1. This is an appeal by the assessee against the order of the Commissioner (Appeals), dated 5-10-1982. The only issue for our consideration in this appeal is whether the Commissioner (Appeals) has erred in holding that the writing off of bad debts of Rs. 28,077 of Dwarkaprasad Bhojnagarwala of Calcutta in the year under consideration would be premature.
2. The facts in short are that the balance outstanding from Dwarkaprasad Bhojnagarwala, the debtor, at the beginning of the Samvat Year 2035, was Rs. 49,920 and sales of Rs. 85,012 were made to the said firm by the assessee during this year. Certain payments were also received but three drafts of Rs. 11,532, Rs. 5,117 and Rs. 3,010 were dishonoured. The assessee enquired through General Cloth Trading Co. of Calcutta and learnt that Dwarkaprasad Bhojnagarwala had stopped functioning and it was not possible to recover any dues from them.
Therefore, the assessee has written off the said amount as bad debt.
The ITO did not agree with the claim of the assessee. According to him, the assessee has received the huge amount from Dwarkaprasad Bhojnagarwala of Calcutta in the year under consideration and merely on the information from General Cloth Stores of Calcutta, the debts cannot be said as bad and, therefore, when there are dealings and the assessee has received certain payments, no question of bad debt arises.
3. In appeal, the view taken by the ITO has been confirmed by the Commissioner (Appeals), saying that the writing off of the debts in this year would be premature.
4. Being aggrieved, the assessee came in appeal before us. The submission of the learned Counsel for the assessee, Shri J.P. Shah, was that the assessee has inquired from its known firm and it is said that the assessee has closed down its business and Dwarkaprasad Bhojnagarwala & Sons have gone into insolvency. There is no hope of recovery of the amount and till today the assessee has not recovered any further amount. He filed the copy of accounts of Dwarkaprasad Bhojnagarwala also. The same is placed at page 1 of the assessee's paper book. On the other hand, the learned departmental representative, Shri Harne, submitted that new credits were received from the same party, i.e., Dwarkaprasad, and this is not a new party. It is an old party, which has dealings in lakhs in earlier year also. Therefore, by a mere letter from some known firm, it cannot be said that debt is not recoverable from Dwarkaprasad. Therefore, the written off of the debt is premature.
5. We heard the rival submissions and considered the material on record. It is clear that the opening balance in Samvat Year 2035 was Rs. 49,920 and the assessee has received the payment from that firm in this year of Rs. 1,06,856 and the assessee has dealings in this year.
The basis of writing off of debt is only that one of the parties, i.e., General Cloth Stores, has written a letter to the assessee that thed ebt is not recoverable. In our view, it is not enough to write off the debt. At least in the year under consideration, the assessee has not made enquiry about the whereabouts of the partners of Dwarkaprasad Bhojnagarwala. After all the debtor which has dealings in lakhs with the assessee several years, the assessee must know the whereabouts of the partners of Dwarkaprasad Bhojnagarwala. Nothing has been said that the assessee has the facts in his personal knowledge that Dwarkaprasad is not in a position to pay the debts in the assessment year under consideration and the partners of Dwarkaprasad have no property from which the debts can be recovered. Therefore, when there are business dealings in the year under consideration and the assessee has received the payment from that party of about Rs. 1,06,856, in our view, there is no infirmity in the order of the Commissioner (Appeals).
1. I have had the benefit of going through the order of my learned brother, the Judicial Member. Inasmuch as it has not been possible for me to persuade myself to agree with his conclusion, I am writing a separate order as follows: 2. The assessee is a firm. Its accounting period for the assessment year 1980-81 ended on Diwali of Samvat Year 2035. During the said accounting year, the assessee wrote off Rs. 28,077 as bad debts, which were recoverable by the assessee-firm from Dwarkaprasad Bhojnagarwala of Calcutta. From the copy of account of the said party in the books of the assessee of the Samvat years 2032-2035, it appears that the assessee used to sell goods to the said party and remittances were received by the assessee from him. In the accounting period corresponding to the assessment year 1977-78, sales to the extent of Rs. 1,06,118 were made by the assessee to the said party and payments in respect of the entire sum were received by the assessee-firm during the accounting period itself.
