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V.N. Rajan and Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 34 of 1979
Judge
Reported in(1983)32CTR(Cal)22,[1983]142ITR545(Cal)
ActsIncome Tax Act, 1961 - Section 36(1); ;Indian Income Tax Act, 1922
AppellantV.N. Rajan and Co.
RespondentCommissioner of Income-tax
Appellant AdvocateK. Roy and ;A.K. Roy Chowdhury, Advs.
Respondent AdvocateAjit Kr. Sengupta and ;B.K. Naha, Advs.
Cases ReferredAnderton and Halstead Ltd. v. Birrell
Excerpt:
- sabyasachi mukharji, j.1. in this reference under section 256(2) of the i.t. act, 1961, the tribunal has referred the following question, as directed by this court :'whether, on the facts and in the circumstances of the case, there was any relevant evidence before the tribunal to support its opinion that the appellate assistant commissioner was not justified in accepting the assessee's claim for deduction of rs. 59,477 ?'2. we are concerned in this reference with the assessment year 1971-72, for which the relevant accounting year is the calendar year 1970. in the return of income as well as during the assessment proceedings, the assessee claimed deduction of rs. 59,477 being bad debts written off in its books of account. this amount was claimed on account of three debtors. the first.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(2) of the I.T. Act, 1961, the Tribunal has referred the following question, as directed by this court :

'Whether, on the facts and in the circumstances of the case, there was any relevant evidence before the Tribunal to support its opinion that the Appellate Assistant Commissioner was not justified in accepting the assessee's claim for deduction of Rs. 59,477 ?'

2. We are concerned in this reference with the assessment year 1971-72, for which the relevant accounting year is the calendar year 1970. In the return of income as well as during the assessment proceedings, the assessee claimed deduction of Rs. 59,477 being bad debts written off in its books of account. This amount was claimed on account of three debtors. The first debtor was M/s, Sankar Coal Co., Kanpur. There was a debt to be recovered from this company amounting to Rs. 47,659. The ITO found from the copy of the account filed that the assessee had regular transactions with this party up to the calendar year 1968 relevant to the assessment year 1969-70, when the outstanding balance stood at Rs. 47,659. This amount, the assessee claimed, was carried forward and written off during the year being unable to realise the amount. It was stated before the ITO and noted in the assessment proceedings that the assessee had filed a suit in the court of the Second Sub-Judge, Alipore, being Suit No. 26 of 1969, and as the defendant in that suit did not appearin the court, an ex parte decree was passed on the 28th April, 1970. It was further stated on behalf of the assessee that the assessee had failed to trace out the whereabouts of the assessee and, as such, the decree could not be executed. The ITO further noted that no evidence in support of these contentions had been produced to show that the firm had really been closed. In that view of the matter and in the absence of anything else the ITO disallowed the claim as being premature.

3. The second claim was for a sum of Rs. 4,546 in the name of M/s. Bamundia Coal Co. Ltd., Calcutta. From the copy of account filed before the ITO, it was seen, the outstanding balance of the calendar year 1969, relevant to the assessment year 1970-71, was carried forward and written off during the year. It was stated that the assessee being unable to realise the amount had filed a suit against the party in the Presidency Small Causes Court, Calcutta, being Suit No. 300 of 1970. That debtor did not appear and the suit was decreed ex parte on the 16th November, 1970. It was further stated before the ITO that the ex parte decree could not be executed as the colliery had been nationalised by an Ordinance dated 18th October, 1971. The ITO was unable to accept the contention of the assessee that the assessee could not realise its deb't of Rs, 4,545 in respect of the ex parte decree passed on the 16th November, 1970, and this was also disallowed by the ITO as premature.

4. The third debt was for a sum of Rs. 7,272 in the name of M/s. Vijay Foundry Pvt. Ltd. From the copy of accounts filed before the ITO it was seen that the outstanding balance for the assessment year 1969-70 was carried forward and written off during the year as bad debt as being unable to realise the amount due. It was stated that the assessee had filed a suit in the High Court, being Suit No. 3313 of 1969, and as the party did not appear, an ex parte decree was passed on the 11th May, 1970. It was further stated that the assessee being unable to trace out the company, which had been closed in the meantime, could not execute the decree. According to the ITO, the assessee's contention was not tenable in view of the fact that on enquiry it was found that the company was in the hands of a receiver since July, 1970, and the ITO was of the view that the assessee could have taken steps to realise the amount on the strength of the High Court decree. This claim was also disallowed by the ITO as being premature.

