TMI Blog1982 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appear in 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. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 Film ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im for bad debt of Rs. 47,659. The same is, therefore, deleted. 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. 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 los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings 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 firm 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. As such, execution could not be effected since it is to be effected through the receiver in whom the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht 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 95, 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, 1922,1 and the attention of the Gujarat High Court was drawn to the Notes on Clauses as mentioned in the said report. While referring to the Notes on Clauses No. 36 of the Report, the court observed as follows : " ' 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 " .' 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 dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o evidence which would have supported the decision for the inspector if they had. Rule 3 is as follows i '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 Commissioners 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 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 j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances 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 [1932] 2 Comp Cas 464, 471; AIR 1932 PC 178 at 181 ; 59 Indian Appeals 290, the judicial Committee interpreting s. 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 of fact, to be determined after consideration of all relevant circumstances. " The Supreme Court in the case of Bank of Bihar Ltd. v. CIT [1962] 45 ITR 427, 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 Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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] 56 ITR 1, 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, therefore, irr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny or other entity, a question of fact to be decided by the appropriate Tribunal upon a consideration of the relevant facts of that case. The Full Bench of the Lahore High Court in the case of B.C.G.A. (Punjab) Ltd. v. CIT [1937] 5 ITR 279, 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 account?" 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." 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, mast not be in the process of realisation. In othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In the case of Jadavji Narsidas Co. v. CIT [1963] 47 ITR 411, 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] 28 ITR 199. 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 off 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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