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Issues:
- Whether the sum of Rs. 60,851 can be allowed as a bad and irrecoverable debt for the assessment year 1981-82. Analysis: 1. The appeal revolved around the question of whether the sum of Rs. 60,851 claimed as a bad debt by the assessee for the assessment year 1981-82 should be allowed. The debtor, Shri K. P. Appala Naidu, owed the assessee a total of Rs. 81,153. Despite the debtor being adjudged insolvent in 1983, the assessee had written off 3/4th of the total amount and claimed Rs. 60,851 as bad debt. The Income Tax Officer (ITO) rejected the claim, citing that the insolvency proceedings had not been completed, and the assets of the debtor had not been realized by the official receiver. The ITO relied on the decision of the Madhya Pradesh High Court in a similar case. 2. The assessee filed an appeal against the decision, emphasizing the precarious financial position of the debtor and the priority sales tax liability, which would leave very little for other creditors. The CIT(A) rejected the appeal, citing precedents from the Madhya Pradesh High Court and Punjab High Court, stating that a debt should not be considered bad until the receiver completes the process. The assessee then appealed to the Appellate Tribunal. 3. The Appellate Tribunal considered various legal precedents, including the decision of the Privy Council, which stated that it is not necessary for a company to be wound up or for the final dividend to be declared to claim a bad debt. The Tribunal also referred to judgments from different High Courts, emphasizing the need for an honest judgment by the assessee based on the circumstances. The Tribunal noted that the assessee had estimated the irrecoverable portion of the debt based on the debtor's financial position and the inspector's assessment of the debtor's assets. 4. The Tribunal observed that the provision of s. 36 allows for the deduction of bad debts established in the previous year, even if not written off in that year. It noted that the purpose of the provision is to allow for bad debt deduction based on the honest belief of the assessee regarding the irrecoverability of the debt. The Tribunal upheld the claim of the assessee for the deduction of Rs. 60,851 as a bad debt, directing the ITO to modify the assessment accordingly. 5. The Tribunal differentiated the case at hand from the precedent cited by the lower authorities, highlighting the evidence provided by the assessee to establish the bad debt. It emphasized the need for an honest judgment by the assessee regarding the recovery of the debt based on the circumstances. The Tribunal concluded that the claim for bad debt deduction was valid in this case, considering the facts and legal provisions. 6. Ultimately, the appeal of the assessee was allowed by the Appellate Tribunal, directing the ITO to allow the deduction of Rs. 60,851 as a bad debt for the assessment year 1981-82.
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