The Judgment of the Court was delivered by

K. Raviraja Pandian, J.:— The tax appeals filed against the order of the Tribunal dated March 12, 2002 made in I.T.A No. 833 of 1999. The assessment year is 1996–97.

2. The assessee, a company incorporated under the Companies Act, is carrying on the business of manufacturing and marketing surgical instruments. For the relevant assessment year, the assessee filed return of income declaring nil income after a claim of deduction under section 80-IA of the Income-tax Act. The Assessing Officer completed the assessment under section 143(3) determining the income at Rs. 83,52,860. That determination was made on disallowance on account of exchange fluctuations in respect of purchases from foreign countries in a sum of Rs. 16,31,594, disallowance of claim of bad debts in a sum of Rs. 65,28,748 under section 36(1)(vii) and disallowance of deduction under section 43B in a sum of Rs. 1,05,141. On appeal by the assessee, the Commissioner of Income-tax (Appeals) allowed the claim relating to section 43B, but confirmed the disallowance in respect of the other two counts. That order was carried on appeal to the Tribunal. The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals). The correctness of the said order is canvassed in the present appeal by raising the following questions of law:

“1. Whether, on the facts and circumstances of the case, the Tribunal was right in disallowing the claim relating to the variation in exchange rate in respect of the liability due to the foreign suppliers taking a view that it is applicable only to the bankers and persons carrying on money-lending business?

2. Whether the Tribunal was right in holding that the debt had not become bad as it was recoverable from the Government?”

3. When the matter was taken up for hearing, Mr. V. Ramachandran, learned senior counsel appearing for the assessee, submits that he is not pressing the first question of law and as such, has not made any argument in respect of that question. Hence the said question of law has not been considered by us. In respect of the second question of law regarding bad debts, learned counsel contended that the reasoning of the Tribunal that the debts 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, is not correct, particularly on the fact that when the debts were more than three years old and have been written off by the assessee in the books of account. He further contended that the Tribunal failed to note that the debts had become time-barred inasmuch as the debts were more than three years old and consequently had been written off by the assessee. Inasmuch as the condition of section 36(1)(vii) has been fully satisfied, the conclusion of the Tribunal that the debts have not become bad is incorrect in law.

4. On the other hand, learned counsel appearing for the Department argued for sustaining the order of the Tribunal.

5. We heard the argument of learned counsel on either side and perused the material on record.

6. The facts are not disputed. The assessee supplied the goods to reputed hospitals and most of them are Government hospitals. It is also an admitted fact that the assessee is still maintaining business transactions and making supplies to these hospitals from which amounts are due and the said amounts were written off by the assessee as bad debts.

7. Section 36(1)(vii) of the Act after the amendment with effect from April 1, 1989, reads as follows:

“36. Other deductions.—(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—….

(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the account of the assessee for the previous year.”

8. Having regard to the above provision of law, the decisions cited at the Bar are as follows:

(1) Devi Films Ltd. v. Commissioner Of Income-Tax, Madras., [1963] 49 ITR 874 (Mad);

(2) Sarangpur Cotton Mfg. Co. Ltd. v. CIT, [1983] 143 ITR 166 (Guj);

(3) Kamla Cotton Co. v. Commissioner Of Income-Tax., [1997] 226 ITR 605 (Guj);

(4) A.W Figgis and Co. P. Ltd. v. CIT, [2002] 254 ITR 63 (Cal);

(5) Jhunjhunwala Company v. Assistant Commissioner Of Income-Tax, [2003] 259 ITR 178 (Bom); and

(6) T.S Pl. P. Chidambaram Chettiar v. CIT, [1967] 64 ITR 181 (Mad). In the first of the cases, Devi Films Ltd. v. Commissioner Of Income-Tax, Madras., [1963] 49 ITR 874 (Mad)

it was held by this court that what is required is an honest judgment on the part of the assessee at the time when he makes the write off in the light of events up to that stage and the Department cannot insist on demonstrative proof, which is infallible. The Division Bench concluded in that case that there is no acid test to ascertain whether a debt has become bad and doubtful. The question is really one of fact depending upon congeries of facts and diverse circumstances bearing on the debtor's pecuniary position, his commitments and obligations, and the natural apprehensions that would be caused in the minds of the creditors regarding recovery of their dues. The court further held that it cannot be laid down as an inflexible rule of law that a waiver by a creditor of a portion of his debt would amount to proof positive of the debt, or any portion thereof, having become bad and doubtful. The onus of establishing that the write off of the alleged bad debt is proper and permissible in the circumstances of the case is upon the assessee.

