TaxTMI 
TaxTMI 
2003 (1) TMI 43
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....on facts in accepting the assessee's claim for allowance of bad debts amounting to Rs. 58,70,063? (2) Whether, the Appellate Tribunal is right in law and on facts in deleting an amount of Rs. 4,43,76,082 being the addition made by the Income-tax Officer?" The assessee-electricity company is engaged in the business of generation and supply of electricity to Ahmedabad and Gandhinagar. In the course of assessment proceedings pertaining to the assessment year 1983-84, the assessee put forth a claim in respect of revised bad debts amounting to Rs. 49,34,842 in its letter dated March 5, 1986. The assessee claimed that the major part of the bad debts related to five textile mills and since the dues were not being paid by them, steps towards recovery were taken by disconnecting the supply of these customers. According to the assessee, these textile mills were in a very poor financial condition and even after disconnection, they did not approach the assessee-company for reconnection which proved that they were unable to resume their business operations. No further legal steps were taken, because, the management perceived that it would amount to spending good money over bad money. Acco....
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....For coming to its decision, the Tribunal relied upon the decision of this court in Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166, decisions of the Bombay High Court in Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 and Lord's Dairy Farm Ltd. v. CIT [1955] 27 ITR 700. The Tribunal, therefore, directed the Income-tax Officer to allow necessary relief in respect of the assessee's claim of bad debts after verifying the correct figures while observing that the interest of the Revenue was duly secured since the subsequent recoveries are subject to tax under section 41(1) of the Act. For the assessment year 1984-85, the assessee had made a similar claim of bad debts, which were written off to the tune of Rs. 58,70,063 in respect of the amounts due from the H.T. consumers which became sick units and whose service connections were disconnected. The Tribunal held that its above decision for the assessment year 1983-84 would apply even in respect of the assessment year 1984-85. It further stated that the total number of industrial units to which the power supply had been disconnected for these two assessment years was sixteen and out of them, only four had revive....
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....nd section 43B was not applicable to the facts of the assessee's case, because, the amount which was sought to be added did not belong to the assessee and was retained by it for a short time as a collecting agent or custodian and subsequently paid over to the Government account within the statutory period. Learned counsel appearing for the Revenue contended that non-initiation of legal steps against the debtors goes to show that there was no justification for treating the debt as bad debt and for writing it off for the purpose of claiming deduction. It was submitted that though the mills were closed and being sick mills, were taken over by the Government, these mills must be having their assets and until such assets were pursued and recovery attempted therefrom, the debts could not have been declared as bad debts. Learned counsel for the assessee, supporting the findings of the Tribunal, argued that the facts established by the assessee and which were not disputed by the revenue clearly indicated that the management of the assessee had, on the basis of an honest judgment on its part, viewed the debt as bad and had actually written it off in its books. He submitted that the ma....
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....ecome a bad debt in the previous year;... (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply:- (i) no such deduction shall be allowed unless such debt or part thereof- (a) has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year;..." The question of bad debts would arise when while following the method of accountancy on accrual basis, the income is shown in any previous year, but the real income is not likely to be received due to the default of the debtor or reasons beyond the control of the creditor. Bad debt is the amount receivable that is likely to remain uncollectible and is written off. If the assessee arrives at a bona fide conclusion that the amount so established would not be collected, the amount of receivables must be reduced to reflect that accounting event. The management of commercial entities have full authority to d....
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....ation and there are no assets from which the debt can be recovered in the forseeable future; (iii) The debt is statute barred; (iv) The debtor is not traceable despite various attempts and there are no known assets from which the debt can be recovered; (v) Attempts at negotiation or arbitration of a disputed debt have failed and anticipated cost of litigation is prohibitive; or (vi) There exist no other circumstances where there is no likelihood of a cost effective recovery of the debt. In most of the cases, a taxpayer's considered opinion that a debt is a bad debt should suffice, when there are circumstances or material to indicate the reasonableness of the decision to treat the debt as bad. The nature of information required to decide whether a debt is bad would depend on the particular circumstances of each case. In final analysis, however, the test would be whether the taxpayer had sufficient information to reasonably conclude that there was no reasonable likelihood that the debt will be paid, even if further or any recovery actions were to be taken. In some cases, the creditor may take no or only limited recovery action, because, enough information is received t....
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....ess which would clearly show that the debt has been actually written off as bad. If the creditor ceases to recognise the debt as an asset for accounting purposes by removing it from the accounting base records, it is written off. No matter what form a taxpayer's books of account or accounting records may take, those existing in respect of a bad debt owed by a bad debtor must record that the taxpayer or an authorised person on behalf of the taxpayer, having decided the debt as bad, has written off the debt accordingly. The writing off a trade debt as bad requires judgment on the part of the person carrying on the business taking into consideration all circumstances of the debt as to the likelihood and cost of its recovery before a decision is taken to write off the debt. The taxpayer has to establish that the circumstances were such that they would indicate to a reasonable and prudent business person that the debt was unlikely to be recovered. For a bad debt to be properly written off, it must be bona fide written off. The evidence should establish that, notwithstanding the fact that the taxpayer might have some hope for some future recovery of some part of the indebtedness, ther....
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....d reconnecting the supply, are paid, but no longer." Thus, one of the ways statutorily provided for effecting recovery of the dues was by discontinuance of the supply to the consumers. The assessee-electricity company did take such coercive measure of disconnecting the supply of electricity in accordance with the provisions of section 24 of the Indian Electricity Act, 1910, for effecting the recovery. The fact that the debtors did not move the company for restoring the supply by paying the dues indicates that there was no likelihood of recovering the dues of these debtors whose assets had vested in the State Government free from all encumbrances since these textile undertakings were taken over as per the provisions of the Gujarat Closed Textile Undertakings (Nationalisation) Act, 1986. There were, therefore, no assets from which the assessee-company could have effected recovery of the dues in any forcible manner. In the facts and circumstances of the case, which are not in dispute, the management of the assessee took a decision not to spend good money over bad money by attempting any further legal remedies against these dead undertakings, whose assets had vested in the State Govern....