1993 (8) TMI 302 - HC - Income Tax

Court allows non-resident bank's bad debt claim for loans despite legal actions

Commissioner of Income-tax Versus Algemene Bank Netharland

Commissioner of Income-tax Versus Algemene Bank Netharland - TMI Issues:1. Determination of bad debts for loans given to two companies.2. Assessment of the bonafide belief of the assessee regarding the irrecoverability of the loans.Analysis:1. The case involved the assessment year 1979-80, where the assessee, a non-resident banking company, claimed two loans as bad debts: one for &8377;40,262 from Associated Industrial Products Co. and the other for &8377;6,122 from Mining & Equipment Manufacturers. The first loan was not repaid, and after investigating, the assessee concluded that recovery was impossible, leading to the debt being written off. The ITO and Commissioner (Appeals) rejected the claim citing the possibility of recovery due to obtained decrees. However, the Tribunal, following the Jethabhai Hirji case precedent, allowed the claim as the assessee genuinely believed the debts were irrecoverable despite legal proceedings.2. The Tribunal considered the investigation reports from 1978, which confirmed the precarious financial state of the debtors. The Tribunal emphasized that if the assessee had a bona fide belief in the bad debt, it could be written off, even with pending legal actions. The Court reiterated that the critical factor is the genuine belief in the debt's irrecoverability, not merely obtaining decrees. The reports showed no assets for repayment, with one debtor's partners declared insolvent, indicating the debts were uncollectible. The Court affirmed that the assessee's decision to write off the debts was based on honest judgment at that time, supported by the investigators' unchallenged reports, and not influenced by subsequent events.3. The Court concluded that the assessee reasonably believed the debts were irrecoverable, justifying the bad debt claims. The first question was answered in favor of the assessee, as was the first part of the second question, while the second part was answered against the assessee. The judgment highlighted the importance of genuine belief in bad debts' irrecoverability, emphasizing the factual context over legal proceedings. Ultimately, the Court ruled in favor of the assessee, allowing the bad debt claims and rejecting the revenue's argument based on the obtained decrees.