Bad debt deduction and section 43B relief depend on bona fide write-off and timely payment under the retrospective proviso.

A bad debt deduction is available when the assessee has made an actual write-off and, on an objective commercial assessment, recovery is no longer reasonably likely; the record showing the debtor mills had become sick, lost electricity supply, and vested in the State supported the bona fide write-off. The resulting deduction was therefore allowed. For electricity duty, the section 43B disallowance could not stand where the retrospective first proviso granted relief if the duty was paid within the prescribed time; the deletion of the addition was upheld. The reference was thus answered in favour of the assessee on both issues.

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Issues: (i) Whether the assessee was entitled to deduction of the amounts written off as bad debts for the assessment years 1983-84 and 1984-85; (ii) Whether the addition made in respect of electricity duty under section 43B of the Income-tax Act, 1961 was justified for the assessment year 1984-85.

Issue (i): Whether the assessee was entitled to deduction of the amounts written off as bad debts for the assessment years 1983-84 and 1984-85.

Analysis: The allowance of a bad debt requires that the debt must have become bad and must also be actually written off in the assessee's accounts. The test is objective and turns on whether a reasonable and prudent business person would conclude that there was no reasonable likelihood of recovery. The material showed that the debtor mills had become sick, their electricity supply had been disconnected, they did not seek restoration, and their undertakings had vested in the State Government free from encumbrances under the nationalisation statute. In those circumstances, the assessee's bona fide commercial decision that further recovery action would be futile was supported by the record, and the possibility of subsequent recovery did not negate the write-off.

Conclusion: The assessee was entitled to the deduction of the bad debts. The finding was in favour of the assessee and against the Revenue.

Issue (ii): Whether the addition made in respect of electricity duty under section 43B of the Income-tax Act, 1961 was justified for the assessment year 1984-85.

Analysis: The electricity duty provisions showed that the licensee was obliged to collect and pay duty, subject to the statutory proviso where recovery of energy charges was not possible. The Tribunal's view that the amount did not belong to the assessee as a collecting agent was not accepted. However, the first proviso to section 43B, inserted with effect from 1 April 1988 and held to operate retrospectively, supported deletion if the duty was actually paid within the prescribed time. On that basis, the deletion of the addition was upheld.

Conclusion: The deletion of the addition was upheld. The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered in favour of the assessee on both questions, and the Tribunal's relief on bad debts and on the electricity duty addition was sustained.

Ratio Decidendi: A debt is deductible as a bad debt when, on an objective and bona fide commercial assessment, the assessee has written it off because recovery is not reasonably likely; and a section 43B disallowance cannot survive where the retrospective proviso grants relief on timely payment of the duty.

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