5. Being aggrieved by the aforesaid disallowance, the assessee preferred an appeal before the A AC.

6. The AAC considered these three bad debts and, after setting out the order of the ITO and the contentions of the parties, observed as follows :

'In the case of M/s. Shankar Coal Co., the claim of the appellent has been disallowed by the ITO only on the ground that evidenceregarding the firm being closed was not produced before the ITO and that the debt relates to assessment year 1969-70, and, therefore, the claim for bad debt is premature in the present assessment year. The very fact that the party had absented from appearing before the court in the suit filed by the appellant in 1969, and that an ex parte decree was passed and that the amount outstanding in this account has remained unrecovered for over two years is sufficient to indicate that there were no chance of recovering the amounts. If the firm had been traceable, the appellant would not have allowed such a large amount to remain unrecovered. It was in the interest of the appellant to get the amount recovered from the party instead of claiming it as bad debt. It is to be noted that an assessee is the best judge to decide whether a particular debt is likely to be recovered or not. If in the given circumstances a reasonably prudent businessman comes to a conclusion that the debt due to him from a particular debtor is wholly or partly irrecoverable, the decision should be acceptable for allowing the claim for bad debt under the Income-tax Act. In deciding whether the decision of the prudent businessman should be accepted or not the concept of commercial insolvency cannot be imported into a consideration of the question whether and under what circumstances a debt becomes bad. [Devi Films Ltd. v. CIT : [1963]49ITR874(Mad) ]. It has also been held in this case that 'the Department cannot insist on demonstrative proof which is infallible 'before the claim for bad debt can be allowed. What is required is an honest judgment on the part of the assessee at the time when he makes the write-off in the light of the events up to that stage and not in the light of later happenings. Although it has been held that that 'in order to determine the question whether the assessee could have believed that the debt was bad on particular date, his subsequent conduct in treating the debtor as solvent and sound would be relevant and admissible', the ITO has not established in the present case that the appellant had renewed his business connection with the party. Thus, even from the point of view of the subsequent conduct of the appellant the decision taken in writing off the amount in the present assessment year, cannot be questioned. The debt is irrecoverable when it becomes patent that the debtor has no means to pay or he has absconded and the debt cannot be recovered. If the assessee honestly feels convinced that the financial position of the debtor is so precarious and shaky, that it would be impossible to collect any money from him, he is justified in claiming it as a bad debt. In the light of the above decision it cannot be said that it was necessary for the appellant to establish before claiming the dues as bad debts, that the firm was closed.'

7. Although in general an assessee is entitled to wait till the period of limitation has run out, a debt may become irrecoverable when there is stilllimitation to enforce payment. If the assessee had no reasonable expectation of recovering the debt, at the time he wrote it off, the claim cannot be disputed merely because the period of limitation was not over. Since the assessee is the best judge in deciding as to when he ceases to have any chance of recovering the dues his decision to claim it as bad debt in a particular year should not be normally challenged unless the facts are otherwise. In the present case since it is not the ITO's case that in the assessment year under reference there could have been any chance of recovering the amount from the party it cannot be said that the claim for bad debts was premature in the present assessment year. In the circumstances, the ITO was not justified in disallowing the claim for bad debt of Rs. 47,659. The same is, therefore, deleted.

8. As regards the amount of Rs. 4,546 due from M/s. Bamundia Coal Co. Ltd., the ITO has made the disallowance on the simple ground that the ex parte decree was passed on 16th November, 1970, but the Ordinance regarding nationalisation of the collieries was issued in October, 1971, and that the appellant could have very well taken steps against the debtor to execute the decree which he has not done. This claim is also disallowed by the ITO, being premature.

9. Although it is true that the Nationalisation Ordinance was issued nearly one year after the decree was issued by the court in favour of the appellant, the position of the accounts of the party with the appellant indicates that the debt had remained unrecovered for more than one year and the financial position of the company was not such as could give any hope to unsecured creditors, of recovering the amounts. The ratio of the decision referred to above would apply in judging the validity of this claim also. The failure of the party to respond the summons issued by the court in the suit filed by the appellant are sufficient to indicate that the party had nothing to lose by allowing the ex parte decree to be issued by the court against him. This attitude can be taken by a debtor when he is sure that he is not to lose anything by his conduct, in view of his financial difficulties. In the circumstances, there is no reason to hold that the appellant's claim for bad debts was premature or that the appellant should have taken steps to execute the court decree. In the circumstances, the disallowance made by the ITO cannot be sustained. The same is deleted, and the appellant gets a relief of Rs. 4,556,

10. As regards M/s. Vijay Foundry Pvt. Ltd., the ITO had made this disallowance as he found that the receiver was appointed and the appellant did not attempt to recover his dues from the receiver on the strength of the court's decree. The ITO has considered the claim as premature.

