G.P. Singh, C.J.
1. This is a reference made by the Income-tax Appellate Tribunal as directed by this court by order dated 29th August, 1978, in Misc. Civil Case No. 311 of 1972. The question of law referred is asfollows:
'Whether, on the facts and in the circumstances of the case, the Tribunal- was justified in allowing the assessee's claim for deduction of Rs. 47,578 as bad debt?'
2. The reference relates to the assessment year 1962-63. The assessee is a private limited company. The assessee had a running account with the partnership firm styled as M/s. Rallaram Melaram. This firm consisted mainly of the directors and/or shareholders of the assessee-company as partners. The assessee's credit fctalance with the said firm in 1952 was Rs. 28/203-6-9. In 1952, the business of the firm including its assets and liabilities was taken over by a private limited company styled as Nagrath Colliery Pvt. Ltd. floated for that purpose. The assessee had some transactions with this new company till 1954. The firm, Rallaram Melaram, and the company, Nagrath Colliery Pvt. Ltd., were sister concerns of the-asses-see. The firm was also a selling agent of the assessee and the debt owed by the firm was a trading debt. The assessee in its accounts wrote off the balance amount of Rs. 47,578 as a bad debt in the previous year ending on 31st December, 196J, relevant to the assessment year 1962-63. The ITO disallowed the claim of deduction of Rs. 47,578 as a bad debt on the ground that the debt became a bad debt in the earlier previous years. The view taken by the ITO was upheld in first appeal. The Tribunal, however, accepted the assessee's claim for deduction of the amount of Rs. 47,578 as a bad debt.
3. The learned standing counsel for the Department contended before us that the debt was not incidental to the assessee's business. He also contended that the debt was barred by time and had become a bad debt more than four years anterior to the account year relevant to the assessment year 1962-63. In our opinion, these contentions must be rejected. It is not disputed that the debt was, to begin with, a trading debt. The Tribunal, in our opinion, was right in holding that the character of the debt did not change simply because the firm of Rallaram Melaram was taken over by the private company formed for that purpose. Now, as regards the contention that the debt was time barred, it is not in dispute that the debt was a bad debt. The only question is as to when it became a bad debt. The argument of the learned standing counsel is that it became a bad debt after it ceased to be recoverable by lapse of limitation and so it must be taken to have become a bad debt in 1955, more than four years anterior to the account year ending on 31st December, 1961. In this connection reference to Section 36(1)(vii) of the I.T. Act, 1961, is necessary. This section permits deduction of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. A bad debt is thus allowable in an assessment year if it became a bad debt in the previous year relevant to the assessment year. However, even in those cases, where the ITOfinds that the debt did not become a bad debt in the relevant account year but in an earlier account year, he can grant relief Under Section 155(6) if it is found that the debt became a bad debt within a period of four years immediately preceding the account year in which the debt was written off. In cases where the rate of income-tax is a flat rate and is the same for the four years preceding the account year in which the debt is written off, the question whether it become a bad debt in the account year in which it is written off or in the earlier four years would be academic in view of the relief to which the assessee is entitled under the provisions of Section 155(6) of the Act. The rate of income-tax on companies is a flat rate and remained the same in the relevant previous year as also in the earlier account years. The Revenue, therefore, can get some benefit only if it is shown that the debt became a bad debt beyond four years from the account year ending on 31st December, 1961. The question as to when a debt becomes a bad debt is a question of fact. Simply because a debt has become barred by time or the debtor has gone in for insolvency, it cannot be said that the debt has become a bad debt. The age of the debt and the financial condition of the debtor are no doubt relevant considerations but neither is conclusive on the question whether the debt has become a bad debt. Moreover, it is not known in this case as to what were the terms on which credit was given to the firm, M/s. Rallaram Melaram, and so it cannot be said that the recovery of the debt became barred on the expiry of three years from 1952. It cannot be lost sight of that the firm as well as the private limited company which took over its business were sister concerns of the assessee. Even after the expiry of limitation for bringing a suit on the debt, the assessee could have well expected the firm, and, after it was taken over by the company, the company would pay back the debt when their financial condition improves. It appears from the order of the AAC that the debtor-company hardly did any business for the first few years and had become defunct. It is, however, not clear as to when the company became defunct. The fact that the assessee-company wrote off the debt in a particular account year is not conclusive of the matter, but it is not wholly or totally irrelevant. The writing off of a debt by the assessee is a material circumstance unless it can be shown from the materials on record that the writing off was not proper or bonafide. As already pointed out, a time barred debt is not necessarily a bad debt. Similarly, the insolvency of the debtor is not conclusive that the debt has become a bad debt. What is required of the assessee is only an honest assessment at the, time when he makes the write off: [See Devi Films Ltd. v. CIT : 49ITR874(Mad) , Jethabhai Hirji & Jethabhai Ramdas v. CIT : 120ITR792(Bom) , There was not sufficient material on record to show that the assessee in writing off the debt in the account year ending on 31st December, 1961,did not make an honest assessment that the debt became a bad debt in that year. The Tribunal, in the circumstances, was right in holding that the assessee was entitled to the deduction of the amount of Rs. 47,578 as a bad debt in the assessment year 1962-63. After all, the question as to when a debt became a bad debt is a question of fact and the Tribunal's opinion must prevail, unless there are strong circumstances to show that the finding reached by the Tribunal was perverse or contrary to law. Such is not the case here.
4. For the reasons given above, we answer the question as follows:
'The Tribunal was justified in allowing the assessee's claim for deduction of Rs. 47,578 as a bad debt.'
5. The assessee will get costs of this reference. Counsel's fee Rs. 100, ifcertified.