V. Ramaswami, J.
1. In compliance with the directions given by this court, the Income-tax Appellate Tribunal, Madras, has referred the following question :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the addition of Rs. 40,550 representing receipts from Mis. Maharaja Talkies on the ground that the same was allowable as a bad debt in the very same year ?'
2. The assessee is a registered firm engaged in business as 'a film producer'. It would appear that the picture 'Moondreluthu' produced by the assessee was screened in Maharaja Talkies, Madras, through a distributor and the assessee accounted for the collections only for about 20 days, from May 10, 1968, to May 31, 1968. However, when the folio of the said Maharaja Talkies in the books of the assessee was examined, it was found that some further collections and receipts from the said Maharaja Talkies were credited to the accounts and it was found that these entries had also been reversed with the narration that the relevant cheques were dishonored. Rejecting the contention of the assessee that the fact that the cheques were dishonoured would show that no collections accrued to the assessee and hence they were not taken to the revenue account, the Income-tax Officer held that since the assessee is maintaining the accounts on mercantile basis, it is but proper that the collections showed should be accounted for in revenue account as and when amounts are due from the exhibitor and that if at a later date these amounts are not realisable, the proper way would be to claim them as bad debts. In that view, the Income-tax Officer added back a sum of Rs. 60,550 to the total income for that year. When the matter was taken up in appeal before the Appellate Assistant Commissioner, it was found that the receipt amounting to Rs. 20,000 was in fact accounted for twice by the Income-tax Officer and hence the correct amount that will have to come up for consideration for addition was only Rs. 40,550. The Appellate Assistant Commissioner confirmed the view of the Income-tax Officer that since the mercantile system had been followed, the appellant will have to necessarily show the receipt of the cheques as income. Alternatively, the assessee contended that the cheques bounced, that he had made reverse entries relating to these cheques in the accounts and that when the appellant tried to recover the monies, he found the party concerned had run away. It was also stated that an attempt to file a suit was given up as they were advised by their advocate that the court fee alone would come to at least Rs. 7,000 and that it was not worthwhile to file a suit and that, therefore, the said amount should be allowed as bad debt. The Appellate Assistant Commissioner was of the view that in the absence of adequate evidence to show that the amount had actually become bad and irrecoverable, it is not possible to hold that they had become bad or irrecoverable and that the same cannot be allowed as bad debts. On a further appeal, the Tribunal held that considering the fact that the assessee was maintaining the mercantile system of accounting, the monies due to the assessee from the exhibitor would definitely be income assessable in their hands. However, on the alternative plea, the Tribunal held that there was no chance of recovery of the amount from the exhibitor as the party in question had absconded and that the cost of litigation for filing a suit would be so prohibitive and that, therefore, the amount due to the assessee from the distributor during the year should be considered as bad debt allowable for that year. In that view, the Tribunal directed the deletion of the amount ofRs. 40,550. As already stated, at the instance of the Revenue, the question set out above has been referred.
3. Though neither before the Appellate Assistant Commissioner nor before the Tribunal, it appears that the Department had specifically argued that in order to allow the claim as bad debt, it should have been written off as such in the accounts of the assessee and that they seem to have concentrated only on the question whether on merits the assessee had established that it is a bad debt. Learned counsel for the Revenue before us contended that since the question for consideration is whether the amount should be allowed as a bad debt, we are bound to see whether the provisions enabling such allowance as a bad debt are complied with and we cannot pin down the Department to the only point that was argued on merits whether it is a bad debt or not. In this connection, learned counsel also contended that though it is not specifically referred to as an argument, it could not be stated that the Revenue had given up the contention that there was need for writing off that debt in the books of account as a bad debt. It is true that when there is a specific provision relating to the deduction of a bad debt and it imposes conditions precedent for such allowance, there could be no doubt that all the conditions would have to be satisfied. But on that ground, we cannot normally permit a party to argue a point which was not urged in the court below unless on the facts as found by the court below, the point could be argued and no fresh fact or finding is needed. No fresh fact or finding is needed in this case for a consideration on the point raised by the learned counsel. Therefore, we had permitted the counsel to argue this new point. We would not have permitted the learned counsel to raise this contention but for the fact that no more facts are necessary. The facts as found are admitted and on the basis of such facts found, we will proceed to consider the question of law referred to us. We accordingly proceed to consider the arguments of the learned counsel whether the provision of law is complied with, in order that the amount could be claimed as a bad debt.
4. Section 36(1)(vii) provides :
'The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein in computing the income referred to in section 28 -....
(vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year.'
5. The relevant portion of sub-section (2) referred to above, reads a follows :
'In making any deduction for a bad debt or part thereof, the ollowing provisions shall apply :-
(i) no such deduction shall be allowed unless such debtor part thereof -
(a) has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee, and
(b) has been written off as irrecoverable in the accounts of the assessee for that previous year.'
