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TMI Blog1996 (9) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... The Counsel further submitted before the Assessing Officer that though the approval of the RBI regarding the said loss was still to be received, but the same was cleared by the High Power Committee of the Ministry of Finance, Government of India, where they agreed to allow the loss. The assessee, therefore, submitted that the loss as claimed by the assessee should be allowed. The CIT(A) observed that the specific letter of the RBI with regard to the loss claimed by the appellant has not been received so far. The Government ofIndia, Ministry of Commerce have only admitted that the joint venture company inWest Germany, floated by the appellant, had undergone liquidation. The CIT(A), therefore, held that the loss claimed on this account cannot be allowed to the appellant since there is no positive evidence to show that the amount is irrecoverable. He further observed that only after getting the positive response from the RBI in this connection, the same should be considered in the year in which such letter is received. He accordingly confirmed the disallowance made by the Assessing Officer on account of bad debt amounting to Rs. 11,46,432. 4. Before us Dr. S. Narayanan, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplementary paper book. The RBI while according such approval had also forwarded a copy of the said letter dated 30-3-1993 of the Joint Controller of Imports and Exports for effecting necessary adjustments in the incentive entitlement earned/to be earned by the exporter (assessee) in relation to the export invoices in question aggregating to Rs. 11,46,432. The learned counsel submitted that the subsequent approval granted by the RBI further confirms the correctness of the decision taken by the assessee as a prudent trader, to write off the said debt as bad debt in the financial year 1985-86 relating to assessment year 1986-87. The German High Court had passed the judgment on21-3-1986which falls in assessment year 1986-87. The debt has thus been proved to be irrecoverable and bad in the year under consideration. 7. The learned counsel further submitted that the credit given to the bad debt reserve account with a corresponding debit to the Profit and Loss Account amounts to sufficient compliance of the conditions prescribed in section 36(2) of Income-tax Act, 1961, as it existed in the year under consideration. The credit was given to bad debt reserve account instead of crediting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e joint venture was also placed at page 9 of the paper book. Pursuant to the aforesaid permission granted by RBI, a joint venture company for trading and marketing inWest Germanyin collaboration with Dr. Satish Batra WestGermanywas formed. Therefore, the contention of the learned D.R. that loss in joint venture is not allowable is not correct. The bad debt has been written off in respect of irrecoverability of the amount of sale proceeds which were duly taken into account as income in the year of sale vide export invoices debited in the account of the said debtor with a corresponding credit to export sales. This was not the ground on which the disallowance was made by the Assessing Officer or was confirmed by the CIT(A). Therefore, such a contention of the learned Sr. D.R. has no merit. As regards the submissions made by the learned Sr. D.R. based on the provisions of FERA and Exchange Control Manual, the learned counsel submitted that the debt in fact had become bad and irrecoverable in the year under consideration because the German High Court had finally rendered a decision against the assessee on21-3-1986which falls in this year. The formality of obtaining approval from RBI can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that section 36(2) provides that in making any deduction for a bad debt or part thereof, one of the conditions prescribed in section 36(2)(i) is that no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year [Emphasis supplied]. The export sales made in financial year 1982-83 were taken into account in computing the income of the assessee for that relevant year. The total sale proceeds were credited as export sales in the trading profit and loss account. The profit on sale is a small fraction of the amount of sale. Out of such small fraction of the export turnover which represents profit on export sales, only part amount of such profits qualifies for deduction under section 80HHC. The claim for bad debt is in respect of the entire amount of bad debt in respect of non-realisable export sale proceeds. The grant of deduction under section 80HHC for assessment year 1983-84 did not require actual receipt of foreign exchange but assessee was entitled to grant of deduction under section 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich should be carried on by the assessee in the relevant year under consideration. (ii) The debt should have been taken into account in computing the income of the assessee of the accounting year or of an earlier accounting year. (iii) The amount of debt should have really become bad in the year under consideration; and (iv) The amount should have been written off as irrecoverable in the accounts of the assessee for the accounting year in which such a claim for deduction in respect of bad debt is made. 14.2 So far as condition No. (i) is concerned, the said condition clearly stands fulfilled because the debt was incurred in respect of the business carried on by the assessee and such a business continued to be carried on by the assessee in the year under consideration. Hence, condition No. (i) stands fulfilled in the present case. 14.3 The second condition is whether the debt in question was taken into account in computing the income of the assessee of the accounting year or of an earlier accounting year. In the present case, the debt represents unrealised export sale proceeds. The export sales, as and when those were made in the years 1982 and 1983 were duly accounted for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the entire income derived on such debt should have been charged to tax or should have formed part of taxable income of the assessee. There is no specific provision in the Income-tax Act which provides that if a debt in relation to export sales turns out, at a later point of time, to be irrecoverable, the deduction already granted under section 80HHC will be withdrawn and there is also no provision that in such a situation the amount of bad debt in full or in part will be disallowed because a small fraction of that debt has been allowed as deduction under section 80HHC in the year when such export sales were made. There is no doubt about the fact that the entire amount of