2002 (11) TMI 78 - HC - Income Tax

High Court Allows Write-Off of Bad Debts in Cotton Business

Jhunjhunwala Company Versus Commissioner of Income-Tax.

The High Court held that the appellant, engaged in the cotton business, was justified in writing off bad debts as irrecoverable from two mills taken over ... Assessee claimed bad debt - in our case, the assessee as a member of the association, wrote letters to the Central Government seeking redressal. The Central Government has rejected their application. Further, in our case, for the same assessment year, the Tribunal has allowed the claim of the sister concern of the assessee under section 36(1)(vii). Lastly, section 8(1)(c) of the Ordinance indicates that no proceedings for winding-up/appointment of the liquidator or the receiver could lie without the consent of the Government. The reply of the Central Government to the representation made by the assessee shows that the Government would not have given consent for recovery of the amount by way of winding up proceedings. One has to look at the problem from the point of view of a prudent businessman. In this case, there is ample material on record to show that there was no possibility of recovering the amounts from the said two mills. There was also no possibility of the Government consenting to the liquidation of the two mills. - For the above reasons, the assessee succeeds Issues:1. Whether the appellant is entitled to claim bad debt in respect of amounts due from two mills taken over by the Central Government.2. Whether the claim for bad debt was premature during the assessment year 1988-89.3. Whether the appellant had taken necessary steps for recovery of the debts from the mills.Analysis:1. The appellant, engaged in the business of dealing in cotton, filed a return of income for the year ending October 22, 1987, claiming bad debt in respect of amounts due from two mills taken over by the Central Government. The Assessing Officer rejected the claim, stating that the appellant had not taken steps for debt recovery. The appellant contended that recovery was impossible due to the weak financial position of the acquiring body. The High Court held that a prudent businessman, based on available material, could justify writing off bad debts as irrecoverable. The judgment cited in support emphasized the need to assess the possibility of recovery before writing off debts.2. The appellant argued that the Ordinance prevented recovery without government permission and highlighted the history of non-recovery from the mills in previous years. The Central Government's response to the appellant's grievances further supported the claim for bad debt write-off. The Court noted that no legal proceedings were initiated against the mills, and the appellant had sought redress from the Central Government. The judgment emphasized the importance of assessing recoverability and the lack of government consent for liquidation.3. The Court compared the case with a similar matter before the Calcutta High Court, emphasizing the specific circumstances of the appellant's case in the assessment year 1988-89. The appellant's actions as a member of an association and the rejection of their application by the Central Government indicated the unlikelihood of recovery. The judgment highlighted the provisions of the Ordinance restricting winding-up proceedings without government consent. Based on the facts and circumstances, the Court concluded that the appellant had sufficient grounds to write off the debts as bad and irrecoverable. The Tribunal's decision was set aside, and the appeal was allowed in favor of the appellant.