Bad debt deduction requires subsisting liability and failed recovery, not merely takeover of management under an ordinance.

A bad debt deduction under section 36(1)(vii) is not available merely because management of a textile undertaking has been taken over under the Textile Undertakings (Taking Over of Management) Ordinance, 1983. The Ordinance was treated as transferring management only, not extinguishing the company's liability or barring recovery proceedings against it. As the debtor's obligation continued to subsist, the assessee remained entitled to pursue recovery and could seek bad debt relief only if recovery ultimately failed. On that basis, the claim was held premature on the facts, and the Tribunal's view that the Commissioner of Income-tax (Appeals) had wrongly granted relief was sustained.

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Issues: Whether the assessee's claim for deduction as a bad debt was premature and whether the Tribunal was justified in reversing the relief granted by the Commissioner of Income-tax (Appeals).

Analysis: The deduction was examined in the context of section 36(1)(vii) of the Income-tax Act, 1961, together with the Textile Undertakings (Taking Over of Management) Ordinance, 1983 and the CBDT circular issued under section 119 of the Income-tax Act, 1961. The Ordinance was found to transfer only the management of the textile undertaking and not to extinguish the liability of the company. Unlike the earlier statutory regime considered in the circular, the Ordinance did not bar proceedings against the company or provide for cessation of liability by operation of law. On that basis, the assessee could pursue recovery against the debtor and, if recovery failed, seek relief under the bad debt provision.

Conclusion: The claim was premature on the facts, and the Tribunal was justified in holding that the relief granted by the Commissioner of Income-tax (Appeals) could not be sustained.

Final Conclusion: The reference was answered in favour of the Revenue and against the assessee, leaving the Tribunal's view undisturbed.

Ratio Decidendi: A debt cannot be treated as deductible as a bad debt merely because management of the debtor undertaking has been taken over under an Ordinance, where the debtor's liability continues to subsist and recovery proceedings against the company remain open.

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