TMI Blog2009 (2) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... r the amendment with effect from 1-4-1989, is it obligatory on the part of the assessee to prove that the debt written off by him is indeed a Bad Debt for the purpose of allowance u/s.36(1)(vii)?" 2. The assessee had claimed writing off of Bad Debts in the sum of Rs.4,59,60,393/-. The bad debts written off were in respect of Mysore Timber Mart Rs.81,44,000/- and Overseas Commercial Pvt. Ltd. Rs.11,52,000/-. In Appeal before the C.I.T. (A) it was the contention of the assessee that the write off was done after creating provisions in accordance with the guidelines of the R.B.I. and was a bona fide write off and as such deduction should be allowed. The C.I.T. (A) was pleased to hold that as per the amended provisions under Section 36(1)(viia) the assessee is not required to establish that the debt had actually became bad and what was required was whether the amount is written off during the year or not. Allowance of deduction has to be made in the year of write off. On facts it held that as of the date of the order, no recovery has been made and if recovery is made in future the same will be automatically offered to tax. As the appellant had written off the amount in question aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y meanings, proceeded to hold that it would be within the personal knowledge of the businessman whether a debt has become bad or not as long as it is bona fide and no demonstrative proof can be demanded from the assessee to establish that the debt had actually become bad. The Tribunal proceeded to hold that writing off of a bad debt, is an evidence on the part of the assessee with whom the information rests and is a sufficient requirement of the amended provision. The minority Judgment on the other hand took a view that mere writing off of the debt is not sufficient for claiming a deduction under Section 36(1)(vii) effective from 1 st March, 1989. In addition, the Assessee is also under an obligation to show atleast prima facie that debt has become bad. Whether a debt has become bad or not will depend on the facts of each case. After answering the issues considering the majority opinion the matter was referred to Regular Bench for decision. Revenue has challenged the majority opinion by this Appeal. 5. To answer the issue it will be relevant to reproduce Section 36(1)(vii), which reads as under:- "36.(1) The deductions provided for in the following clauses shall be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent to the amendment from the language of the Section it is sufficient if the bad debt or part thereof is written off as irrecoverable in the accounts of the assessee based on commercial expediency. If we apply the Rule of interpretation as spelt out in Hyden's case, it would lead to an irresistible conclusion, that the Legislature by the amendment has sought to exclude the burden on the assessee to prove that the debt is bad debt and leaves it to the commercial wisdom of the assessee to treat the debt as bad, once it is written off as irrecoverable in the accounts of the assessee. 7. Subsequent to the amendment the Board has issued Circular 551 dated 23 rd January, 1990. The issue pertaining to bad debt is set out in para.6.6. and the relevant portion reads as under:- "In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise 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 irrecoverable in the accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to establish that in fact the debt has become bad. If this interpretation is read with the Board's Circular it would be clear that the Board's Circular reflects this very object which the Legislature had in its mind while amending the provisions. The amendment clearly was brought to cure a defect and/or in other words to avoid the mischief. So read the distinction pre or post amendment to Section 36(1)(vii) becomes clear. 9. It was sought to be argued on behalf of the Revenue that what has to be written off as irrecoverable is bad debt or part thereof and not any debt or part thereof. In our opinion the argument does not take the case of the Revenue any further as to when a debt can be said to be bad. Our attention was also invited to the Judgment in Travancore Tea Estates Co. Ltd. vs. Commissioner of Income Tax, Cochin, (1998) 8 SCC 667 to point out that it is settled law that whether a debt became bad or the point of time when it became bad, are pure questions of fact. In our opinion the ratio of that judgment would really not be applicable to answer the interpretative issue which has been raised in this Appeal. 10. Let us refer to some Dictionary meanings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable that the debt is bad and that would be sufficient requirement of the amended provisions. 12. Our attention was invited to the judgment of the Madras High Court in South India Surgical Co. Ltd. vs. Assistant Commissioner of Income-tax, (2006) 287 ITR 62 (Mad.). In case the amount was payable by a Government Department (Hospital). The Tribunal there had taken the view that the debt could not be claimed as bad on the mere ground that the hospital and the Departments might make payments as and when funds are provided. The Madras High Court after considering the various judgments was pleased to observe that it is not sufficient for the assessee to say that he has become pessimistic about the prospect of recovery of debt in question. The assessee must honestly feel 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 question is really one of fact depending upon the various facts and diverse circumstances bearing on the debtor's pecuniary position, his commitments and obligations. Further that the judgment of the assessee in regard of the debt as a bad debt must be a honest judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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