JUDGMENT
R.K. Abichandani, J.
1. The following two questions have been referred to us for our decision by the Tribunal, Ahmedabad ‘A’ Bench :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 73,582 was not a bad and doubtful debt ?
Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the claim of bad and doubtful debt was premature in the asst. yr. 1973-74 and the debt became bad in the asst. yr. 1977-78 was perverse and/or not borne out by the evidence on record ?”
2. The assessee, a dealer in cotton, had supplied cotton by invoice value of Rs. 73,582 to Ahmedabad Jupiter Spg. and Wvg. Co. Ltd., Bombay, which transaction took place on 10th June, 1971. The said Bombay company issued two cheques dt. 25th June, 1971 and 26th July, 1971, in the sum of Rs. 37,000 and Rs. 36,582.61 respectively – i.e., for the total sum of Rs. 73,582.61 paise. However, these cheques were dishonoured and on 28th June, 1971, the management of the said company intimated to their employees that because of the financial difficulties, the mill was to close down. The management of the Ahmedabad Jupiter Spg. & Wvg. Co. Ltd., Ahmedabad and Bombay was taken over under the provisions of s. 18A of the Industries (Development and Regulation) Act,. 1951, for a period of 5 years commencing from the date of publication of the notification in the Official Gazette. A notification was published in the Gazette of India Extra-ordinary Part II, s. 3 sub-s. (ii) dt. 1st Dec., 1971, page No. 3259. On 15th Oct., 1971, a notification came to be issued by the Government of Bombay under ss. 3 and 4(1)(a)(iv) of the Bombay Relief Undertakings (Special Provisions) Act, 1958, declaring the said company at Bombay, to which a guarantee was provided by the State Government, to be a relief undertaking. Simultaneously, a direction was issued in relation to the said undertaking that for the period for which it continued as relief undertaking, the rights and liabilities that may have accrued before 15th Oct., 1971 and any remedy for the enforcement thereof shall be suspended and all proceedings relating thereto pending before any Court, tribunal, officer or authority shall be stayed. In respect of the asst. yr. 1973-74, initially ex parte assessment was made under s. 144 on 9th March, 1976, but by its applications dt. 9th April, 1976 and 17th April, 1976, the assessee had applied for reopening the assessment, which was reopened on 19th April, 1976. In respect of the relevant period the assessee had debited an amount of Rs. 73,583 as bad debt on the ground that the Ahmedabad Jupiter Spg. & Wvg. Co. Ltd., Bombay had been taken over by the Central Government and that the amount due from the company was not recoverable. The ITO, however, held that though the said company was taken over by the Central Government, it was not known whether the Government had paid any amount to the assessee and, therefore, it could not be held that the said amount had become irrecoverable. The bad debt claim was, therefore, disallowed and added in the total income of the relevant year.
The assessee challenged the ITO’s order before the AAC, Range “A”, Baroda and the AAC finding that the conditions of s. 36(1)(vii) of the IT Act were fulfilled inasmuch as the chances of the assessee’s recovering his money were almost nil, set aside the order of the ITO with a direction to allow the deduction as bad debt under the said proviso. In the process, the AAC observed that what was necessary under s. 26(1)(vii) of the said Act was that the assessee should have a reasonable cause to come to a belief that a debt had become bad and that such debt should be written off in the books of accounts relevant to the previous year and that such write-off should be claimed as a deduction in the IT return of the assessee. It was noted that the total liabilities of the mill company amounted to more than 2 crores of rupees an the chances of the assessee’s recovering his dues were almost nil.
The Department approached the Tribunal against the order of the AAC and the Tribunal, by its order dt. 30th March, 1979 held that the said company was taken over by the Government only on 21st Dec., 1974 under the provisions of the Sick Textile Undertakings Nationalisation Act, 1974, and, therefore, it could not be said that the debt had become bad during the accounting year. The Tribunal held on the strength of a letter dt. 17th April, 1976, which was written by the Central Gujarat Cotton Dealers’ Association to the assessee informing the assessee that there was no chance of recovery of its dues, that the debt had become bad only in the accounting year in which the letter was received by the assessee, i.e., in the asst. yr. 1977-78, but so far as the year 1973-74 was concerned, the claim was premature. The appeal was accordingly allowed. Later on, a review application was made before the Tribunal pointing out certain factual errors which had crept in its order, partly due to the errors reflected in the written arguments which were submitted by the assessee. The Tribunal by its order dt. 17th Sept., 1979, directed certain corrections to be made in its order dt. 30th March, 1979. These corrections will have some bearing on the merits of the matter and, therefore, we may refer to them.
In paragraph 2 of its earlier order the Tribunal had observed : “it would appear that the liability of the Jupiter Company amounted to Rs. 2.35 crores and the assessee’s chance of recovering the amount were bleak”. This was substituted by the following :
“It would appear that the liability of the Jupiter Company was far in excess of the assets of the said company and the assessee’s chance for recovering the amount was bleak.”