11. In this case also the court had issued an ex parte decree in favour of the appellant for the amounts due from that party. The court's decreewas issued in May, 1970, i. e., immediately before the appointment of the court receiver. The appointment of a court receiver does not ensure the recovery of the debts by the various creditors. It is not the ITO's case that the court receiver had paid the various creditors in full or even in part. The appellant has written off the amount due from this party at the end of 1970 calendar year. The assessment has been made by the ITO on 14th March, 1974. If the subsequent happenings that even after the period of over three years of the appellant writting off the dues, the court receiver has not paid any amount to the creditors are taken into consideration, it cannot be said that the appellant was rather hasty in treating the amount as a bad debt in the present assessment year. The ratio of the decision referred to above will apply to the present claim also. In the circumstances the disallowance of bad debts of Rs. 7,272 cannot be upheld and the same is deleted. The appellant gets a relief of Rs. 7,272 on this count.

12. There was a further appeal before the Tribunal. Before the Tribunal the assessee produced a letter dated 21st September, 1976. That was a letter written by the advocate to the assessee. The letter is as follows:

'Dear Sirs,

Ref: Execution of decree against M/s. Sankar Coal Company,

M/s. Bamundia Coal Co. Ltd. and M/s. Vijay Coal

Foundry.

I shoud report the latest position of the execution proceedings started against the above judgment-debtors.

(1) M/s. Sankar Coal Co. of Cawnpore:

The decree was sought to be executed through the Cawnpore court and accordingly the decree was caused to be transferred from the Alipore court. Enquiry through local lawyer could not find the whereabouts of the firm since they left the original place of their business. Of course, efforts are still being made to trace out the party before which nothing can be done towards execution.

(2) M/s. Bamundia Coal Co. Ltd. :

Execution could not be effected as yet. At the registered address of the 6rm so many name plates of some other parties were found hanging and persons available there totally disowned the identity of the judgment-debtors. Nothing could be done under the circumstances.

(3) M/s. Vijay Coal Foundry:

Execution could not proceed further than the initial stage. On information that a receiver was appointed for the affairs of the company efforts were made to find out the receiver himself and at the address on Netaji Subhas Road, Mc. Lloyd Building. But he could not be traced. Assuch, execution could not be effected since it is to be effected through the receiver in whom the company's property vested for the time being.'

13. The Tribunal took that letter into consideration in disposing of the appeal. After setting out the facts and the rival contentions and submissions of the parties, the Tribunal observed as follows :

'We have considered the rival submissions of the parties and are of the view that the submissions made on behalf of the Revenue are well founded and should be accepted. It appears to us that the AAC was influenced by the fact that the assessee was not in a position to execute the decrees against the aforesaid three parties. However, in deciding the assessed claim for deduction of bad debts written off, we have to find out whether the assessee has lost the last ray of hope of recovering the debts from the aforesaid three parties. In our opinion, in view of the aforesaid letter dated September 21, 1976, of the assessee's advocate, it is difficult to hold that the assessee has lost the last ray of hope of recovering outstanding dues from the aforesaid three parties. On the contrary, it clearly shows that the assessee is still pursuing the matter and is trying to recover the outstanding dues from the aforesaid three parties. In this view of the matter, we are of opinion that the AAC was not justified in accepting the assessee's claim for deduction of Rs. 59,447. We, therefore, set aside the order of the AAC on this point and restore that of the ITO.'

14. The assessee sought to raise certain questions for reference to this court. As the Tribunal refused to refer any question of law to this court the assessee made an application under Section 256(2) of the I.T. Act, 1961, and as directed by this court the Tribunal has referred the question to this court as indicated before.

15. Before we consider the rival contentions we may notice that under the Indian I.T. Act, 1922, under Section 10(2)(xi), bad and doubtful debts due to the assessee in respect of that part of the business, profession or vocation was allowed to be deducted. There was a slight change in the phraseology used in the I.T. Act, 1961, under which this case is governed. This position is now dealt within Section 36(1)(vii). Under that provision subject to the provisions of Sub-section (2) of Section 36, ' the amount of any debt or part thereof, which is established to have become bad debt in the previous year ' is entitled to deduction. It appears to us that though there has been a slight alteration in the phraseology used on this aspect of the matter, there has not been any substantial alteration in the situation. This view is corroborated by the decision of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 5, where the Gujarat High Court has referred to the Twelfth Report of the Law Commission of India on the working of the Indian I.T. Act, 1922, and the attention of the Gujarat High Court was drawn to the Notes on Clauses as mentionedin the said report. While referring to the Notes on Clauses No. 36 of the Report, the court observed as follows (pp. 110-111 of 130 ITR):

''Instead of the words' bad and doubtful debts ' (as mentioned in the opening lines of the existing Section 10(2)(xi), the words, ' debts or parts thereof that are established to have become bad debts ' have been used. The word 'doubtful' is unnecessary and does not add anything to what is conveyed by ' bad ' .'

