Unrecovered loan treated as bad debt despite no civil suit, after years of non-recovery; deduction allowed for AY

The dominant issue was whether an unrecovered loan could be deducted as a bad debt for the relevant AY, notwithstanding the assessee's failure to institute a civil suit for recovery. The HC held that persistent non-recovery over several years sufficiently established the debt as bad, and that filing a suit is not a legal precondition for allowance where the assessee reasonably considers litigation futile and financially burdensome. Accordingly, the Tribunal's rejection lacked justification and the deduction was allowable as bad debt; the alternative claim as business loss under s. 28 became academic, and the question was answered in favour of the assessee and against the Revenue.

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Issues Involved:
The judgment involves the following Issues:
1. Allowability of the assessee's claim as deductible business loss u/s 28 of the Income-tax Act, 1961.
2. Rejection of the assessee's claim for deduction of a sum as a bad debt.

Issue 1: Allowability of Deductible Business Loss:
The assessee, a private limited company engaged in tea brokering, auctioneering, and financing, debited an amount as "irrecoverable advances written off" in the account during the relevant assessment year. The amount arose from an advance made to Shri R. P. Gupta against a financial accommodation agreement. Despite efforts, no communication was received from Shri Gupta after a minimal tea sale through the assessee-company. Legal actions were taken against Shri Gupta, but recovery was unsuccessful. The Assessing Officer and the court previously rejected the claim, citing the absence of a civil suit for recovery. The Tribunal found that the debt arose in the course of business but was not proven to be bad during the year under appeal. However, the High Court allowed the amount as a bad debt, emphasizing that a civil suit for recovery is not necessary to claim a bad debt.

Issue 2: Rejection of Claim for Bad Debt Deduction:
The Tribunal rejected the assessee's claim for deduction of the sum as a bad debt, stating that the debt was not proven to be bad during the relevant year and that the conditions for bad debt deduction were not satisfied. The Tribunal maintained the disallowance, as the debt was not written off in the books of account and no material evidence was provided to prove the debt as bad. The High Court, however, noted that the loan remained unrecovered and allowed the amount as a bad debt, ruling in favor of the assessee against the Revenue.

Conclusion:
The High Court allowed the amount as a bad debt, emphasizing that a civil suit for recovery is not necessary to claim a bad debt. The court ruled in favor of the assessee against the Revenue, allowing the deduction as a bad debt.

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