The Tribunal also directed a correction to be made in para 6 of its earlier order which has some bearing. In the earlier order it was stated : “The assessee has stated that the company was taken over on 8th Jan., 1971, by the Maharashtra Government. We are not sure whether the date is correct. The assessee’s transaction with the Jupiter Company was after 8th Jan., 1971 and that also when the assessee was dealing with the company whose management was with the State Government. Knowing that it is being managed by the State Government the assessee had supplied the goods to the unit, so, that by itself would not be a reason for coming to the belief that nothing would be recoverable. As against this position, we find that the Jupiter Company unit was taken over by the Government only on 21st Dec., 1974. So till it was taken over it could not have been said that the debt became bad during the accounting year”. This was ordered to be substituted by the following :
“The assessee has stated that the company was taken over on 8th Jan., 1971, by the Maharashtra Government, however, later on we were informed that the company was taken over by the Central Government and passed on to the authorised controller on 8th Oct., 1971. Later, on 21st Dec., 1974, it was taken over under the Sick Textile Undertakings (Nationalisation) Act, 1975.”
This modification is material because while making the earlier order the Tribunal had proceeded on the footing that the Government had taken over the undertaking on 8th Jan., 1971 and in the context of that date, it had proceeded to observe that the assessee had in fact dealt with the Government which had taken over the undertaking, since the transaction had taken place on 10th June, 1971. In reality, the Central Government had passed the order of takeover of management on 8th Oct., 1971 and thereafter, the company was dealt with under the provisions of the Sick Textile Undertakings (Taking Over of Management) Act, 1972 on 21st Dec., 1974. Thus, the Government came into picture only after 8th Oct., 1971 as per the correct position. The Tribunal, however, held that despite these corrections made in its earlier order, it was not necessary to modify its conclusions because they had rested their conclusions on the fact that the debt had become bad only on 17th April, 1976 when the assessee had received a letter from the Central Gujarat Cotton Dealers’ Association that there were no chances of recovery of its dues.
3. Section 36(1)(vii) as it stood at the relevant time, enabled the assessee to claim deduction in respect of any amount of debt or part thereof which was established to have become a bad debt in the previous year, subject to the provisions of sub-s. (2) of the Act. In context of the said provision, it was held by a Division Bench of this Court in Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj) that when a businessman writes off an amount, there is a prima facie evidence that the amount is irrecoverable and the Department can rebut the prima facie inference to show that the position taken up by the assessee was not correct. It was held that the relevant test applicable in such cases was whether there was sufficient material on record to show that a decision taken by the assessee to write off the claim as bad debt was or could be demonstrated to be improper or otherwise not bona fide.
4. In our view, the requirement that the debt has become bad or irrecoverable did not mean that the Department can insist upon demonstrative and infallible proof that the debt had become bad. Moreover, it is not compulsory for the assessee to take legal proceedings against the debtor for recovery of the claim before writing it off as a bad debt. In our opinion, when the creditor bona fide writes off the debt as there appears no chance of its recovery in a foreseeable future or where the recovery proceedings would be so cumbersome and expensive as to outweigh any advantage of instituting any recovery proceedings, he discharges the onus and would be entitled to claim deduction under the said clause (vii) of s. 36(1) as it stood at the relevant time.
5. This approach was even reflected in the instructions issued by the CBDT particularly in Instruction No. 370 (F. No. 205/15/71 (A-II) dt. 13th Jan., 1972, in which it was stated that where a claim under s. 36(1)(vii) was made by the suppliers of stores, etc., to sick mills that have been taken over by the Government or a public sector undertaking, the ITO should examine the claim sympathetically and try to arrive at a decision after taking into account the financial position of the mill, the chances of recovery and other relevant circumstances. In the instant case, the Tribunal by correcting the mistake that it had made in the earlier order, came to a finding that the liability of the mill company was far in excess of the assets of the company and the assessee’s chances for recovering the amount were bleak. This alone would have been sufficient to justify the action of the assessee in writing off the debt as a bad debt as it would satisfy the test which has been indicated in Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (supra). The Tribunal has clearly failed to apply this test and has ignored the relevant circumstances consequently misdirecting itself to reach the final conclusion that it has reached. The record clearly establishes that the orders were issued for takeover of the management of the undertaking of the said company under s. 18A of the Industrial (Development and Regulation) Act, 1951 on 8th Oct., 1971. It is also established that the two cheques which were issued by the company on 25th June, 1971 and 26th July, 1971 were dishonoured. The notification declaring the said mill company at Bombay to be a relief undertaking was issued under the provisions of the Bombay Relief Undertakings (Special Provisions) Act, 1958 on 15th Oct., 1971and the enforcement of any right or remedy against the said undertaking was suspended. Therefore, if the assessee had written off its claim as a bad debt in this background in the asst. yr. 1973-74, it can never be said that it had not acted in a bona fide manner. There was sufficient reason for the assessee to have written off the claim as a bad debt at that relevant time. From the subsequent facts which show that the recovery was almost impossible as reflected from the letter dt. 17th April, 1976 written by the Central Gujarat Cotton Dealers’ Association as also from the finding of the Tribunal itself that the chances of recovery of the dues from the said company were bleak, it becomes clear that the assessee’s action of claiming the deduction in the relevant year was perfectly justified. There was no rational basis to hold on the strength of the letter dt. 17th April, 1976 that the claim of the assessee had become bad debt only when that letter was written. Even prior to that letter it is clear that there was no chance of recovery of any amount by the assessee from the company or from the Government, which had taken over the company, in any foreseeable future. As there appeared to be no chance of recovery of any amount in the foreseeable future, the assessee having written off the claim as a bad debt was entitled to claim deduction under s. 36(1)(vii) of the Act in the asst. yr. 1973-74.
6. In this view of the matter, the question No. 1 referred to us is answered in the negative in favour of the assessee and the question No. 2 is answered in the affirmative in favour of the assessee. This reference stands disposed of accordingly with no order as to costs.