Bona fide write-off governs bad debt deduction; practical irrecoverability, not prior recovery action, determines allowance

A bad debt is deductible when the creditor bona fide writes it off as irrecoverable on a practical assessment of surrounding circumstances; demonstrative proof of actual impossibility of recovery or prior recovery proceedings is not required. On the facts, dishonoured cheques, takeover of management, declaration as a relief undertaking, and liabilities exceeding assets supported the write-off, so the deduction was allowable. A later communication did not postpone the debt becoming bad, and the view that the claim was premature in the earlier year was rejected.

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Issues: (i) Whether the amount of Rs. 73,582 written off by the assessee was a bad and doubtful debt deductible under section 36(1)(vii) of the Income-tax Act, 1961. (ii) Whether the Tribunal was right in holding that the claim of bad debt was premature in assessment year 1973-74 and that the debt became bad only in assessment year 1977-78.

Issue (i): Whether the amount of Rs. 73,582 written off by the assessee was a bad and doubtful debt deductible under section 36(1)(vii) of the Income-tax Act, 1961.

Analysis: A debt is deductible when the creditor bona fide writes it off as irrecoverable on the basis of relevant surrounding circumstances. The statutory requirement does not insist on demonstrative or infallible proof of irrecoverability, and it is not compulsory to institute recovery proceedings before writing off the debt. The facts showed dishonour of cheques, takeover of management under the Industries (Development and Regulation) Act, 1951, declaration of the company as a relief undertaking under the Bombay Relief Undertakings (Special Provisions) Act, 1958, and a financial position indicating that the liabilities far exceeded the assets.

Conclusion: The write-off was justified and the deduction was allowable in favour of the assessee.

Issue (ii): Whether the Tribunal was right in holding that the claim of bad debt was premature in assessment year 1973-74 and that the debt became bad only in assessment year 1977-78.

Analysis: The Tribunal's approach rested on an erroneous factual premise and it failed to apply the correct test of bona fide write-off and practical irrecoverability. The material on record showed that even in the relevant year there was no realistic chance of recovery, and the later letter of the trade association did not create the bad debt for the first time. The finding that the claim matured only in assessment year 1977-78 was therefore unsupported.

Conclusion: The Tribunal's view was rejected and the assessee's claim for assessment year 1973-74 was upheld.

Final Conclusion: The debt was properly treated as a bad debt in the relevant year, and the assessee was entitled to the deduction on the facts found.

Ratio Decidendi: For deduction of a bad debt, what is required is a bona fide write-off based on a practical assessment of irrecoverability; proof of actual impossibility of recovery or prior legal proceedings is not essential.

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