1. During the assessment proceedings for the assessment year 1972-73, the assessee claimed to deduct certain debts due from Ajanta Taxtiles Ltd., Lakshmiratan Cotton Mills Company Ltd., Moradabad Spg. & Wvg.
Mills Company Ltd., Moradabad and Usha Spg. & Wvg. Mills Ltd., Faridabad. The ITO rejected the claim on the ground that it was premature as it had not been established beyond doubt that the debts had, in fact, become irrecoverable or bad during the relevant previous year. The matter reached up to the Tribunal. The Tribunal allowed the claim regarding Usha Spg. & Wvg. Mills. Ltd., but rejected the claim with regard to the other three parties.
2. In the meantime the assessment for the assessment year 1973-74 was taken up. The ITO did not consider the claim of the assessee in this year. The assessee also did not approach the ITO for any such claim as at that time its appeal for the assessment year 1972-73 itself was pending. After the receipt of the order of the Tribunal dated 20-6-1979, the assessee approached the ITO under Section 154 of the Income-tax Act, 1961 ('the Act') requesting him to allow the claim in the assessment year 1973-74. The ITO rejected the claim on the ground that it was not established that the debts had actually become bad in the assessment year 1973-74 and further, it was not a case falling within the provisions of Section 154, as no such claim had been made in the original proceedings of the assessment year 1973-74. The AAC agreed with him. He observed that it could not be treated as a mistake, much less apparent from the record justifying the rectification of the assessment for the assessment year 1973-74.
3. The assessee is now in appeal before us. It has sent us written submissions contending that its claim is allowable under Section 36(1)(vii) and 36(2)(iii) of the Act. On behalf of the department, reliance was placed on the decisions of the lower authorities.
4. We have carefully considered the submissions placed before us on behalf of the rival parties. We are of the opinion that the assessee cannot succeed even before us. Section 36(1)(vii) states that in computing the income of an assessee from business, the amount of any debt or part thereof, which is established to have become a bad debt in the previous year, will be allowed subject to the provisions of Sub-section (2) of Section 36. Section 36(2) lays down various situations and conditions under which the claim can be considered. In the case before us, we are concerned with Clauses (iii) and (iv) of Section 36(2). Clause (iii) of Section 36(2) lays down that in making any deduction for a bad debt or part thereof, any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year, but the ITO had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year. Clause (iv) of Section 36(2) lays down that where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year and the ITO is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of `Sub-section (6) of Section 155 of the Act shall apply. Sub-section (6) of Section 155 states that for the purpose of such deduction, it will be treated as a mistake to which the provisions of Section 154 shall, so far as may be, apply thereto.
5. The assessee's case falls in Clause (iii) of Section 36(2). As stated above, this section casts a burden on the ITO to deduct any debt or part of the debt, which has not been allowed by him, to be deducted, on the ground that it had not been established to have become a bad debt in an earlier previous year. This clause does not lay down any special mode or procedure for allowing the claim of the assessee. On the other hand, Clause (iv) of Section 36(2) provides a mode or procedure for allowing the assessee's claim by treating it as a mistake apparent from the record falling under Section 154. The assessee, therefore, cannot as a matter of right, state that its claim can be admitted even under Clause (iii) of Section 36(2) by treating it as a mistake apparent from the record falling within Section 154. It will depend upon the facts and circumstances of each case, whether it could be treated as a mistake or it could not be so treated. If the facts of the case go to show that it could be treated as a mistake apparent from the record, then the assessee could claim its allowance under Section 154. If, on the other hand, it required investigation into facts, as laid down by the Supreme Court in the case of T.S. Balaram, ITO v.Volkart Bros.  82 ITR 50, the remedy of the assessee in that case will have to be found elsewhere. The learned authors of Law of Income-tax by Sampath lyengar, 7th edn., Vol. 2, have also dealt with this question in the commentary. We quote below their observations as under : Clause (iii) deals with the situation where the assessee write off a debt but the same is not allowed as a deduction on the ground that it has not become bad in that year and that the claim is premature.
In such an event, it enables the assessee to claim and oblige the officer to allow a deduction for the debt in such year as it is accepted to have become bad. This can be done without difficulty if the assessment for such subsequent year is pending either before the officer or an appellate authority at the point of time when such finding is given. However, in case the assessment has been completed by the time a finding is given by the officer in the year of claim, the assessee will have to seek his remedy by way of revision or perhaps rectification under Section 154. The assessee having already written off the debts in his books cannot write it off again and so the deduction in the subsequent year is not condition upon such write off. A provision similar to that in Clause (iv) below enabling the assessee to invoke, even in such a case, the provisions for rectification with a special time limit will be useful here also.
From the above, it will appear that the assessee will normally have to seek his remedy by way of revision before the Commissioner. An application under Section 154 can also lie before the ITO if it does not involve investigation of the facts and the mistake can be treated as apparent from the record. In the present case, the ITO has rightly pointed out that it was not established before him that the debts in question had actually become bad in the assessment year 1973-74. This thing has to be established by the assessee, which cannot be done within the scope of Section 154. The assessee, therefore, must fail under the above section. We are, of course confident that the department will otherwise consider its case sympathetically if so approached under the relevant provisions of the Act.