OBTAINING A DECREE TO RECOVER DEBT DOES NOT MEAN THAT DEBT WAS NOT BAD

[Mr. M. GOVINDARAJAN]

Sec.36 of the Income Tax Act, 1961 deals with other deductions allowable. Bad debts is allowed as deduction. Sec. 36(1) (vii) provides that subject to the provisions of sub-section of Sec. 36 the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. Any bad debt or part thereof written off is irrecoverable in the accounts of the assessee shall, not include any provisions for bad and doubtful debts made in the accounts of the assessee.

The issue taken for discussion in this article is whether an assessee is required to show that serious efforts were made for recovery of debts before considered the debt as bad debt and irrecoverable with reference to the decided case law in 'Commissioner of Income Tax V. Punjab Tractors Ltd.,' - 2009 -TMI - 34587 - (PUNJAB AND HARYANA HIGH COURT).          

In this case the assessee claimed bad debt in respect of payments for supply of tractors to M/s Aneja Traders. The goods had been supplied in June, 1982. The cheques issued by the purchaser had been dishonored in December 1982. The assessee filed a suit against the purchaser and obtained an ex-parte decree. The debtor's appeal against the decree was dismissed by the District Judge. The Assessing Officer did not allow the deduction on the ground that the assessee did not show that any serious efforts were made for the recovery. The Commissioner of Income tax (Appeals) upheld the view of the Assessing Officer.

The assessee filed an appeal before the Tribunal. Before the Tribunal the assessee submitted that the amount in question was allowable as a business loss under Section 28(1) of the Act. The assessee's books of account are not only subject to statutory audit but also are under the control of the Comptroller and Auditor General of India and a such write off must be treated to be based on the honest judgment. The Tribunal held that they are of the opinion that the assessee is the best judge to decide as to when a particular debt has to be treated as bad and irrecoverable. The assessee waited for some more time to write off the debt as bad and irrecoverable. The ex-parte decree was a paper decree because nothing in fact was received by the assessee till date. Therefore the assessee was justified in writing off the amount as bad and irrecoverable in the year under consideration and that write off was based on an honest judgment and conviction of the assessee.

Aggrieved against the order of the Tribunal the Revenue has referred the following question of law for the opinion of the High Court:

"Whether, on the facts and in the circumstances of the case, the Income tax Appellate Tribunal was right in law in deleting the addition of Rs. 2,62,326 made by the Assessing Officer on account of bad debts written off because no efforts for recovery were made at all and the Court decree was obtained in the year 1988 ?"

The Revenue submitted the following before the Court:

* The Tribunal was not justified in holding that the opinion of the assessee was genuine for declaring the amount as bad debt;

* Even thought after April 1, 1989, there is an amendment to Section 36(1)(vii), for the period prior thereto, the assessee was required to show that there was justification for writing off the bad debt;

* The claim for bad debt can be permitted only if it was established that the debt became bad debt in the previous year concerned.

The assessee submitted the following before the Court:

* The assessee has genuinely thought that the debt was not recoverable and the same could be claimed as bad debt for the period prior to April 1, 1989;

* Alternatively the amount could be claimed to be business loss in the year in question;

* The Tribunal, for valid reasons held that the opinion of the assessee was genuine and in such circumstances the Tribunal was justified in deleting the additions on that account;

* A prudent business man had to act on the basis of the material before him and if there is no basis for recovering the amount, he could certainly write off the debt as bad debt as held by the Bombay High Court in 'Jethabhai Hirji and Jethabhai Ramdas V. Commissioner of Income Tax' - (1979) 120 ITR 792 = 2008 -TMI - 37348 - BOMBAY High Court, and in 'Jhunjhunwala Company V. Assist Commissioner of Income Tax' - 2008 -TMI - 12159 - BOMBAY High Court;

The Court is of the view that it is not the case of the Revenue that the debt was ever recovered or had ever become recoverable. Before the Tribunal the contention of the Revenue was that the amount may be treated as bad debt in subsequent year. While the debt has to be allowed as bad debt in the year in which the same became bad debt, it will depend on the facts of each case as to the year in which the same became bade debt, depending upon the judgment of the assessee unless such judgment was not genuine. The Court further held that in the present case the judgment of the assessee that the amount became bad debt in the year relevant for the assessment, i.e., 1984-85 itself, could not be reject. The mere fact that the assessee continued efforts by obtaining decree which could not be executed in subsequent year is not enough to reject the opinion of the asessee that the amount had already become bad debt. The assessee had valid reasons for its judgment that the amount was not recoverable, as held by the Tribunal. In view of the above the Court answered against the Revenue.