ITR/71/1996 1/5 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE NO. 71 OF 1996 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE D.H.WAGHELA ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the Civil Judge? ========================================================= COMMISSIONER OF INCOME TAX - Applicant(s) Versus M/S. DINESHCHANDRA CHANDULAL SHAH - Opponent(s) ========================================================= Appearance : MR. MANISH R. BHATT for Applicant(s). MR. B.D. KARIA for MR. R.K. PATEL for Opponent(s). ========================================================= CORAM : HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE D.H.WAGHELA Date : 06/09/2006 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE R.S.GARG) 1. The Income-Tax Appellate Tribunal, Ahmedabad Bench “C” has referred the following question under ITR/71/1996 2/5 JUDGMENT Section-256(1) of the Income Tax Act, 1961 (“the Act” for short) for the opinion of this Court, which arose out of I.T.A. No.1594/Ahd/1990 relating to Assessment Year 1984- 85: “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to deduction in respect of bad debt of Rs.8,95,277 u/s. 36(1)(vii) r.w. s. 36(2) for assessment year 1984-85 and the said amount was not allowable as trading loss under section 28 or u/s. 37 of the Act?” From the very frame of the question, it would clearly appear that the Assessee was claiming certain deductions on account of the fact that certain debts had become bad and there was no possibility of making any recovery and under the circumstances, the bad debts were to be squared off as the trading loss and the Assessee was entitled to the benefits under Section-36(1)(vii), read with Section-36(2), of the Act for Assessment Year 1984-85. 2. The short facts necessary for disposal of the present matter are that the Assessee sold certain goods on credit to M/s.Usha Spinning & Weaving Mills Ltd., Faridabad, U.P. in the preceding year. The debit entries in the account of the said customer were to the tune of ITR/71/1996 3/5 JUDGMENT Rs.21,20,578.34, out of which the Assessee could realise a sum of Rs.13,47,000/- leaving an outstanding balance of Rs.7,73,578.34 at the beginning of the year under consideration. A sum of Rs.1,51,698.86 was added as an interest on the aforesaid opening balance. Thus, the total debit in the account of the said M/s.Usha Spinning & Weaving Mills Ltd. came to be recorded at Rs.9,25,277/. Out of the said amount, a sum of Rs.30,000/- only could be recovered on 29th January, 1983 and the balance amount of Rs.8,95,277/- was shown as outstanding amount at the time when the original return was filed. On dawn of the wisdom, the Assessee filed his revised return and claimed deduction showing the said amount as bad debt. The Assessing Officer rejected the Assessee's claim for deduction of the aforesaid amount and completed the assessment on total income of Rs.9,33,670/- vide his Order dated 25th November, 1988. The Commissioner of Income-Tax (Appeals) confirmed the order, therefore, the matter went to the Tribunal. The Tribunal, after taking into consideration the totality of the circumstances and the facts, which were either undisputed or were basically plain, recorded a finding that the said amount debited against M/s.Usha Spinning & Weaving Mills Ltd., in fact, had become bad debt and the recovery being impossible, the Assessee was entitled to write off the amount and claim deduction as the trading loss. ITR/71/1996 4/5 JUDGMENT The Revenue, being dissatisfied with the said final order, made an application under Section-256(1) of the Act; accordingly, on the above referred question, the Tribunal has made this Reference. 3. We have gone through the entire order passed by the Tribunal. The Tribunal has found that from the facts, it would clearly appear that nothing could be recovered from the debtor, it became almost impossible to make the recovery, the debtor had virtually become insolvent and proceedings for its winding up had been taken in the concerned High Court. It also observed that it was almost impossible to recover even a single penny from the said debtor and it was an act of prudent businessman to write off the said bad debt. 4. For applicability of Section-36(1)(vii) of the Act, read with Section-36(2), the Assessee is required to show to the Assessing Officer that the debt was bad and was actually written off before any deduction could be claimed. In the present matter, the Tribunal had given reasons for holding that it had become bad and its recovery became impossible. 5. In the matter of Commissioner of Income-Tax vs. ITR/71/1996 5/5 JUDGMENT Ahmedabad Electricity Co. Ltd., [(2003) 262 I.T.R. 97], a Division Bench of this Court has held that the objective test in deciding whether a debt is bad or not is whether a reasonable prudent business person would conclude that there is no reasonable likelihood that the debt will be paid by the debtor or someone else either on behalf of the debtor or otherwise. If a prudent man thinks that recovery of debt from the debtor has become an impossibility, then, it is expected of such a prudent businessman that he would write off such debts. 6. On the facts and in the circumstances of the case, the Tribunal, according to us, was absolutely, justified in holding that the debt had become bad debt and its recovery was impossible; it was also justified in giving the deduction for the said amount under the head of the trade loss. The question is answered against the interest of the Revenue and in favour of the Assessee. [R.S.Garg, J.] [ D. H. Waghela, J.] kamlesh*