TMI Blog2006 (12) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular Number 551. Thus, In our view that the Circular Number 551 leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year, which had generated enormous litigation on the question of allowability of bad debt in a particular year. The circular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as a bad or irrecoverable no sooner it was written off in the books of the assessee concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores, out of which only Rupees six crore has been written off. 2. The High Courts of Bombay, Calcutta, Rajasthan, Gujarat, Allahabad and Madras have, in the following cases, taken the view that it is for the assessed concerned to make an honest judgment as to whether a debt is recoverable or not: Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792(Bom) ; Nandlal Vithaldas v. CIT [1989] 180 ITR 609(Bom) ; CIT v. Bhagptia Food Industries [217] ITR 1045; CIT v. Dunlop India Ltd. [1994] 209 ITR 987(Cal) ;CIT v. Coates of India Ltd. [1998] 232 ITR 324(Cal) ; CIT v. Alegemene Bank Netherlands [73]Taxman 307; Sarangpur Cotton Manufacturing Co. v. CIT [1983] 143 ITR 166(Guj) ; Hindustan Commercial Bank Ltd. v. ITO [16] ITJ 65(All) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a debt becoming 'bad' or 'irrecoverable' are but two sides of the same coin. The CIT(A) had endorsed the reasoning of the AO to the effect that 'assessed has merely written off the debts at the end of the year and so that its taxable income gets reduced'. The CIT(A) as well as the AO were influenced by the fact that there had been no previous dealings between the assessed and Shithir Housing and Construction (P) Ltd.; no security was taken for the loan and the sequence of events from the advance of the loan to its writing off did not span across even one year. To the contrary, it appears to us that these factors would be relevant if the stand of the Department is that the transaction itself was sham or false. Once i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in the year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987 has amended Clause (vii) of Sub-section (1) and Clause (I) of Sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Gujarat High Court had to decide the question of whether it was enough if the assessed writes off the debt as bad in its Books of Accounts and whether the assessed company need not establish the debt to have become bad, in Deputy Commissioner of Income Tax v. Patidar Ginning and Pressing Co. [1999] 157 CTR 177. The Appeal of the Revenue was dismissed. 7. It is our view that the Circular Number 551 leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year, which had generated enormous litigation on the question of allowability of bad debt in a particular year. The Circular expressed the hope that this litigation would be eliminated by permitti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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