6. Thus, it is seen, the assessee firstly has to establish that any debt had become a bad debt in the previous year. Secondly, it should have been taken into account in computing the income of the assessee of that previous year, or of an earlier previous year and, thirdly, it shall have been written off as irrecoverable in the accounts of the assessee for that previous year. In the light of the finding of the Tribunal deleting the addition, it may be taken that the second condition relating to taking into account in computing the income of the assessee for that previous year has been satisfied. On the first point, though the learned counsel for the Revenue contended that on the two grounds mentioned in the orders, it is not possible to hold that the debt had become a bad debt, we are unable to agree with the learned counsel. There is a specific finding that the party/debtor had absconded. There is also the finding that the cost of litigation involved is so expensive with no chance of recovery making it futile to spend more money for recovery of that debt. These grounds cannot be considered to be irrelevant or not sufficient to hold that the debt had become a bad debt. In fact, a Division Bench of this court has considered the question as to when a debt can be considered to be bad debt in Devi Films Ltd. v. CIT : 49ITR874(Mad) and the relevant passage reads follows (at page 877) :
'The expression 'bad and doubtful debt' is descriptive of a debt which cannot reasonably be expected to be realised. It would not do for the assessee to say that he became pessimistic about the prospects of recovery of the debt in question. He must feel honestly convinced that the financial position of the debtor was so precarious and shaky that it would be impossible to collect any money from him. There is no acid test to ascertain whether a debt has become bad and doubtful, and if so, when. A time-barred debt can be assumed to be bad, but it is not necessarily bad because of the bar of time. The insolvency of the debtor is not conclusive proof that the debt has become bad. Nor does the fact that the debtor has managed to keep outside bankruptcy proceedings constitutes evidence of the debt being good. The question is really one of fact depending upon congeries of facts and diverse circumstances bearing on the debtor's pecuniary position, his commitments and obligations, and the natural apprehensions that would be caused in the minds of the creditors regarding recovery of their dues. While the onus of establishing that the write off of the alleged bad debt is proper and permissible in the circumstances of the case is undoubtedly upon the assessee, the Department cannot insist on demonstrative proof which is quite infallible.'
7. Thus, though the onus of proving that it had become a bad debt is on the assessee, the Department cannot insist on foolproof evidence. The Tribunal has believed the evidence of the assessee and we are satisfied that this view is not unreasonable. Therefore, we confirm the finding of the Tribunal that the debt had become a bad debt.
8. On the question as to what is meant by writing off as irrecoverable debt in the accounts of the assessee, we have two instructive judgments, one rendered with reference to the old provision in section 10(2)(xi) of the Indian Income-tax Act, 1922, and the other under section 36(2)(i)(b) of the Income-tax Act, 1961.
9. In CIT/EPT v. Jwala Prasad Tiwari : 24ITR537(Bom) , we find the following passage :
''Writing off' is a technical term used by financiers and auditors. There are two methods of dealing with a debt which has been written off in the books of account, (1) by giving the corresponding credit to the debtor's account, and (2) by giving the corresponding credit to the bad and doubtful debts account. The first method is only employed where it is desired to close the account of the debtor. The second method is employed where there are some chances of recovery, howsoever remote they may be.
When we talk of ' writing off ', we are not concerned with the credit to be given to an account.' Writing off ' means the raising of a debi t entry. This can only be to the debit of the profit and loss accoun t. This is the only debit which can possibly be raised as a result of writing off a bad debt.'
10. Approving this principle, the learned Chief Justice observed (p. 540) :
'It is open to a businessman to take a view that the debt is entirely bad and there is absolutely no possibility to recover it, in which case he may debit the profit and loss account and credit,the amount to his debtor; or it may be that a businessman may take a view that the debt is not bad but doubtful, in which case he would not take the risk of closing the account of his debtor but he may debit the profit and loss account and he may make corresponding entry in another appropriate account.'
11. A similar view was taken by a Division Bench of the Gujarat High Court in the decision reported in Vithaldas H. Dhanjibha Bardanwala v. CIT : 130ITR95(Guj) . Therefore, there would be no doubt that a debt may be either written off as irrecoverable in the individual accounts of the debtor in the assessee's books or by making appropriate entries in the profit and loss account. In either case, the condition relating to writing off in sub-section (2) of section 36 is satisfied. In this case, the facts stated above show that not only the assessee reversed the entries relating to the receipt of the bounced cheques but also the effect of it was reflected in the profit and loss account by showing reduced profit to the extent of the amount that was reversed in the entries. This, in our opinion, does establish that it had written off the amount as irrecoverable in its accounts. It may also be looked at from the point of view of the intention of the party. The fact that it has reversed the entry relating to the receipt of the cheques and has also not included the amount as a profit in the profit and loss account clearly prove the intention to treat the amount as irrecoverable as held by the Division Bench of the Gujarat High Court in Vithaldas H. Dhanjibhai Bardanwala v. CIT : 130ITR95(Guj) . In that case, it was held that even if the assessee had not followed a more scientific system of accounting, it cannot be said that he cannot show by following a simple system of posting the entries in his books of account that so far as he is concerned, he has written off a bad debt as irrecoverable.
12. We should also keep in mind that in this case for the very same year when the income is stated to have accrued, the reverse entry relating to receipt of the cheques also has been made. This fact, taken with the other circumstances that this income is not shown in the profit and loss account, clearly established that the assessee intended to treat this as irrecoverable in that year itself. We are, therefore, satisfied that the third condition relating to writing off of the amount as irrecoverable in the books of the assessee is also satisfied.
13. For the foregoing reasons, we answer the question in the affirmative and against the Revenue. Since the assessee is not represented, there will be no order as to costs.