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TMI Blog1982 (6) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ures came to Rs. 1,50,000. The above contract came to be cancelled or terminated and the firm gave three cheques of Rs. 50,000 each to the assessee-company for the repayment of the balance of the premium received by it in March, 1965. All the three cheques were dishonoured and it appears that after the cheques were dishonoured, no payment was received by the assessee-company from the firm towards the dishonoured cheques or the balance of the premium which the firm was required to pay back to the assessee-company. The assessee-company, therefore, filed a suit being Summary Suit No. 532 of 1966 in the Bombay High Court for the recovery of Rs. 1,50,000, the amount due under the dishonoured cheques and interest. It appears that there was a compromise between the assessee-company and the firm and a consent decree was passed in the suit. Under the consent terms, the assessee-company had agreed not to execute the decree for period of one year. The firm, however, failed to pay the decretal amount after the expiry of the period of one year and, therefore, the assessee-company took out Chamber Summons on July 13, 1968 seeking permission of the court to execute the decree. The decree, however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision made against doubtful debts and advances were debited to the profit and loss account for the year 1970. In the course of the assessment for the assessment year 1971-72, the assessee-company claimed deduction of Rs. 2,37,537 as bad debt. While furnishing details of the above claim, the assessee-company by its letter dated March 5, 1974, addressed to the ITO stated that the claim for bad debt was made as it could not recover any amount till the end of the calendar year 1970. It was further stated : " even after several years, we do not find any chance of recovery ". In other words, according to the assessee-company, it was not able to recover anything from the firm up to the date of the letter, that is, March 5, 1974. The ITO, while framing the assessment, rejected this claim holding that the assessee-company had failed to prove that the debt had become bad and that it was not recoverable. The ITO was of the opinion that the claim made by the assessee-company was premature. In the appeal preferred by the assessee-company, the AAC confirmed the view taken by the ITO (i) holding that the debt did not relate to the previous year relevant to the assessment year under reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctible in the previous year in which the ultimate recovery is made ; (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year, but the Income-tax Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year ; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year and the Income-tax Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply. " Four conditions govern the grant of deduction under cl. (vii) of s. 36(1), namely: (i) the debt or loan should be in respect of a business which is carried on by the assessee in the relevant accounting year ; (ii) the debt should have been taken into account in computing the income of the assessee for the accounting year or for an earlier accounting year or should represent money lent in the ordinary c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company had written off the debt in question. The question now raised by the learned counsel was not raised before the lower authorities. The fact that the assessee-company had written off the debt in question was never questioned before the lower authorities. It is, therefore, not open to the learned counsel for the Revenue to agitate this point for the first time in this reference. But, apart from that, the assessee-company has produced sufficient material to link up the aforesaid amount of Rs. 2,35,000 credited to the Doubtful or Bad Debt Reserve Account and debited to the profit and loss account with the debt in question. As discussed above, there was a credit balance of Rs. 33,028 in the Bad Debt Reserve Account at the end of the calendar year 1969, and it was, therefore, that the board of directors decided to credit Rs. 2,35,000 to this account to bring the total credit balance to Rs. 2,65,028. The debt of Rs. 2,37,537 due from the firm, that is, the debt in question and another bad debt of Rs. 23,381 were adjusted against the total credit balance of Rs. 2,68,028 in the Bad Debts Reserve Account. As a result of this adjustment, credit balance of Rs. 7,110 was lef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the debt had become irrecoverable in the previous year, was correct and, in any case, it was a possible view which cannot be interfered with by this court in exercise of its reference jurisdiction under s. 256 of the Act. There are a number of decisions having a bearing on the question raised before us. We, however, do not consider it necessary to refer to them, since in Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792, the Bombay High Court while dealing with a similar question has discussed these decisions and succinctly culled out the principles which govern the determination of the question. The Bombay High Court has summarised these principles as follows at p. 811 of the report: " It is clear that a debt cannot be written off as bad and irrecoverable if on the material available it could be shown that there was a possibility of recovering the same or which is not yet taken into liquidation, will not by itself establish such a possibility. That the assessee wrote off the debt at a particular point of time or in a particular year is not conclusive of the matter, but is not wholly or totally irrelevant. This will be material circumstance unless it can be sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... get relief because the specific cases of deduction dealt with under s. 10 did not cover its case. According to the Division Bench, this was a trading loss which had to be deducted before arriving at the true profits of a business from a commercial point of view and the assessee would be entitled to deduct that loss although such a loss may not fall within the ambit of any of the deductions mentioned in sub-s. (2) of s. 10. The Bench was then required to consider the question as to when the amount of loss could be allowed to the assessee. It was observed that the material date was not the date on which the embezzlement took place but the date on which the loss is caused. According to the Bench, it is only when it is clear that the money cannot be recovered that the loss is caused. It is in this context of irrecoverability of the amount embezzled that the Division Bench went on to observe as follows (p. 708): When a businessman writes off an amount, there is prima facie evidence that that amount is irrecoverable. Undoubtedly, the Department can rebut the prima facie inference by drawing attention to circumstances or by leading some evidence to suggest that the position taken up by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm in 1965 and paid Rs. 1,68,000 by way of premium for the purchase of the right to import the staple fibres of non-viscose origin. The contract was subsequently cancelled and to repay the balance amount of the premium, the firm gave three cheques of Rs. 50,000 each to the assesseecompany. A It the three cheques were dishonoured and, therefore, the assessee had to file Summary Suit No. 532 of 1966 in the Bombay High Court to recover Rs. 1,50,000 due under the dishonoured cheques and interest. As pointed out above, a consent decree was passed in the suit and the firm was given one year's time to pay up the decretal amount. The firm did not, however, pay the decretal amount even after the expiry of the period of one year. The assessee-company was, therefore, constrained to take out Chamber Summons seeking permission of the court to execute the decree. No amount was, however, recovered till the end of 1970. It was under these circumstances that the company took the decision that the amount was irrecoverable. Mere passing of a decree in favour of the assessee-company does not necessarily indicate that there was possibility of recovering the debt. Subsequent events clearly show that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be released for a very long time and over and above the financial difficulties, the said M/s. Madhusudan Gordhandas Co. and its associates were further involved into numerous civil as well as criminal litigations...... all the activities of the said Madhusudan Gordhandas Co. and their associates including of the defendants, came to a virtual standstill and their affairs including in respect of their several important matters were in a mess. It was a squeeze on the said firms from all sides and the seizure of the records added further to the confusion that prevailed and to their immense difficulties ........ If in the background of the above facts, the assessee-company came to the conclusion that the amounts due from the firm were not recoverable and wrote off the amounts in its books, in our opinion, the assessee was justified in doing so. The Tribunal has completely ignored the above circumstances which are clearly brought out on record and harped on only one thing that no event had taken place in the year of account justifying a writing-off of the amount due from the firm ." No event happened " is, in our opinion, a strong circumstance to justify writing off the amount. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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