16. It was, therefore, submitted that according to the Law Commission's Report, the omission of the word 'doubtful' after the word 'bad and' in the then proposed new Act of 1961, was really of no consequence as the term ' bad debt' would include even a doubtful debt. Our attention was also invited to a copy of instruction No, 370 (Circular letter No. F. No. 205/ 15/71, dated January 13, 1972, issued by the Secretary, Central Board of Direct Taxes, Government of India, New Delhi). The said circular was with reference to the provisions of bad debt allowance in the hands of assessees who had sold goods to sick textile mills. While dealing with the aforesaid subject, the said circular referred to the provisions for bad and doubtful debts as made in Section 10(2)(xi) of the 1922 Act and the similar provision made in Section 36(1)(vii) of the 1961 Act. The circular on this aspect observed as under :

'The Law Commission had replaced the words 'bad and doubtful debts ' occurring in Section 10(2)(xi) of the Indian I.T. Act, 1922, by the words 'debts or parts thereof that are established to have become bad debts ' as the Commission was of the view that the word ' doubtful' was unnecessary and did not add anything to what was covered by a word 'bad'. It is, therefore, obvious that there was no intention to reduce the scope of the earlier provisions contained in Section 10(2)(xi) of the Indian I.T. Act, 1922; it is considered that the provision in Section 36(1)(vii) also covered doubtful debts.' '

17. The question whether a particular debt is considered to be bad or irrecoverable must be viewed on the facts and circumstances prevailing in the relevant assessment year. This view is corroborated by the observations of Rowlatt J. in the case of Anderton and Halstead Ltd. v. Birrell [1931] 16 TC 200 (KB), where at p. 208 of the report, Rowlatt J. observed as follows :

' The question for me is whether there was any evidence on which they could find in favour of the Crown on the whole matter. Now what has happened is this; the Surveyor has made these additional assessments simply because it has come to his knowledge, as stated in paragraph 8 of the case, that in the years since the two successive writings-down of this debt were allowed, the Appellants have permitted the debtors to increase their indebtedness to them while they reduced that ofother creditors. The finding of the Commissioners on the appeal was that they were not satisfied that the debt or part thereof had been proved to be a bad debt within the meaning of Rule 3(i) of Cases I and II.

In my judgment the Commissioners have not considered the right question, and there was no evidence which would have supported the decision for the inspector if they had. Rule 3 is as follows :

' In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of, and then after a list, '(i) any debts, except bad debts proved to be such to the satisfaction of the Commis-missioners and doubtful debts to the extent that they are respectively estimated to be bad '. What the statute requires, therefore, is an estimate to what extent a debt is bad, and this is for the purpose of a profit and loss account. Such an estimate is not a prophecy to be judged as to its truth by after events, but a valuation of an asset de praesenti upon an uncertain future to be judged as to its soundness as an estimate upon the then facts and probabilities. It is overthrown as an estimate in 1923 and 1924 by coming to the conclusion, as the Commissioners have done, that in 1930 it had not been proved that the debts were to any extent bad. Supposing, however, instead of making an irrelevant pronouncement, the Commissioners had addressed themselves to the true points, namely, the criticism of the estimate as in 1923 and 1924, what material had they before them to justify, first the intervention at all of the inspector on the ground of a ' discovery', and, secondly, their own action in upholding the assessment made in pursuance of that intervention? The only way, I think, in which it could be put, would be that the subsequent growth of the indebtedness indicated that there must have been some fact in 1923 and 1924, which (a) was not taken into account in the estimate, and (b) would have made the estimate as an estimate in 1922 and 1923 higher. It may indicate that the appellants in 1923 and 1924 were willing to contemplate that the debt should or might increase, but I think it is merely guesswork under the circumstances of this case to infer that that was because there was then reason to think the existing debt good. Perhaps it may be said, loosely, that people who act as the appellants have done, do not deserve to be allowed depreciation, and that is really the only basis on which it seems to me that the reconsideration of the estimate can be explained, but that is not a justification for these additional assessments.'

