1985 (12) TMI 49 - HC - Income Tax

Court allows deduction for bad debt, ruling in favor of assessee under Income-tax Act

The court ruled in favor of the assessee, allowing the amount representing receipts from a distributor to be deducted as a bad debt for the year. The ... Bad Debt, Cheques Dishonoured Issues Involved:The judgment involves the issue of whether the addition of a certain amount representing receipts from a distributor should be allowed as a bad debt deduction in the same year.Details of the Judgment:The assessee, a film producer, had receipts from a distributor credited to their accounts, but these entries were later reversed due to dishonored cheques. The Income-tax Officer added back the amount to the total income, considering the accounts were maintained on a mercantile basis. The Appellate Assistant Commissioner upheld this view, stating that the receipts should be shown as income. However, the Tribunal found that the distributor had absconded, making recovery impossible, and allowed the deduction as a bad debt for that year.The Tribunal's decision was challenged by the Revenue, arguing that the debt should have been written off in the accounts to be considered a bad debt. The court allowed this new argument, considering the provisions of Section 36(1)(vii) of the Income-tax Act, which requires the debt to be established as bad, taken into account in previous income, and written off as irrecoverable. The court found that the debt had become bad due to the distributor absconding and the high cost of litigation, satisfying the conditions for a bad debt deduction.Regarding the requirement of writing off a debt as irrecoverable, the court referred to previous judgments emphasizing that the debt could be written off in the individual accounts or the profit and loss account. In this case, the entries related to the bounced cheques were reversed, reducing the profit in the accounts, indicating the debt was treated as irrecoverable. The court concluded that all conditions for claiming the deduction as a bad debt were met, affirming the Tribunal's decision to delete the amount from the income.In conclusion, the court answered the question in favor of the assessee, confirming the allowance of the amount as a bad debt deduction for that year.