3. In the accounting period corresponding to the assessment year 1978-79, the value of the goods sold came to Rs. 1,65,987 as against which the said party (the Calcutta party) paid to the assessee Rs. 1,55,218. Rs. 10,701 remained by way of balance, which were carried over by the assessee to the next year. In the accounting period corresponding to the assessment year 1979-80, the sales made by the assessee to the Calcutta party aggregated to Rs. 3,00,670 as against which receipts from the said party were to the extent of Rs. 2,61,451.
Rs. 49,920 remained recoverable from the said party at the end of the accounting period in question. In the accounting period under consideration, the sales made amounted to Rs. 85,012 only. The opening balance amount due from the said party was Rs. 49,920. The total recoverable amount from the said party, thus, was of Rs. 1,34,932, as against which payments received from the said party aggregated to Rs. 1,06,856. Towards part discharge of the remaining debt, the Calcutta party issued to the assessee B.P. Drafts for Rs. 11,532, Rs. 5,117 and Rs. 3,010 on 21-3-1979, 7-5-1979 and 6-6-1979, respectively. All the three B.P. Drafts were, however, dishonoured.
4. The assessee thereupon caused an enquiry made with regard to the financial position of the Calcutta party through General Cloth Store, 196, Cross Street, Calcutta, who advised the assessee on 13-10-1979 that "the local party, Dwarkaprasad Bhojnagarwala & Sons, has wound up its working since last four months and they have gone into insolvency and they have stopped the payment since last four months which we have known here, which please note." One more communication was received by the assessee from Cloth Traders Co., wherein the said party also gave the following information about Dwarkaprasad Bhojnagarwala & Sons: Party M/s Dwarkaprasad Bhojnagarwala & Sons, has failed and they have lost their capacity to pay to the creditors and they have been totally ruined, which is 100 per cent fact. Every creditor has got different views and initiated legal steps...nobody is going to stop it. But in case if somebody takes legal steps, nothing is going to be realised; which we say definitely and with confidence.
5. Faced with the above position, the assessee-firm decided to write off the amounts in question as irrecoverable and did not initiate any legal steps against the said party. It was obvious that such steps will bring forth no result.
6. In the face of the aforesaid factual position, it has to be determined whether the assessee's claim for bad debt is acceptable or not. In my opinion, the assessee's claim is valid because after its hundis were dishonoured and after it had known from its correspondents in Calcutta that the financial position of the Calcutta party was such that nothing would be realised from it, even if legal steps were taken, it had lost hope of recovering anything from the said party. In order that a debt becomes bad, it is not necessary that legal steps must be initiated by the party against the debtor before it can claim the bad debt. Whether or not the assessee would spend its good money in order to recover something which has already, in its opinion, become bad, has to be left to the judgment of the businessman, who is carrying on his business and the bona fides of his decision should not normally be challenged unless there is material to show some collusive action. In the present case, it is not the department's stand that the assessee was in any way or in some way related with the Calcutta party and that the write off is the result of collusive action on the part of the two.
Their Lordships of the Gujarat High Court considered the principles, which should be applied while evaluating the claim of bad debt in the case of Sarangpur Cotton Mfg. Co. Ltd. v. CIT  143 ITR 166.
According to their Lordships, "when a businessman writes off an amount, there is prima facie evidence that the amount is irrecoverable". The department can, of course, rebut the prima facie inference by drawing attention to circumstances or by leading some evidence to suggest that the position taken up by the assessee was not correct. Such rebuttal has not been done by the revenue in the present case. Taking into account the facts and circumstances of the present case, as stated above, I am of the opinion that the assessee's claim for bad debt is entirely correct and as such, I allow it.