18. There the assessee-company wrote off, partly in its accounts for 1921 and partly in its accounts for 1922, a debt due from a second company in which it held a majority of the shares. After discussion with the inspector of taxes and the company's auditors the whole of the amount written off in 1921 and part of the amount written off in 1922 were allowed as deduc-tions in computing the company's profits for income-tax purposes as representing the amounts of the debt which at the time were estimated to be bad. The assessee-company continued, after 1922, to trade with the debtor-company and extended it further and increasing credit while its indebtedness to other creditors diminished. Having regard to these facts the inspector in 1929 submitted additional assessments to neutralise the effect of the deductions allowed in computing the profits and the additional assessments were confirmed on appeal by the General Commissioners who held that no part of the. debt in question had been proved to be bad. It was held by Mr. Justice Rowlatt that there was no evidence that the deductions were wrongly allowed by reference to the circumstances at the time of allowance and that the additional assessments were not, therefore, justified.

19. It is, however, important to bear in mind whether in the particular facts and circumstances a debt could reasonably be allowed as deduction having been considered by the assessee to be bad debt or not, is essentially a question of fact. In the case of CIT v. Sir S.M. Chitnavis , the Judicial Committee interpreting Section 24 of the Indian I.T. Act, 1922, observed as follows:

'Whether a debt is a bad debt, and, if so, at what point of time it became a bad debt, are questions which in their Lordships' view are questions of fact, to be decided in the event of dispute by the appropriate Tribunal, and not by the ipso dixit of anyone else. The assessee has no option of declaring a debt as bad...... In every case it is a question offact, to be determined after consideration of all relevant circumstances. '

20. The Supreme Court in the case of Bank of Bihar Ltd. v. CIT : [1962]45ITR427(SC) , referred to the aforesaid observations. There the Supreme Court held that if a debt had become bad, subsequent amalgamation of that debt with other debts due from the same debtor which had not become bad could not revive the bad debts so as to enable the creditor to write off as a bad debt in a later year. The Supreme Court also reiterated that the question whether a debt was bad was one of fact and if there was some evidence to justify the conclusion of the Tribunal, it was not open to the High Court in a reference under Section 66 of the Indian I.T. Act, 1922, to reappreciate the evidence.

21. In the case of Associated Banking Corporation oj India Ltd. v. CIV : [1965]56ITR1(SC) , the Supreme Court reiterated that it was for the ITO to ascertain what debts had become bad or doubtful in the year of account. There, the Supreme Court referred to the observations of the Judicial Committee in Chitnavis' case [1932] 2 Comp Cas 464 (PC), and the Supreme Court noted that under the I.T. Act, 1961, by Section 36(1)(vii) the amount ofany debt or part thereof which was established to have become a bad debt in the previous year had to be allowed in computing the income under Section 28; but that allowance was subject to Sub-section (2) which provided in so far as it was material that in making any deduction for a bad debt or a part thereof certain provisions mentioned in Sub-section (2) had to be established. Referring to such provisions, the Supreme Court noted that the material clause had been wholly redrafted and the Legislature had done it intentionally. It appears to us that in imposing certain conditions the Legislature had intended different intention. But about the meaning of bad and doubtful debts or debt which had to be established to have become bad, there was no change of any purpose in the different languages used by the two different sections.

22. From the various decisions which were cited and which we shall presently note, it appears to us that both under the 1922 Act as well as under the 1961 Act an assessee is entitled to the deduction in respect of any debts, if it could be reasonably established, to the satisfaction of the ITO, that it was incapable of recovery, considered from a business and practical, point of view, and that position must be judged from the background of the events prevailing in the relevant assessment year. Subsequent events would not alter the position.

23. Emphasis was laid in view of a certain observation that an entry made by the assessee was prima facie evidence of the fact that an assessee had considered a debt to be bad and unless it was demonstratively established by the Revenue that the entry was not correct, then the prima facie evidence should be taken as conclusive. It is true that the entry made by the assessee in his books is prima facie evidence. But it has also to be borne in mind that the section requires that the assessee should establish that the debt had become bad. Therefore, the prima facie evidence should be considered objectively by the revenue authorities to find out if any other view or alternative or contrary view is possible. In this connection, we may refer to the observations of the Supreme Court in the case of Associated Banking Corporation of India Ltd. v. CIT : [1965]56ITR1(SC) , where at p. 10 of the report, the Supreme Court observed as under:

