Brief of the Case
Calcutta High Court held In the case of Duncan International Ltd. vs. CIT that Section 36 (2) (iii) allowed the assessee to claim the deduction on account of bad debts in subsequent years even if bad debts have written off in earlier years and which were not allowed. The deduction being allowed on account of bad debt either in the assessment year 1980-81 or in the assessment year 1984-85, though strictly speaking law permits deduction in a subsequent period. But considering that the assessment in the year 1980-81 is also open as the reference is pending before us, we permit the bad debt in the assessment year 1980-81 themselves.
Facts of the Case
The assessee has been trading with Messrs. White Lamb & Finlay Inc. of U.S.A. for a long time and was exporting jute goods to them regularly. In respect of shipments made from 27th July, 1978 covered by 6 bills aggregating to Rs.22, 98,172, the foreign Company failed to honour the bills on presentation even after extending the due dates. The assessee, in the circumstances, wrote off the aforesaid sum of Rs.22, 98,172. The foreign buyer was declared insolvent on 14th April, 1980 though the proceedings had started on 26th July, 1979. The amount was actually written off on 30th September, 1979 corresponding to assessment year 1980-81.
The deduction on account of bad debt, however, was not allowed on the ground that the assessee had failed to establish that the debt had become irrecoverable. The assessee, in the circumstances, once again claimed deduction in the assessment year 1984-85, which was also disallowed on the ground that debts were not written off in the relevant previous year.
Contention of the Assessee
The Senior Counsel of the Assessee referred a judgment of the Bombay High Court in the case of Karamsey Govindji vs. CIT reported in (1957) 31 ITR 953 in which it was held that the omission on part of the Income tax authorities to permit the deduction could not be said to be bad because the debt had not really become bad in 1947. However the Division Bench was of the view that the position of law with regard to the bad debts was difficult for the assessee. The view expressed by division bench is as follows:-
“The present income-tax law with regard to bad debts makes the position of the assessee extremely difficult. He may write off a debt in a particular year and may claim it and the claim may be disallowed. In the next year he cannot make that claim because it would be urged against him that he did not write off the debt in that year. Therefore, the assessee always finds himself on the horns of a dilemma and it is the duty of the Department to take a sympathetic view of the matter if in fact the debt was never recovered. Therefore, if the debt was not allowed to the assessee in the year of account, there is no reason why the Department should not consider allowing him this debt in the next year when admittedly the debt became irrecoverable, although the assessee may not have written it off in that year. ”
Held by ITAT
ITAT held that the debt in question had not become bad during the relevant previous year and as such as the said amount cannot be allowed as a bad debt during the relevant year.
Held by High Court
In Income Tax Act, 1961 in Sub-section 2 of Section 36, Clause (iii) was added which is as follows:-
“ (iii) any such debt, or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year, but the Income-tax Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year.”
The provisions appearing in Clause (vii) of Sub-section 1 of Section 36 requiring the assessee to satisfy twin conditions namely to write off the debt and to establish that the debt has become irrecoverable are subject to the provisions contained in Sub-section 2. Therefore, the rigour of Clause (vii) of Sub-section 1 of Section 36 is relaxed by Clause (iii) of Sub-section 2 of Section 36.
In that view of the matter, there can be no real objection, nor has counsel of the revenue urged any, to the deduction being allowed on account of bad debt either in the assessment year 1980-81 or in the assessment year 1984-85 though strictly speaking Clause (iii) of Sub-section 2 permits deduction in a subsequent period. But considering that the assessment in the year 1980-81 is also open, we think proper course would be to permit the bad debt in the assessment year 1980-81 itself.
As of date, nobody can doubt the debt had become bad in the assessment year 1980-81. The assessee did not have any doubt when he wrote it off. We find that Reserve Bank of India has also, subsequent to the aforesaid assessment year, permitted the assessee to write off the amount. When law permits the assessee to get the deduction, there is no reason why the assessee should not be given the deduction in the assessment year 1980-81 themselves.
Accordingly, appeal of the assessee allowed.