1982 (6) TMI 23 - HC - Income Tax

Court allows deduction for bad debt written off by public limited company under Income Tax Act for assessment year 1971-72.

Sarangpur Cotton Manufacturing Co. Limited Versus Commissioner Of Income-Tax, Gujarat I

The court held in favor of the assessee, a public limited company, allowing the deduction of Rs. 2,37,537 as a bad debt for the assessment year 1971-72. ... Bad Debt Issues Involved:1. Entitlement to deduction of Rs. 2,37,537 as bad debt.2. Compliance with conditions under Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961.3. Establishment of the debt becoming bad in the relevant accounting year.4. Proper writing off of the debt in the assessee's books of account.Issue-wise Detailed Analysis:1. Entitlement to Deduction of Rs. 2,37,537 as Bad Debt:The primary issue is whether the assessee, a public limited company, is entitled to a deduction of Rs. 2,37,537 in the computation of its income for the assessment year 1971-72. The assessee had entered into a contract with a firm for the purchase of the right to import staple fiber, paying Rs. 1,68,000 as a premium. This contract was later terminated, and the firm was to repay the balance amount. However, the cheques issued by the firm were dishonored, leading to legal proceedings and a consent decree that remained unexecuted. Additionally, the assessee had advanced Rs. 2,73,000 to the firm, out of which Rs. 87,687 remained unpaid. The total amount due from the firm was Rs. 2,37,537, which the assessee decided to write off in the calendar year 1970.2. Compliance with Conditions under Section 36(1)(vii) and Section 36(2):Section 36(1)(vii) of the Income Tax Act allows for the deduction of any debt or part thereof established to have become a bad debt in the previous year, subject to the provisions of Section 36(2). Four conditions must be satisfied:- The debt should be in respect of a business carried on by the assessee.- The debt should have been taken into account in computing the income of the assessee for the accounting year or an earlier year.- The debt should be established to have become bad in the accounting year.- The debt should be written off as irrecoverable in the accounts of the assessee for that accounting year.In this case, the first two conditions were undisputedly satisfied. The contention was whether the last two conditions were met.3. Establishment of the Debt Becoming Bad in the Relevant Accounting Year:The Tribunal rejected the assessee's claim on the grounds that no event had taken place in the relevant year to justify the claim and that recovery proceedings were still pending. However, the court noted that the assessee had provided sufficient material and evidence to establish that the debt had become irrecoverable. The Tribunal should have assessed whether the decision to write off the debt on December 31, 1970, was bona fide and based on the circumstances up to that date. The court found that the assessee's judgment was honest and justified, given the firm's financial difficulties and the unsuccessful recovery efforts.4. Proper Writing Off of the Debt in the Assessee's Books of Account:The court examined whether the assessee had properly written off the debt in its books of account. The assessee had credited Rs. 2,35,000 to the Doubtful Debt Reserve Account and debited it to the profit and loss account, which, along with a credit balance of Rs. 33,028, covered the bad debt. The court held that these entries, coupled with the deduction of Rs. 2,37,537 from advances in the balance sheet, constituted sufficient compliance with the statutory requirement for writing off the debt.Conclusion:The court concluded that the assessee had satisfied the conditions for claiming the deduction of Rs. 2,37,537 as a bad debt. The Tribunal's decision was found to be unreasonable and not based on a proper appreciation of the evidence. The court answered the question in favor of the assessee and against the Revenue, holding that the amount had become irrecoverable and was rightly written off in the relevant accounting year. The reference was answered accordingly with costs.