KAMLA COTTON COMPANY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE following two questions have been referred to us for our decision by the Tribunal, Ahmedabad 'A' Bench :

(2.) THE assessee, a dealer in cotton, had supplied cotton by invoice value of Rs. 73,582 to Ahmedabad Jupiter Spg. and Wvg. Co. Ltd., Bombay, which transaction took place on 10th June, 1971. The said Bombay company issued two cheques dt. 25th June, 1971 and 26th July, 1971, in the sum of Rs. 37,000 and Rs. 36,582.61 respectively - i.e., for the total sum of Rs. 73,582.61 paise. However, these cheques were dishonoured and on 28th June, 1971, the management of the said company intimated to their employees that because of the financial difficulties, the mill was to close down. The management of the Ahmedabad Jupiter Spg. and Wvg. Co. Ltd., Ahmedabad and Bombay was taken over under the provisions of s. 18A of the Industries (Development and Regulation) Act,. 1951, for a period of 5 years commencing from the date of publication of the notification in the Official Gazette. A notification was published in the Gazette of India Extra -ordinary Part II, s. 3 sub -s. (ii) dt. 1st Dec., 1971, page No. 3259. On 15th Oct., 1971, a notification came to be issued by the Government of Bombay under ss. 3 and 4(1)(a)(iv) of the Bombay Relief Undertakings (Special Provisions) Act, 1958, declaring the said company at Bombay, to which a guarantee was provided by the State Government, to be a relief undertaking. Simultaneously, a direction was issued in relation to the said undertaking that for the period for which it continued as relief undertaking, the rights and liabilities that may have accrued before 15th Oct., 1971 and any remedy for the enforcement thereof shall be suspended and all proceedings relating thereto pending before any Court, tribunal, officer or authority shall be stayed. In respect of the asst. yr. 1973 -74, initially ex parte assessment was made under s. 144 on 9th March, 1976, but by its applications dt. 9th April, 1976 and 17th April, 1976, the assessee had applied for reopening the assessment, which was reopened on 19th April, 1976. In respect of the relevant period the assessee had debited an amount of Rs. 73,583 as bad debt on the ground that the Ahmedabad Jupiter Spg. and Wvg. Co. Ltd., Bombay had been taken over by the Central Government and that the amount due from the company was not recoverable. The ITO, however, held that though the said company was taken over by the Central Government, it was not known whether the Government had paid any amount to the assessee and, therefore, it could not be held that the said amount had become irrecoverable. The bad debt claim was, therefore, disallowed and added in the total income of the relevant year. The assessee challenged the ITO's order before the AAC, Range 'A', Baroda and the AAC finding that the conditions of s. 36(1)(vii) of the IT Act were fulfilled inasmuch as the chances of the assessee's recovering his money were almost nil, set aside the order of the ITO with a direction to allow the deduction as bad debt under the said proviso. In the process, the AAC observed that what was necessary under s. 26(1)(vii) of the said Act was that the assessee should have a reasonable cause to come to a belief that a debt had become bad and that such debt should be written off in the books of accounts relevant to the previous year and that such write -off should be claimed as a deduction in the IT return of the assessee. It was noted that the total liabilities of the mill company amounted to more than 2 crores of rupees an the chances of the assessee's recovering his dues were almost nil. The Department approached the Tribunal against the order of the AAC and the Tribunal, by its order dt. 30th March, 1979 held that the said company was taken over by the Government only on 21st Dec., 1974 under the provisions of the Sick Textile Undertakings Nationalisation Act, 1974, and, therefore, it could not be said that the debt had become bad during the accounting year. The Tribunal held on the strength of a letter dt. 17th April, 1976, which was written by the Central Gujarat Cotton Dealers' Association to the assessee informing the assessee that there was no chance of recovery of its dues, that the debt had become bad only in the accounting year in which the letter was received by the assessee, i.e., in the asst. yr. 1977 -78, but so far as the year 1973 -74 was concerned, the claim was premature. The appeal was accordingly allowed. Later on, a review application was made before the Tribunal pointing out certain factual errors which had crept in its order, partly due to the errors reflected in the written arguments which were submitted by the assessee. The Tribunal by its order dt. 17th Sept., 1979, directed certain corrections to be made in its order dt. 30th March, 1979. These corrections will have some bearing on the merits of the matter and, therefore, we may refer to them. In paragraph 2 of its earlier order the Tribunal had observed : 'it would appear that the liability of the Jupiter Company amounted to Rs. 2.35 crores and the assessee's chance of recovering the amount were bleak'. This was substituted by the following :

(3.) IN our view, the requirement that the debt has become bad or irrecoverable did not mean that the Department can insist upon demonstrative and infallible proof that the debt had become bad. Moreover, it is not compulsory for the assessee to take legal proceedings against the debtor for recovery of the claim before writing it off as a bad debt. In our opinion, when the creditor bona fide writes off the debt as there appears no chance of its recovery in a foreseeable future or where the recovery proceedings would be so cumbersome and expensive as to outweigh any advantage of instituting any recovery proceedings, he discharges the onus and would be entitled to claim deduction under the said clause (vii) of s. 36(1) as it stood at the relevant time.