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.

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. ... Deduction for a bad debt - writing off in the accounts as irrecoverable - debt having become bad in the previous year - prima facie evidentiary value of books entries - reappreciation of findings in reference jurisdictionWriting off in the accounts as irrecoverable - compliance with sub-s. (2) of s. 36 - books entries as prima facie evidence - Whether the debt of Rs. 2,37,537 was written off in the assessee's accounts in the relevant year of account so as to satisfy the requirement of sub-s. (2) of s. 36. - HELD THAT: - The court examined the balance-sheet and board resolution showing that Rs. 2,35,000 was credited to the Doubtful Debt Reserve Account and debited to the profit and loss account, that a pre-existing credit balance in the reserve and subsequent adjustments resulted in the deduction and specific write-off of Rs. 2,37,537 from advances in the balance-sheet. The Revenue's late contention that the credited sum was not linked to the debt in question was not raised below and could not be entertained for the first time in the reference. Applying the principle that entries in the profit and loss account together with corresponding entries in the Bad Debt Reserve Account furnish compliance with the statutory requirement for writing off the debt in the books, the court held that the statutory condition as to writing off was satisfied.The debt was written off in the assessee's accounts for the relevant year and the requirement of sub-s. (2) of s. 36 in respect of writing off is satisfied.Debt having become bad in the previous year - prima facie evidentiary value of books entries - assessment of bona fides in writing off - reappreciation of material evidence in reference jurisdiction - Whether the debt of Rs. 2,37,537 had become bad (irrecoverable) in the previous year corresponding to calendar year 1970 so as to permit deduction for A.Y. 1971-72. - HELD THAT: - The court reviewed the factual matrix: dishonour of cheques, institution of summary suits, a consent decree with a one-year stay, failure of the firm to pay by end of 1970, pending chamber summons for execution, subsequent affidavits disclosing the defendants' acute financial difficulties, and the assessee's 1974 statement that there was no prospect of recovery. Citing the applicable principles distilled by the Bombay High Court in analogous authorities and , the court observed that a write-off in the books gives prima facie evidence of irrecoverability but that such inference may be rebutted by material showing continuing prospects of recovery. The Tribunal erred by focusing solely on the absence of a discrete 'event' in the year of account and by failing to test whether, on the materials available up to December 31, 1970, the assessee's write-off was improper or not bona fide. Having regard to the unsuccessful recovery steps up to the year-end, the consent-decree history, the specifics of the affidavits disclosing financial paralysis of the debtor, and subsequent insolvency proceedings indicating the debtor's parlous position, the court concluded that there was sufficient material to justify the assessee's honest conclusion of irrecoverability as at the relevant year-end. The Tribunal's contrary finding was held to be unreasonable and to have ignored material evidence.On the facts, the debt had become bad in the previous year (calendar year 1970) and the assessee was entitled to treat it as irrecoverable for the purpose of claiming deduction for A.Y. 1971-72.Final Conclusion: The reference is answered against the Revenue: the assessee satisfied the statutory requirement of writing off the debt in its accounts and established that the debt had become irrecoverable in the year of account relevant to A.Y. 1971-72; the Tribunal's contrary finding was unreasonable and is set aside. 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.