' But this does not mean that an assessee who chooses not to post an entry in the books of account about bad or doubtful debts places himself in a better position than an assessee who has actually posted entries writing off amounts as irrecoverable in his books of account. On the materials placed before him, it is always open to the Income-tax Officer to come to the conclusion that the fact that the assessee has not chosen to post an entry is consistent with the circumstances that no part of the debt due to him in the year of account has become bad or doubtful and, there-fore, irrecoverable, and on that account to disallow the claim which may be made at the hearing that some or all debts had become bad or doubtful. Even when no entry has been posted in the books of account, the question is one of power to be exercised on the facts and circumstances on the record by the Income-tax Officer to allow deductions in the computation of profits and gains. If the Income-tax Officer estimates certain debts to be irrecoverable, it would be within his power under Section 10(2)(xi) to allow the same in computing the profits. That power is only restricted in one direction, namely, that where the assessee has posted an entry or entries in the books of account the amount to be estimated as irrecoverable is not to exceed the amount actually written off as irrecoverable by the assessee. '

24. Reference was made to certain observations where it has been observed that a debt could not be considered to be bad debt until the last ray of hope had been established. It has also been observed by some Calcutta decisions, to which we shall presently refer, even slender hope is considered to be good enough not to make a debt bad. In our opinion, there is not much conflict in these expressions used. The whole question must be looked at from a practical and business point of view. But the action of the assessee in treating an entry to be bad would not by itself be conclusive. It must be bad by certain objective facts which a reasonable man should accept reasonably that the debt had become irrecoverable or bad or practically impossible of recovery.

25. In this connection, reference was made to the meaning of the expression 'irrecoverable' in Webster's Third New International Dictionary, p. 1195, whereas one of the meanings of 'irrecoverable' Webster indicated 'not capable of being recovered '. Therefore, it was submitted that the assessee must objectively consider the debt to be not recoverable from a practical point of view.

26. The Privy Council in the case of F. E. Dinshaw v. CIT [1934] 2 ITR 319, observed that it was not necessary to constitute moneys due by a joint stock company, a bad debt or a business loss to the creditor, that the company should be actually wound up or have ceased to be a going concern. Whether the debt is wholly or partly and to what extent, bad or irrecoverable was in every case, and whether the debtor was a human being or a joint stock company or other entity, a question of fact to be decided by the appropriate Tribunal upon a consideration of the relevant facts of that case.

27. The Full Bench of the Lahore High Court in the case of B.C.G.A. (Punjab) Ltd. v. CIT , had the occasion to consider this and there one of the questions referred before the court was question No. 5 which was as follows :

' The assessee having an amount due from an insolvent estate, as to the badness of which the only evidence was that petty realisations were received during the prior year and the subsequent year, was it impossible in law for the Assistant Commissioner to find that badness thereof did not eventuate in the year of amount ?'

28. There, the Full Bench, after setting out the facts, observed as follows :

' So long as there is any ray of hope left to recover a debt, however dim it may be, and so long as a debt is in the process of realization, it cannot be said that it has become irrecoverable.'

29. As indicated above, Din Mohammad J. was emphasising two tests, viz , that in order to become a bad debt there should not be any ray of hope left and, secondly, a debt, however, must not be in the process of realisation. In other words, it was pointed out by Din Mohammad J., emphasising that, if a debt was in the process of realization or if there is any ray of hope left, then it could not be considered to have become a bad debt. It is true that if a debt is in the process of realisation and the assessee has not exhausted all reasonable steps for realisation, then a debt could not be considered to have become bad. But it does not mean that the assessee should wait until the period of limitation to consider a debt to be bad debt. In our opinion, what Din Mohammad J. observed was that the last ray of hope was a hope to be considered from a practical point of view of a businessman, having regard to the circumstances.

30. Our attention was also drawn to the decision of the Division Bench of this court in the case of Hongkong and Shanghai Banking Corporation v. CIT : [1955]28ITR199(Cal) , where the words 'as the Income-tax Officer may estimate to be irrecoverable ' in Section 10(2)(xi) of the Indian I.T. Act, 1922, governed not only the sum referred to in the phrase immediately preceding, viz., ' loans made in the ordinary course of business ', but also the sum referred to in the earlier phrase, viz , ' bad and doubtful debts due to the assessee '. Consequently, both in the case of a debt and in the case of a loan, the claim for deduction could be allowed only if, and to the extent, the ITO estimated it to be irrecoverable. The court noted that the expression ' bad and doubtful debts ' in Section 10(2)(xi) did not contemplate two kinds of debts, but referred to the same class of debt, namely, a debt which was bad and doubtful, i.e., a debt, of which the chance of recovery was nil or slender. A doubtful debt did not mean a debt which could not be held to be irrecoverable. Such a debt might also be held to be irrecoverable wholly or in part.

