COMMISSIONER OF INCOME TAX Vs. DUNLOP INDIA LTD

JUDGEMENT

(1.) This reference under Section 256(2) of the Income-tax Act, 1961, relates to the assessment year 1980-81, the previous year ending December 31, 1979. The assessee is a limited company deriving income from business in the manufacture of tyres, tubes, etc.

(2.) The assessee exported goods to several parties in Turkey between November, 1976, and September, 1977, amounting to Rs. 2,72, 19,587. The parties in Turkey were to pay for the goods in U.S. dollars and deposited an equivalent amount in lira in the Central Bank of Turkey. The Central Bank of Turkey, however, did not transfer the amount deposited by the purchasers in Turkey to India. In view of the extremely critical foreign exchange reserve position, the Government of Turkey imposed a ban on all remittances out of Turkey. As a result, the amount deposited in the Central Bank of Turkey remained there. The normal period of 90 days within which the sale proceeds should have been realised expired without any receipt by the assessee on account of the aforesaid ban. The assessee entered into correspondence with the Government of Turkey through the Indian Embassy there. In the meantime, the Turkish currency was devalued successively on five occasions between October 27, 1976, and April 10, 1979, with the result that the value of lira came down to 30.66 per cent. of its value prior to the first devaluation. As a result, the value of lira deposited by the purchasers came down in terms of U.S. dollars and also, as a consequence, in terms of rupees. During the calendar year 1979, which is the previous year under consideration, the assessee received a letter dated March 6, 1979, from the Indian Embassy in Turkey saying that there was no chance of realising the Turkish debts in the foreseeable future due to acute foreign exchange shortage. The directors of the assessee-company, while finalising the accounts for the calendar year 1979, took note of the above fact and wrote off a sum of Rs. 121 lakhs as bad debt. A sum of Rs. 95 lakhs was written off from the current profit and loss account and the balance of Rs. 20 lakhs was written off from the provision for bad and doubtful debts account.

(3.) The assessee claimed deduction for bad debt of Rs. 121 lakhs which was actually written off from the books and taken into account in the audited profit and loss account and balance-sheet of the year under consideration. The Income-tax Officer rejected the claim on the ground that there was a chance of recovery of the amount because of the decree dated January 25, 1980, of the Government of Turkey under which the debts of the foreigners would be paid only after 54 months, and that too, in small instalments over a period of further 10 years and that negotiations were being carried on by the Indian Embassy in Turkey.