COMMISSIONER OF INCOME TAX Vs. DUNLOP INDIA LIMITED

JUDGEMENT

(1.) The question for determination pursuant to direction passed by this court under Section 256(2) of the Income-tax Act, 1961, is as follows :

(2.) The facts, inter alia, leading to this reference as appearing from the statement of case are that the assessee is a limited company deriving income from business in the manufacture of tyres, tubes, etc. Between November, 1976, and September, 1977, the assessee exported goods to several parties in Turkey amounting in all to Rs. 2,72,19,587. 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 sales 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 the 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. 1,21,00,000 as bad debts. A sum of Rs. 95 lakhs was written off from the current profit and loss account and the balance of Rs. 26 lakhs was written off from the provision for bad and doubtful debts account. There was no dispute that the sales made by the assessee to the Turkish purchasers were included in the sale proceeds of the relevant years and also the fact that the provision made for bad and doubtful debts was subjected to tax in the year in which the provision was created. The sum of Rs. 1.21 crores claimed as bad debts was arrived at after valuing the Lira deposited in the Central Bank of Turkey in terms of rupees as on December 51, 1979. There was another fact which had to be taken into consideration, namely, that a decree was promulgated on January 25, 1980, by 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 ten years. The assessee got the debt as on December 31, 1979, valued by its bankers who opined that after discounting the value as on December 31, 1979, it would be only Rs. 28,85,234 which was less than the billed amount of Rs.2,72,19,587 by Rs. 2,43,34,303.

(3.) The assessee claimed the aforesaid sum of Rs. 2,43,34,303 as business loss as arising in the calendar year 1979. Alternatively, it claimed deduction for bad debt of Rs. 1.21 crores 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 both the claims of the assessee 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 and the negotiations which were being carried on by the Indian Embassy in Turkey.