31. On behalf of the assessee it was stated that the Calcutta High Court was taking a view contrary to the view of the Lahore High Court Full Bench because where there was even slender hope, a debt could be considered in appropriate cases by the Calcutta High Court to be bad and doubt-ful debt; according to the Lahore High Court, in order to be a bad and doubtful debt, the last ray of hope must be extinguished. As we have mentioned before, there is not much difference between the two different expressions used. It appears to us, what the learned judges wanted to convey was that for all practical purposes, a debt could be, from a business point of view, reasonably considered to be irrecoverable. The Calcutta High Court also emphasised, as we have indicated before, the fact that it cannot be said that the assessee's claim to a particular debt to have become bad and doubtful was conclusive, unless it was established that such view was bona fide.

32. In the case of Jadavji Narsidas & Co. v. CIT : [1963]47ITR411(Bom) , the Division Bench of the Bombay High Court had occasion to consider the decision of the Calcutta High Court in the case of Hongkong and Shanghai Banking Corporation : [1955]28ITR199(Cal) . The Bombay High Court had observed that when a 'bad debt' was claimed as an allowance by the assessee the burden was on him to show that he had no reasonable expectation of recovering it at the time he wrote it off or that there was no hope at all on which he could rely for recovering the amount from his debtor at the time he wrote oS the debt. There the assessee wrote off a sum of Rs. 2,23,162 and claimed it as a bad debt in the Samvat year 2004 (1947-48), but it appeared that he had accepted hundies from the debtor which were to mature after the close of the year 2004 and had also filed a suit against the debtor for recovering this amount after the close of the year 2004 and had recovered a small portion of the amount from the debtor. There, it was held that the sum of Rs. 2,23,162 could not be treated as having become a bad debt in 2004 and the claim for allowance of the sum as a bad debt in that year was rightly disallowed by the I.T. authorities.

33. Thereafter, referring to the decision of the Bombay High Court in the case of Mukundlal Bansilal (Raja Bahadur) v. CIT : [1952]22ITR94(Bom) , where the Bombay High Court had held that a debt became a bad debt when the creditor had no reasonable expectation of recovering it from the debtor or when there was no ray of hope at all on which the creditor could rely for recovering the amount from his debtor, and also after referring to the decision of the Calcutta High Court in the case of Hongkong and Shanghai Banking Corporation : [1955]28ITR199(Cal) , referred to hereinbefore, the Division Bench of'the Bombay High Court observed that the principle of law stated by the Calcutta High Court and that stated by the Bombay High Court were not in any way different. The Bombay High Court reiterated, in our opinion, with great respect corrretly, that ' bad debt' was claimed as an allowance by the assessee and, therefore, the burden was on him to show that he had no reasonable expectation of recovering itat the time he wrote it off or that there was no ray of hope at all on which he could rely for recovering the amount from his debtor at the time he wrote off the debt.

34. It is true that the assessee's conduct in writing off a debt prima facie was good evidence provided, it must be based on certain objective factors on which such decision could be taken.

35. We must, however, observe that in the case of Raja Bahadur Mukundlal Bansilal v. C1T : [1952]22ITR94(Bom) , Chagla C.J. observed that a loan became irrecoverable or a debt became a bad debt when the creditor had no reasonable expectation of recovering it from the debtor or when there was no ' ray of hope at all ' on which the creditor could rely for recovering the amount from his debtor.

36. In the case of Devi Films Ltd. v. CIT : [1963]49ITR874(Mad) , the Division Bench of the Madras High Court had held that the expression 'bad and doubtful debt ' was descriptive of a debt which could not reasonably be expected to be realised It was not sufficient 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. The Madras High Court reiterated that there was no acid test to ascertain whether a debt had become bad and doubtful, and if so, when. The question was 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 was proper and permissible in the circumstances of the case was upon the assessee, the Department could not insist on demonstrative proof which was infallible. It could not be laid down as an inflexible rule of law that a waiver by a creditor of a portion of his debt would amount to proof positive of the debt, or any portion thereof, having become bad and doubtful. What was required was an honest judgment on the part of the assessee at the time when he made the decision to write off in the light of events up to that stage and not in the light of later happenings.

