Deduction u/s 36(1)(vii). - Income Tax - 370/CBDT

INSTRUCTION NO. 370/CBDT Dated: January 21, 1972 Section(s) Referred: 36(1)(vii) Statute: Income - Tax Act, 1961 During the last few years the condition of some of the Textiles Mills has been far from satisfactory and the management of several such 'Sick' mills has been taken over by the State Textile Corporations set up in the various States. The Board had occasion to examine the question of allowance of bad debts in the hands of assessees who had sold stocks, raw materials, milling stores to such sick mills. Section 36(1)(vii) of the Income-tax Act; 1961 authorises deduction of any debt which is established to have become a bad debt in the previous year. When the management of a sick mill has been taken over by State Textile Corporation, generally the assessee who had sold any goods to such textile mill is not allowed to file a suit in the court of law. Section 8 of the Cotton Textile Cos (Management of Undertakings and Liquidation or Reconstruction) Act, 1967 provided that in the case of textile Co. which has been taken over owing to its unsound position, no suit or other legal proceeding shall be instituted or continued against the textile Company except with the previous permission of the Central Government or any officer or authority authorised by that Government in this behalf. Further under Section 4(1) (iv) of the Bombay Relief Undertaking (special provisions) Act, 1958 any right, privilege, obligation or liability accrued or incurred before the undertaking was declared a relief undertaking and any remedy for the enforcement thereof shall be suspended and all proceedings relating thereto pending before any court or tribunal shall be stayed. 2. There are similar provisions relating to undertakings taken over by the State Textile Corporation. It cannot be stated that any debts owed by such sick mills become bad when they are taken over by such State Textile Corporations, But they can be considered to be 'Doubtful' and may have to be considered eligible for allowance under section 36(1)(vii). There is no express provision in Section 36(1)(vii) of the I.T. Act, 1961 for the allowance of a doubtful debt as was the provision in Section 10(2)(xi) of the I.T. Act, 1922. The Law Commission had replaced the words 'bad and doubtful debts' occurring in Section 10(2)(xi) of the I.T.Act, 1922 by the words 'debts or parts thereto that are established to have become bad debts' as the Commission was of the view that the word 'doubtful' was unnecessary and did not add any thing to what was conveyed by a word 'bad'. It is, therefore, obvious that there was no intention to reduce the scope of the earlier provisions contained in Section 10(2)(xi) of the I.T. Act, 1922 it is considered that the provision in Section 36(1)(vii) also covers doubtful debts. 3. Hence where a claim under Section 36(1)(vii) is made by the suppliers of stores etc. to sick mills that have been taken over by Government or a public sector undertaking the Income-tax Officer should examine the claim sympathetically and try to arrive at a decision after taking into account the financial position of the mill, the chance of recovery and all other relevant circumstances. 4. The above instructions may please be brought to the notice of all the officers working in the charge.