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TMI Blog1988 (11) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... t involve any additional facts, we admit the said ground. 2. Now let us take up the main ground of disallowance of bad debts of Rs. 1, 10,875. The break up of the disallowed bad debts of Rs. 1, 10,875 is stated to be as follows in the impugned order : (i) Grown Chemists, Bombay Rs. 27,548 (ii) Sri G.R.K. Shastry Rs. 34,620 (iii) Due from various private parties Rs. 33,557 (iv) Due from various Government Organisations Rs. 15,150 --------------------- Total Rs. 1,10,875. --------------------- 3. The assessee is a private limited company incorporated on 21-4-1972. It manufactures pharmaceutical medicines such as intravenous fluids, injections and veterinary products. For assessment year 1980-81, the assessee-company returned a loss of Rs. 44,090 in its income-tax return dated 27-3-1981. The ITO seeks to make an addition of more Rs. 1,00,000 and therefore, he passed a draft assessment order dated 23-3-83 proposing to assess the assessee company of a total income of Rs. 1,68,500. Copy of the draft assessment order was furnished at pp. 55 to 59 of the paper book filed. The following observations and findings are given by the I.T.O. in the draft assessment orders relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubtful debts to the tune of Rs. 1,39,130.68 and the bad debts were written off by way of transfer from the Debtors Accounts to the provision account. When a provision to the extent of Rs. 17,433.94 is required for the year under consideration a like amount was debited to the profit and loss account. You will appreciate that when the provision was created in the earlier years for bad and doubtful debts there was a debit to the profit and loss account, in that year when the provision is created. When the debts were written off, it is sufficient if they are transferred to the provision account. This is one of the accepted methods of accounting. It is not correct to hold that the claim is made at the time of the filing of the return. The write off of all debts is very much on the face of the Balance Sheet in the Schedule-G. 3. You have also pointed out that the claim for deduction of all debts written off is not applicable because (1) all the debts are claimed to have been written off are more than 4 years old and that the debts become bad in the 4th year no recovery or action for recovery had taken place within 3 years, (2) that the parties from whom the debts are due are financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of Rs. 28,256 from the sum of Rs. 1,38,131, which was originally proposed by the I.T.O. to be disallowed towards bad debts. Thus the amount disallowed towards bad debts, was reduced to Rs. 1, 10,875. The break up of this amount disallowed towards bad debts was already furnished above. In appeal the learned CIT(A) in her impugned orders confirmed the disallowance. 6. As regards the debt of Rs. 27,548 due from Crown Chemists, Bombay, it was stated by the learned CIT(A) that this amount was collected, in cash from Ws. Crown Chemists, Bombay by the assessee's representative one Sri K.V. Ramana on 12-4-1972 itself. But he failed to remit it in the accounts of the assessee-company. The assessee-company filed a police complaint in Balanagar Police Station. However, neither Sri K.V. Ramana was traced nor any amount was realised from him till date. The CIT(A) further held that as three years have passed from 12-4-1972 which is the date of misappropriation by the representative of the assessee-company, the debt became time barred. As the assessee company allowed the date to become time barred, the CIT(A) confirmed the disallowance of bad debt of Rs. 27,548. 7. One Sri J.R.K. Sastri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative that the embezzled amounts cannot be taken to be bad debts but should be considered as business loss. However, as no clear evidence regarding the dates of complaints made against them was available from records and admittedly no legal action also is taken against them by the assessee-company with a view to recover back the embezzled amounts the disallowance of the learned CIT(A) should be confirmed. On the other hand Sri B. Satyanarayana Murthy, learned counsel for the assessee-company argued that the ledger account of Sri J.R.K Sastri was provided at p. 27 of paper book and it can be seen therefrom that the last transaction was dated 20-6-1978, the observation of the learned CIT(A) that the debt became time barred even by 31-3-1980 which is the end of the previous year for assessment year 1980-81 is wrong. The learned D.R. then contended that when the transactions with Sri J.R.K. Sastri continued up to 27-6-78 that debt due from him did not become bad during assessment year 1980-81. Sri B. Satyanarayana Murthy explained that as can be seen from the entries in the ledger account of Sri J.R.K. Sastri on page 27 of the paper book the two entries made subsequent to 31-3-78 we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to have resulted. He argued that the assessee waited for a reasonable time after preferring a police complaint against its employees and after it came to know that nothing can be realised from out of them and pursuit of civil litigation for realising embezzlement amounts from them proved to be quite unnecessary and may likely to result in further loss the assessee-company is quite reasonable in claiming the embezzled amount as bad debt in the accounting year 1979-80. 8. Firstly we have to hold that the finding of the CIT(A) that the debt due from Sri J.R.K. Sastri became time barred is incorrect and secondly even assuming that the embezzled amount should be claimed as trading or business loss, the assessee is reasonable to claim the same in the accounting year 1979-80 relevant to assessment year 1980-81, following the ratio of the Hon'ble Supreme Court decision cited above. 9. As regards items 3 and 4 of the break up figures furnished in the above table are concerned, it was argued that the only ground on which the learned CIT disallowed the same was that the last date of transaction with each of the parties was not specified and it was not proved that the said debt was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though in book-keeping, an entry is made about a ' hypothetical income ', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the book of account." In Addl. CIT v. U.P. State Agro Industrial Corpn. [1982] 133 ITR 597 (All.) it is held as per the head note as follows : " Though under the mercantile system of accounting all items of credits are brought into credit immediately they become legally due and before they are actually received, and all expenditure is debited for which a legal liability has been incurred before it is actually disbursed, yet before a credit or debit entry can legitimately be made in the accounts, it must be shown that a certain enforceable liability had accrued or arisen. Such liability must be one that has been ascertained and capable of being enforced by the person in whose favour the deb ..... X X X X Extracts X X X X X X X X Extracts X X X X
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