37. Our attention was also drawn to certain observations of the Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT : [1979]120ITR792(Bom) , where the Bombay High Court observed that as to when a debt became bad depended upon the circumstances and the materials brought on record and there was no general rule or universal test which would apply to all cases and in all circumstances. The Department could not insist on demonstrative proof of the fact which should satisfy the test of infallibility. All that was required was an honestjudgment on the part of the assessee at the time when he made the writeoff. A debt could not be written off as bad and irrecoverable if on the material available it could be shown that there was a possibility of recovering the same. That a company had not yet gone into liquidation would not by itself establish such a possibility. That the assessee wrote off the debt at a particular point of time in a particular year was not conclusive of the matter, but was not wholly or totally irrelevant. That would be a material circumstance. The Bombay High Court emphasised that it was also not possible to agree with the conclusion of the Tribunal that proceeding with the suit, obtaining the decree, giving notices for winding up and asking the Registrar of Companies to prosecute the directors of New Era would have to be regarded as vigorous recovery proceedings in respect of the amount due to the assessee or that all these materials would indicate that it had not abandoned all hopes of recovery.

38. Our attention was also drawn to the decision in the case of Nanak Chand Mamraj Mal v. CIT , where a debtor has been adjudicated an insolvent and his estate is in the hands of the receiver. It was held that it would not be proper to hold that the debt or any part of it had become bad until the receiver has completed his work. A debtor was adjudicated an insolvent in 1938 and the assessee received a sum of Rs. 13,000 as a first dividend. No further sum was received until 1950, when, as a result of a litigation, the assessee received another sum of Rs. 2,195. In the year 1949-50 the assessee claimed a sum of Rs. 1,00,000 as a bad debt. The Tribunal held that the debt had become irrecoverable soon after the year 1941, on the ground that, subsequent to the payment of the first dividend in 1941, there was no visible asset belonging to the insolvent except a sum of Rs. 10,000 regarding which there was a dispute between the Punjab National Bank Ltd. and tbe official receiver, and that whichever way the dispute was settled, the assessee could never hope to recover more than Rs. 2,500 and from this concluded that the bulk of the debt had become irrecoverable soon after 1941, and, in any case, long before the relevant accounting year 1948-49; it was held that there was no material to justify the finding of the Tribunal that the bulk of the debt had become irrecoverable long before 1948-49, as the receiver completed the winding-up only in 1950.

39. It appears, from the aforesaid decisions, the following principles emerge --(a) Whether a debt could be considered to be bad debt or not must depend on the facts and circumstances of each case, (b) If a fact finding Tribunal after considering all the relevant facts has arrived at a conclusion that the assessee's claim that a debt was to be considered to be bad was either good or bad that conclusion should not be interfered with in a reference by the High Court, (c) Thirdly, it appears that the question must be looked from the practical point of view whether the assessee considered the chance from business point of view that debt had become irrecoverable in that sense and not being capable of from a practical point of view to realise the debt and as such bad. It appears that though the assessee's entry is prima facie evidence, that is not conclusive unless such entry is justified. The onus, however, is on the assessee to establish that the debt has become bad in the relevant year.

40. In this case, it appears that up to few months until the closing of the relevant assessment year, i.e., up to 31st of December, 1970, in respect of first debt of 20th April, 1970, second debt of 2nd of November, 1970 and third debt of 3rd of May, 1970, the assessee had not considered these to be bad and proceeded with the application and obtained ex parte decrees. The fact that the decrees were ex parte does not establish either way. A debtor might have been an insolvent or a debtor might have tried to avoid contesting decrees, because there was no defence.

41. From the letter dated September 1, 1976, it appears that in the relevant assessment year steps were taken for realisation of the decrees and that the assessee had not given up his claim by taking steps in respect of those decrees. It also appears that nothing was found to be seen that the assessee took any step to prefer any claim before the receiver or before the appropriate authority appointed under nationalisation of the coal mines. What other steps the assessee took in finding out the judgment-debtor in Suit No. 26 of 1969 in respect of the first debt, viz., Sankar Coal Company, has also not been indicated by the assessee to the ITO. If on these facts the Tribunal, having considered also the view of the AAC, came to the conclusion that-the assessee's claim that these debts could be considered to be bad and irrecoverable was not established, we cannot say that the Tribunal has acted without relevant materials or on wrong principles of law. It may be that on these facts or some of these facts and some others, the Tribunal might have come to the conclusion that the assessee was justified but having regard to the findings of the Tribunal we are not ia a position to say that the findings were perverse or based on wrong principles of law or ignored any relevant piece of evidence. If that is the position, then, in our opinion, the Tribunal had not acted wrongly. If that is the position then the question must be answered in the affirmative and in favour of the Revenue.

42. In the particular facts and circumstances of the case each party will pay and bear its own costs.

Suhas Chandra Sen, J.

43. I agree.


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