JUDGMENT
Ajit K. Sengupta, J.
1. This reference under Section 256(2) of the Income-tax Act, 1961, relates to the assessment year 1980-81, the previous year ending December 31, 1979. The assessee is a limited company deriving income from business in the manufacture of tyres, tubes, etc.
2. The assessee exported goods to several parties in Turkey between November, 1976, and September, 1977, amounting to Rs. 2,72, 19,587. The parties in Turkey were to pay for the goods in U.S. dollars and deposited an equivalent amount in lira in the Central Bank of Turkey. The Central Bank of Turkey, however, did not transfer the amount deposited by the purchasers in Turkey to India. In view of the extremely critical foreign exchange reserve position, the Government of Turkey imposed a ban on all remittances out of Turkey. As a result, the amount deposited in the Central Bank of Turkey remained there. The normal period of 90 days within which the sale proceeds should have been realised expired without any receipt by the assessee on account of the aforesaid ban. The assessee entered into correspondence with the Government of Turkey through the Indian Embassy there. In the meantime, the Turkish currency was devalued successively on five occasions between October 27, 1976, and April 10, 1979, with the result that the value of lira came down to 30.66 per cent. of its value prior to the first devaluation. As a result, the value of lira deposited by the purchasers came down in terms of U.S. dollars and also, as a consequence, in terms of rupees. During the calendar year 1979, which is the previous year under consideration, the assessee received a letter dated March 6, 1979, from the Indian Embassy in Turkey saying that there was no chance of realising the Turkish debts in the foreseeable future due to acute foreign exchange shortage. The directors of the assessee-company, while finalising the accounts for the calendar year 1979, took note of the above fact and wrote off a sum of Rs. 121 lakhs as bad debt. A sum of Rs. 95 lakhs was written off from the current profit and loss account and the balance of Rs. 20 lakhs was written off from the provision for bad and doubtful debts account.
3. The assessee claimed deduction for bad debt of Rs. 121 lakhs which was actually written off from the books and taken into account in the audited profit and loss account and balance-sheet of the year under consideration. The Income-tax Officer rejected the claim on the ground that there was a chance of recovery of the amount because of the decree dated January 25, 1980, of the Government of Turkey under which the debts of the foreigners would be paid only after 54 months, and that too, in small instalments over a period of further 10 years and that negotiations were being carried on by the Indian Embassy in Turkey.
4. The assessee filed an appeal to the Commissioner of Income-tax (Appeals) who allowed the sum of Rs. 95 lakhs as bad debt which had arisen in the calendar year 1979 and had been written off from the books.
5. Being aggrieved, the Revenue went in appeal before the Tribunal. The Tribunal observed that the conditions for allowing the bad debt as deduction had been fulfilled in this case. It was the letter dated March 6, 1979, that convinced the assessee that at least a part of the amount due from the Central Bank of Turkey had become irrecoverable and bad. This event occurred in the calendar year 1979. The quantification had been properly made by an expert and no flaw had been found therein. Further, the sum of Rs. 95 lakhs had been written off from the current profits. It, therefore, upheld the allowance of Rs. 95 lakhs as bad debt given by the Commissioner of Income-tax (Appeals).
6. It is in this context, the following question has been referred to this court at the instance of the Revenue.
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the conditions laid down under Section 36 of the Income-tax Act, 1961, were satisfied with regard to the debt of Rs. 95 lakhs and in that view of the matter directing the Income-tax Officer to allow deduction of Rs. 95 lakhs as bad debts?”
7. Counsel for the parties repeated their contentions urged before the Tribunal. On behalf of the Revenue, it was pointed out that the debt could be valued by the assessee only in May, 1981. Therefore, the debt could not become bad nor could any loss be said to have arisen during the calendar year 1979. It has further been urged that the onus of proving the deductibility of debt as bad debt rests on the assessee and in this case the onus has not been discharged. The circumstances rather show that the recovery did not really prove to be chanceless because a decree dated January 25, 1980, of the Government of Turkey could be taken out. Under the decree the foreigners are entitled to be paid only after 54 months over a period of further 10 years in small instalments and negotiations were still being carried on by the Indian Embassy in Turkey during the previous year for salvaging the assessee’s dues. So long as there is a slight ray of hope of realising the debt, the debt could not be said to have become bad. The law as envisaged in Section 36(1)(vii) does not contemplate the admissibility of a claim of bad debt even where the conclusion as to irrecoverability of the debt is manifestly premature and hasty.
