Taxability of Recovered Bad Debts depends on prior allowance of deduction; absence of prior allowance precludes taxation and merits remand.

Recovered bad debts are taxable under the recovery provision only where a deduction for those debts was previously allowed; where the assessee enjoyed statutory exemption in the earlier year and no deduction was claimed or granted, the statutory condition precedent for taxing recoveries is absent, so the impugned addition is set aside. A further claim arising from an intervening higher-court decision that changes the earlier-year tax status is admissible where facts exist on record; the claim is admitted and remitted to the Assessing Officer for fresh adjudication with opportunity of hearing.

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Issues: (i) Whether the addition of Rs.2,15,03,988/- by invoking the provisions relating to taxation of recovered bad debts was sustainable; (ii) Whether the assessee's fresh claim in respect of recovered bad debts of Rs.64,00,000/-, Rs.26,00,000/- and Rs.75,00,000/- arising from a subsequent High Court decision should be admitted and remitted for fresh adjudication.

Issue (i): Whether recovered bad debts can be taxed under the statutory provision dealing with recoveries of bad debts when no corresponding deduction for those bad debts had been allowed earlier.

Analysis: The statutory rule provides that an amount recovered in respect of a bad debt is taxable only if a deduction in respect of that bad debt had been allowed earlier. The assessee's return and submissions consistently stated that the recovered sum of Rs.2,15,03,988/- was not claimed or allowed as a deduction under the provision dealing with bad debts in earlier years. A subsequent High Court ruling established that the assessee enjoyed exemption from income tax up to the relevant earlier year, precluding computation of income and therefore any allowance of deduction under the relevant bad debt provision for that period. On these facts and applying the statutory test, the condition precedent for taxing recoveries was absent.

Conclusion: The addition of Rs.2,15,03,988/- under the provision taxing recoveries of bad debts is set aside and in favour of the assessee.

Issue (ii): Whether the assessee's additional claim in respect of recovered bad debts (Rs.64,00,000/-, Rs.26,00,000/-, Rs.75,00,000/-) arising from the subsequent High Court decision should be admitted and remitted to the Assessing Officer.

Analysis: The additional claim arises directly from the subsequent High Court decision affecting the tax status for the earlier year and was not considered by the lower authorities. Principles permitting admission of fresh claims based on intervening judicial decisions apply where facts are on record and the claim is legally relevant. It is appropriate to admit the claim and allow the assessing authority to examine it afresh in light of the High Court ruling, providing reasonable opportunity of hearing.

Conclusion: The additional claim is admitted and the matter is restored to the file of the Assessing Officer for fresh adjudication in accordance with law; this disposition is in favour of the assessee to the extent that the claim is admitted for consideration.

Final Conclusion: The Appellate Tribunal allowed the appeal on merits by setting aside the impugned addition of Rs.2,15,03,988/- and admitting the assessee's additional claim for recovery amounts, remitting the admitted claim to the Assessing Officer for fresh adjudication consistent with the applicable law and the intervening High Court decision.

Ratio Decidendi: A recovery of a bad debt is taxable under the provision dealing with recovered bad debts only when a deduction for that bad debt has previously been allowed; absence of any earlier allowance (including where the assessee enjoyed statutory exemption for the earlier period) precludes taxation of the subsequent recovery.

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