1. The dispute in this appeal is about the admissibility of a sum of Rs. 52,252 as a bad debt or as a business loss in the assessment of the assessee for 1976-77. The corresponding previous year is the calendar year 1975. The bad debt arose in the account of Jaifabs Rayon Industries (P.) Ltd. The case of the department is that the claim is premature.
2. The assessee sold goods to the debtor in 1974. Cheques received from the debtor were not realised. Jaifabs Textile Mills (P.) Ltd. took over Jaifabs Rayon Industries (P.) Ltd. The creditors of Jaifabs Textile Mills (P.) Ltd. forced it to go into liquidation and its affairs vested in the official liquidator. The assessee was an unsecured creditor but there were other secured creditors.
3. Jaifabs Textile Mills (P.) Ltd., while opposing the application in the matter arising under Section 391 of the Companies Act, 1956, proposed a scheme for settling its affairs and stated, inter alia, as below : If the proposed scheme is not approved, there is every likelihood of the secured creditors enforcing their security by putting up for sale the lands, buildings, plants and machinery as fixed assets of the Company and it would not realise full value thereof, leaving very little surplus available to the unsecured creditors, whereas by the proposed scheme, the Company would be in a position to pay off all its creditors in full with interest within a period of some years only. The said payment would be made by the Company out of its profits.
4. The assessee wrote in the past repeatedly to the liquidator but was given to understand that there was no possibility of making payment to unsecured creditors of the company "in near future". A similar reply was received by the assessee from liquidator even in January 1982.
5. Needless to state that the assessee had not recovered anything in 1975 and Shri Patil, learned counsel for the assessee, stated that it has not recovered anything uptil now.
6. The case of the department that the assessee could not have lost all hopes of the recovery of the whole of the debt is based upon the expression "... very little surplus available to the unsecured creditors ..." in the letter addressed by the debtor in opposing the Company Petition No. 12 of 1975 and the liquidator qualifying the statement that there was no possibility of making payment to the unsecured creditors with the expression "in near future".
However, these expressions have to be considered in the context in which they were used. In my opinion, they merely indicate a cautious use of language employed in circumstances like the circumstances of the case under consideration. Whether a debt has become bad or not at a particular stage has to be decided having regard to the overall facts and circumstances. It may not be without significance that even after noticing the expressions used about, the departmental authorities have not allowed even a part of the debt as a bad debt.
It is not necessary that the liquidation proceedings in the case of the debtor must be complete at the stage at which it is written off. The most important aspect is whether it can be said that the assessee had lost all hopes of recovering any part of the debt.
The debtor had not been able to pay the assessee and its cheque had been dishonoured. It was dragged into liquidation. The assessee was an unsecured creditor. By 1975 it was known that the secured creditors had claims larger than the assets of the assessee. The conduct of the parties is also consistent with the assessee's claim that the debt was bad and the entry made by the assessee, which is a company, in its own accounts writing off the debt cannot be brushed aside Having regard to all the facts and circumstances, I hold that the debt had become bad in the year under consideration and direct that the corresponding deduction shall be allowed.