taken into account in earlier years' income, became bad in the year under consideration as evidenced by the German High Court's decision, and was written off in the profit and loss account with a corresponding credit to the bad debt reserve account.

4. Whether the deduction under section 80HHC affected the assessee's claim for the bad debt deduction:
The Tribunal considered whether the deduction under section 80HHC, claimed in the year of export, affected the bad debt deduction. It noted that section 36(2) does not require the entire income derived from the debt to be taxable. The Tribunal concluded that the deduction under section 80HHC did not impact the assessee's claim for the bad debt deduction, as the debt was taken into account in computing the income when the export sales were made.

Conclusion:
The Tribunal allowed the assessee's appeal, concluding that the bad debt of Rs. 11,46,432 was genuinely irrecoverable in the financial year 1985-86, the write-off without prior RBI approval was valid under the Income-tax Act, 1961, all conditions under section 36(2) were fulfilled, and the deduction under section 80HHC did not affect the bad debt deduction claim.

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