Order under Section 255(4) of the income-tax act, 1961 - Inasmuch as it has not been possible for us to come to an agreed conclusion in IT Appeal No. 65 (Ahd.) of 1983, we refer the following question for the opinion of the Third Member: Whether, on the facts and in the circumstances of the case, the claim of the assessee for bad debts amounting to Rs. 28,077 due from Dwarkaprasad Bhojnagarwala of Calcutta in Samvat Year 2035 relevant to the assessment year 1980-81 is allowable? 1. During the accounting year relevant to the assessment year under appeal, the assessee-firm wrote off a bad debt of Rs. 28,077. The amount was due from one Dwarkaprasad Bhojnagarwala of Calcutta. The assessee was selling goods to the said Calcutta party. Remittances were regularly received from that party. During the accounting year relevant to the assessment year 1977-78, the assessee made sales of Rs. 1,06,118 to the Calcutta party. During the next year, the sales came to Rs. 1,65,987. Against this, the assessee received payment of Rs. 1,55,218 leaving a balance of Rs. 10,701. In the subsequent year, as against sales of Rs. 3,00,670, the assessee received Rs. 2,61,451 leaving a balance of Rs. 49,920. During the accounting year. relevant to the year under appeal, the sales amounted to Rs. 85,012. As against the total amount due of Rs. 1,34,932, the assessee received Rs. 1,06,856 leaving a balance of Rs. 28,077, which was written off during the year. The facts also indicate that the Calcutta party issued three bills payable to the assessee of Rs. 11,532, Rs. 5,117 and Rs. 3,010 on 21-3-1979, 7-5-1979 and 6-6-1979, respectively. These bills were dishonoured. The assessee seems to have made enquiries about the financial position of the Calcutta party through one General Cloth Stores. The assessee was advised on 13-10-1970 that the Calcutta party had wound up its business and gone into insolvency. For more than four months, payments had been stopped by the party. In a subsequent communication, the assessee was informed that since the Calcutta party had absolutely no capacity to pay creditors, no purpose would be served by taking legal action. On the strength of the above communications, the assessee wrote off the sum of Rs. 28,077 as irrecoverable debt. The ITO rejected the claim of bad debt on the ground that the assessee had not initiated any legal steps against the debtor. The Commissioner (Appeals) confirmed the order of the ITO.2. When the matter came on appeal to the Tribunal, the two members having differed on the question of the allowability of the bad debt, the following point of difference has been referred to me as the Third Member for resolution: Whether, on the facts and in the circumstances of the case, the claim of the assessee for bad debts amounting to Rs. 28,077 due from Dwarkaprasad Bhojnagarwala of Calcutta in Samvat Year 2035 relevant to the assessment year 1980-81 is allowable 3. The learned Counsel for the assessee has pointed out that every possible step was taken to realise the amount. It was written off only when the recovery was impossible. The bills payable were dishonoured.
That the debtor has gone into insolvency is also known. The outstandings related to an earlier year. Till today nothing has been recovered. It is on the basis of these facts that the assessee has properly written off the bad debt during this year. It is not always necessary to take legal steps against a debtor when facts were clear.
The department has not either alleged or pointed out any collusive action between the assessee and the debtor. Reliance is also placed on the observations of the Gujarat High Court in Sarangpur Cotton Mfg. Co.
Ltd.'s case (supra).
4. For the department, it is pointed out that the broad principles laid down in Sarangpur Cotton Mfg. Co. Ltd.'s case (supra) would not apply to the facts of the present case. The case of the department is not that there is any collusion between the parties but that even if the debt has become bad, the writing off was premature. There is absolutely no evidence of the assessee having entered into even any correspondence with the debtor. The writing off has been done mainly on the assertions of third parties. It cannot be left to the ipse dixit of the assessee to write off a bad debt whenever he liked. Reference is made to the decision in Chettinad Co. (P.) Ltd. v. CIT  147 ITR 724 (Mad.).
The learned Counsel has stressed the point that the assessee himself must know about the whereabouts of the debtor or his capacity to repay.
This knowledge is not available in the present case.
5. That the debtor has been having business with the assessee over a long time is not in dispute? The debtor has been paying amounts also fairly regularly in the past. The assessee had transactions running to lakhs of rupees from year to year. The amount written off during the year comes to only Rs. 28,077. There is no allegation that the debtor and the assessee are related. There is no allegation of collusive action either. On the contrary, three bills payable issued by the debtor on three different occasions have been dishonoured. There is information from Calcutta parties, relied on by the assessee, that the debtor has gone into insolvency. It is not necessary in every case that the assessee writes to the debtor or establishes his whereabouts. Where that is not known, it is not that he can regard debt as irrecoverable.
As a matter of fact, till today, no amounts have been recovered out of the sum of Rs. 28,077 outstanding. For a prudent businessman all these would be sufficient indications that the outstandings cannot be recovered. At any rate, the chances of recovery are remote. The income of the assessee is in the neighbourhood of Rs. 5 lakhs. It is also a fairly steady income from year to year. Taking all these facts into account, it cannot be stated that as a matter of fact no prudent businessman can write off the outstanding debt as bad during the year.
I agree with the learned Accountant Member that the bad debt should be allowed during the accounting year. The matter will go back to the Bench, which heard the case for proper disposal.