debt in question was taken into account in computing the income of the assessee of the years when those export sales were made. Such export sales formed part of the income of the assessee both as per books of accounts and also for the purposes of computing the total income of the assessee. It may be imperative to make a useful reference to the provisions like section 155(4A) or 155(5) which provides that where an allowance by way of investment allowance or development rebate has been made, it will be deemed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher Regional Court of Germany vide their order dated21-3-1986. The judgment ofHigher Regional Courtdated21-3-1986was accepted by the assessee and no further appeal was made before the Supreme Court atGermanyas the assessee had to incur substantial money on litigation inGermanyand the assessee was not able to remit foreign exchange for advocate fee and other charges. The assessee, therefore, had no ray of hope of any recovery of the said amount after the order of Higher Regional Court of Germany which was delivered on21-3-1986. The decision to write off the said amount in assessment year 1986-87 was based on such an honest and careful consideration by the assessee of the entire facts and circumstances which clearly establish that nothing can be recovered out of the said amount. The debt, according to the learned counsel clearly became bad and irrecoverable in the year under consideration. As regards the provisions relating to FERA and Exchange Control Manual, the learned counsel submitted that the assessee or their authorised agent, namely, the New Bank of India in the present case, could approach the RBI only after all efforts have been made by the exporter to realise the dues an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de before Supreme Court at Germany, as the assessee did not consider it wise to throw good money for recovering bad money particularly in view of the fact that the assessee had lost its case up to the High Court of Germany and the debtor joint venture company was left with no assets and had already become defunct company by that time on account of losses. All these facts were submitted on behalf of the assessee before the learned authorities below. Those have been submitted in the written submissions dated4th October, 1989submitted before the CIT(A), a copy whereof has been placed at pages 1 to 8 of the paper book. These facts have not been controverted by the Assessing Officer or by the CIT(A) in their respective orders nor by the learned DR. before us during the course of hearing. 14.9 A perusal of the copy of account of the said debtors M/s Pearl Agency, GMVH, West Germany submitted at pages 59 to 62 of the paper book shows that a sum of Rs. 11,46,432 remained as an outstanding balance against that concern as on 31-3-1983. This represents the unpaid amount of the various export invoices debited in this account in the financial year 1982-83. There was also an opening balance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim is being made. The question whether a debt has become bad or not must be decided from the point of view of possibility of the realisation of the debt. The assessee should be honestly convinced that there is no hope of any recovery of the debt in question. What is required is an honest judgment on the part of the assessee at the time when he makes the write off in the light of the events up to that stage when the amount was written off. In the present case, the Higher Regional Court of Germany rendered a decision against the assessee on21-3-1986. That judgment achieved finality as no further appeal was preferred before the Supreme Court of Germany after a very careful consideration of the entire relevant facts and circumstances made by the assessee in that regard. The decision of the assessee to write it off as a bad debt after the order of the Higher Regional Court of Germany was delivered, was a bona fide decision and the action of the assessee to write it off as a bad debt by no stretch of imagination can be treated as premature or erroneous in any manner. The assessee has brought adequate material on records to prove that the debt had become bad and irrecoverable in the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possibility of recovery of the undrawn balance, frequency of similar cases considered in the past and the antecedents of the overseas buyer, if available, before allowing the closure. (vi) The cost of reporting to legal action would be disproportionate to the unrealised amount of the export bill or where the exporter even after winning the Court case against the overseas buyer could not execute the Court decree due to reasons beyond his control and sufficient documentary evidence is produced to fully satisfy the authorised dealer. (e) The case is not the subject matter of any civil or criminal suit which is pending. (f) The exporter has not come to the adverse notice of the Enforcement Directorate or the Central Bureau of Investigation or such other law enforcement agency. (g) The exporter has surrendered proportionate export incentives, if any, availed in respect of the relative shipments." The aforesaid clauses of the Manual on Export of Goods clearly shows that the approval can be obtained only after the exporter has not be enable to realise the outstanding export dues despite his best efforts. The exporter has to produce satisfactory documentary evidence to prove tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, as to whether amount can be said to have been written off as irrecoverable in the accounts of the assessee for the accounting year relevant to assessment year 1986-87. The amount in question was debited in the Profit and Loss account with a corresponding credit to bad debt reserve account. It has been held by various courts that it is not essential that the debtor's individual account should be squared off by an appropriate credit entry. Even if the credit is made in a bad debt reserve account against debit to the Profit and Loss account indicating that the entry refers to the amounts due by the particular debtor or debtors, the writing off would be complete in accordance with the relevant provisions of Income-tax Act, 1961. Such a view is clearly fortified by the judgments in Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95/6 Taxman 105 (Guj.), CIT v. Jwala Prasad Tiwari [1953] 24 ITR 537 (Bom.) and Sarangpur Cotton Mfg. Co. Ltd.'s case. We have already discussed hereinbefore that the provisions of FERA Act and Exchange Control Manual does not in any manner affect such valid writing off of the debt as bad debts in accordance with the provisions of Income-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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