The Commissioner of Income Tax vs Punjab Tractors Ltd.

The Income Tax Appellate Tribunal, Chandigarh has referred following question of law for opinion of this Court u/s 256(1) of the Income Tax Act, 1961 (for short, "the Act"), arising out of its order dated 29.11.1994 in I.T.A. Nos. 338 & 454/Chandi/1989 relating to assessment year 1984-85:

Whether, on the facts and in the circumstances of the case, the ITAT was right in law in deleting the addition of Rs. 2,62,326/-made by the Assessing Officer on account of bad debts written off because no efforts for recovery were made at all and the court decree was obtained in the year 1988?

The assessee claimed bad debt in respect of payments for supply of tractors to M/s Aneja Traders. The Assessing Officer did not allow the deduction on that account on the ground that the assessee did not show that any serious efforts were made for the recovery. The CIT(A) upheld the said view. However, the Tribunal held that the assessee waited for some time and was fully conversant with the fact that debt was irrecoverable. The decision of the assessee to declare the amount as bad debt was genuine.

The finding of the Tribunal is as under:

After carefully considering the rival submissions, we are of the opinion that the assessee is the best judge to decide as to when a particular debt has to be treated as bad and irrecoverable. In the instant case, the goods had been supplied in June, 1982 but the cheques issued by the purchaser had been dishonoured in December, 1982. The assessee waited for some more time to write off the debt as bad and irrecoverable in the balance sheet as on 30.6.1983 relevant to assessment year 1984-85. As pointed out by the learned Counsel for the assessee, the Assessee''s books of account are not only subject to statutory audit but are also under the control of the Comptroller and Auditor General of India and a such the write off of the amount of Rs. 2,62,326/-must be treated to be based on the honest judgment. It is true that the assessee filed a suit against the purchaser and obtained an ex-parte decree also and the debtor appeal against the decree was also dismissed by the District Judge, Ropar in 1992, but that decree was however, a paper decree because nothing in fact was received by the assessee till date. We, therefore, hold that the assessee was justified in writing off the amount as bad and irrecoverable in the year under consideration and that write off was based on an honest judgment and conviction of the assessee. We also accept the alternative plea of the learned Counsel for the assessee that in view of the decision of Tribunal in the case of Gokaldas Pragji (Supra) the amount in question was allowable as a business loss u/s 28(1) of the Act. Thus viewed from any angle, the assessee was entitled to a deduction of Rs. 2,62,326/-. We hold and direct accordingly.

We have heard learned Counsel for the parties.

Learned Counsel for the revenue submits that the Tribunal was not justified in holding that the opinion of the assessee was genuine for declaring the amount as bad debt. He submits that even though after 1.4.1989, there is an amendment to Section 36(1)(vii), for the period prior thereto, the assessee was required to show that there was justification for writing off the bad debt. He also submitted that claim for bad debt can be permitted only if it was established that the debt became bad debt in the previous year concerned, as held in Chettinad Company Pvt. Ltd. Vs. Commissioner of Income Tax, Tamil Nadu-IV, and CIT v. Annapurani Veerappan (1991)193 ITR 426

Learned Counsel for the assessee submitted that the assessee had genuinely thought that the debt was not recoverable. The same could be claimed as bad debt for the period prior to 1.4.1989 also. Alternatively, the amount could be claimed to be business loss in the year in question. In the present case, the Tribunal, for valid reasons held that the opinion of the assessee was genuine. In such circumstances, the Tribunal was justified in deleting the additions on that account.

Learned Counsel for the assessee relies on judgments of the Bombay High Court in Jethabhai Hirji and Jethabhai Ramdas Vs. Commissioner of Income Tax, Bombay City-II, and Jhunjhunwala Company Vs. Assistant Commissioner of Income Tax, , holding that a prudent businessman had to act on the basis of the material before him and if there is no basis for recovering the amount, he could certainly write off the debt as bad debt.

We are of the view that it is not the case of the revenue that the debt was ever recovered or had ever become recoverable. Before the Tribunal, the contention on behalf of the revenue was that the amount may be treated as bad debt in subsequent year. While the debt has to be allowed as bad debt in the year in which the same became bad debt, it will depend on facts of each case as to the year in which the same became bad debt, depending upon judgment of the assessee unless such a judgment was not genuine. In the present case, the judgment of the assessee that the amount became bad debt in the year relevant for assessment i.e. 1984-85 itself, could not be rejected. Mere fact that assessee continued efforts by obtaining decree which could not be executed in subsequent year is not enough to reject the opinion of the assessee that the amount had already become bad debt. The assessee had valid reasons for its judgment that the amount was not recoverable, as held by the Tribunal.

In view of above, the question referred is answered against the revenue and in favour of the assessee.