8. Dr. Pal appearing for the assessee on the other hand has contended that there was no dispute that the sales made by the assessee-company to the Turkish purchaser formed part of the sale proceeds of the relevant year and thus entered into the profit and loss account nor is there any dispute over the fact that the provision made for bad and doubtful debts was subjected to tax in the year in which the provision was created. Thus, the entire sum of Rs. 121 lakhs which the assessee claims as having become bad was arrived at after valuing the lira deposited in the bank in Turkey in terms of rupees on December 31, 1979. The assessee got the debts as on December 31, 1979, valued by its bankers. It is an immaterial consideration that the said valuation was arrived at subsequent to the expiry of the previous year. The decision for the write off of the debt as bad debt was taken by the board of directors while finalising the accounts. The decree referred to by the Revenue is of no bearing as during the previous year there was no decree promulgated by the Government of Turkey. He further pointed out that the assessee got the debts as on December 31, 1979, valued by its bankers who opined that after discounting the value as on December 31, 1979, the same would be only Rs. 28,85,284 which was less than the billed amount of Rs. 2,72, 19,587 by Rs. 2,43,34,303.
9. The assessee claimed the aforesaid sum of Rs. 2,43,45,303 as business loss arising in the calendar year 1979. Alternatively, it claimed deduction for bad debt of Rs. 121 lakhs which was actually written off from the books and taken into account in the profit and loss account and balance-sheet of the year under consideration.
10. The Income-tax Officer rejected both the claims of the assessee on the ground that proper quantification of the loss was not made and that there was a chance of recovery of the amount because of the decree dated January 25, 1980, of the Government of Turkey and the negotiations which were being carried on by the Indian Embassy in Turkey.
11. The Commissioner of Income-tax (Appeals) found that no trading loss could be claimed in the calendar year 1979 because the transactions were made in the calendar years 1976 and 1977. However, coming to the alternative claim for bad debt, the Commissioner of Income-tax (Appeals) allowed the sum of Rs. 95 lakhs as bad debt which had arisen in the calendar year 1979 and had been written off from the books. Regarding the balance sum of Rs. 26 lakhs, the Commissioner of Income-tax (Appeals) disallowed the same on the ground that the assessee did not write off the same from the books of account and so one of the essential conditions for allowing deduction for bad debt was not satisfied in respect of the said amount of Rs. 26 lakhs.
12. The Tribunal by a consolidated order allowed the entire claim of Rs. 121 lakhs as bad debt. The Tribunal did not allow the claim of the assessee as a trading loss, as according to the Tribunal, there is no provision in the Income-tax Act to allow the business loss part by part in a piecemeal way. However, the Tribunal allowed the claim for bad debt as a deduction as, according to the Tribunal, all the conditions for allowing such bad debt have been fulfilled. It was the letter dated March 6, 1979, that convinced the assessee that at least a part of the amount due from the Central Bank of Turkey had become irrecoverable and bad. This event occurred in the calendar year 1979. The quantification has been properly made by an expert and no flaw has been made therein. The sum of Rs. 26 lakhs had also been written off from the books of the assessee and it is apparent from Note No. 12 in the printed accounts appearing at page 28 thereof. The only difference is that while a sum of Rs. 95 lakhs has been written off from the current profit, the balance of Rs. 26 lakhs had been written off from the taxed provision for bad and doubtful debts made in the calendar year. Hence, the Tribunal accepted the alternative contention of the assessee. In other words, the Tribunal did not uphold the disallowance of business loss but upheld the allowance of Rs. 95 lakhs as bad debt given by the Commissioner of Income-tax (Appeals) and in addition also upheld the allowance of a further sum of Rs. 26 lakhs as a deduction for bad debts.
13. We have considered the rival contentions. True, the assessee must establish that the debt in question has become in fact a bad debt. It is not that the mere fact of the debt having been written off in the books by the assessee is sufficient for the claim that deduction under the provisions of Section 36(1)(vii) as bad debt is allowable. But the question whether a debt has become bad or not must be decided from the point of view of the possibility of the realisation of the debt and the assessment of such possibility has to be first a bona fide assessment and the decision to write off being dictated by the reality in the light of the events till the time the decision is taken. Later happenings would not be relevant. This principle is laid down by the Madras High Court in the case of Devi Films Ltd. v. CIT [1963] 49 ITR 874. Therefore, we shall have to direct our attention to the true state of circumstances that obtained at the time the trader wrote off the debt. But the standard with which the assessment with regard to recoverability of the debt is to he made cannot he too rigid a standard as the Revenue may adopt; the standard has to he the standard of a reasonably prudent businessman or director of a company coming to the conclusion that the debt is irrecoverable depending on the facts and circumstances of each case.
14. In any case, whether a debt has become bad in a particular year is purely a question of fact and the Tribunal has found as fact that the amount of debt for which the deduction has been claimed as bad debt has really become bad during the previous year and we do not feel called upon to interfere with that fact-finding which has not been challenged by the Revenue as perverse. The Tribunal’s finding has not been assailed as based on no evidence or on considerations partly relevant or partly irrelevant. Unless it is specifically assailed to be a finding of fact vitiated by perversity, that finding has to be accepted as final.
15. In that view of the matter, we answer the question in the affirmative and against the Revenue.
16. There will be no order as to costs.
Shyamal Kumar Sen, J.
17. I agree.