9. In the next decision of Sarangpur Cotton Mfg. Co. Ltd. v. CIT, [1983] 143 ITR 166 rendered by the Gujarat High Court, it was held once the assessee has posted entries in the profit and loss account, that would be sufficient compliance with the provisions of statutory requirement for writing off as irrecoverable the concerned debt. When a businessman writes off an amount, there is prima facie evidence that the amount is irrecoverable.

10. The decision of Kamla Cotton Co. v. Commissioner Of Income-Tax., [1997] 226 ITR 605 of the Gujarat High Court mostly relied on the principle laid down in Devi Films Ltd. v. Commissioner Of Income-Tax, Madras., [1963] 49 ITR 874 (Mad) on the facts peculiar to that case that the liabilities of the company were far in excess of its assets and the asses-see's chances of recovering the amount were bleak. The debtor-company was taken over under section 18A of the Industries (Development and Regulation) Act 1951, and declared as a relief undertaking under the Bombay Relief Undertakings (Special Provisions) Act, 1958. The Government has also issued directions in relation to the said undertaking that for the period for which it continued as a relief undertaking, the rights and liabilities that might have accrued before the period it was declared as a relief undertaking and any remedy for enforcement thereof shall be suspended and all proceedings relating thereto pending before any court or Tribunal, etc., shall be stayed.

11. In the case of A.W Figgis and Co. P. Ltd. v. CIT, [2002] 254 ITR 63, it was held by the Calcutta High Court that if the assessee knows that filing of the suit would not in any way help the assessee to recover the amount, but rather burden the assessee with the additional financial expenses, the filing of the suit is not necessary to write off the debt as a bad debt.

12. The other decision of Jhunjhunwala Company v. Assistant Commissioner Of Income-Tax, [2003] 259 ITR 178, rendered by the Bombay High Court is also a case where the management of the two debtor textile mills was taken over by the Central Government and the Central Government categorically informed the assessee that it was not possible for the Government to make payment to the suppliers of raw material to the two mills during the pre-takeover period. Further, in view of section 8(1)(c) of the Textile Undertakings (Taking Over of Management) Ordinance, 1983, no proceedings for winding up or for the appointment of a liquidator or for the appointment of a receiver could lie except with the consent of the Central Government. The Central Government categorically rejected the representation made by the assessee and on that fact, the court came to the conclusion that there was no material available, which would show possibility of recovery.

13. The other decision in T.S Pl. P. Chidambaram Chettiar v. CIT, [1967] 64 ITR 181, of this court was a case in which the Division Bench of this court held that whether a debt is bad or doubtful is a factual matter which depends on actual facts relevant thereto and not on the hopes, fears or judgment of the creditor himself. The test of a debt being doubtful or bad being objective, the authority to decide is either the Departmental authority set up for the purpose or the Tribunal. The assessee, who claims a bad or doubtful debt has to prove not merely that the debt he seeks to deduct is bad or doubtful but also that it became bad or doubtful in the accounting year.

14. From the above judgments, it is clear that it is not sufficient for the assessee to say that he has become pessimistic about the prospect of recovery of debt in question. He must feel honestly 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. The judgment of the assessee in regarding the debt as a bad debt must be an honest judgment and not a convenient judgment. The judgment of the assessee must be established to have been taken on relevant facts and circumstances, which should show that the debt is not realisable for some fault on the part of the debtor or some supervening impossibility on the part of the debtor to pay, but not possible difficulties or hurdles the assessee may have to incur to compel the recalcitrant debtor to pay. The assessee for his convenience may decide that the debt is too small and it is not worthwhile to pursue the debtor but that judgment would not be an honest judgment, which would establish that the debt has become a bad debt. A time-barred debt can be assumed to be bad, but is not necessarily bad because of expiry of limitation for recovery of the same. Now, coming to the facts of the present case, it is clear from the order of the Commissioner of Income-tax (Appeals) that on a perusal of the correspondence produced by the assessee that the concerned hospitals have acknowledged that they are due to pay these amounts to the assessee. It was only paucity of allocated budget to the hospitals that resulted in non-payment. The parties are actually Government themselves. It would be preposterous to consider that the Government is not in a position to discharge its acknowledged debt. It might be due to certain fund-flow problems and priority between different needs and there is postponement in discharging certain liability by the Government. There is no negation of claim nor has any Government hospital written that they would not pay any of these amounts. The other parties from whom huge amounts running into lakhs are due are public and private hospitals like Apollo Hospital, Vijaya Health Centre, CMC Hospital, Sree Chitra Tirunal Institute, Trivandrum. In this case also, the assessee did not produce any evidence to support its stand that the debts have become bad. With regard to a sum of Rs. 2,14,365 due from one Dr. S.S Ramesh of Bangalore, the Commissioner of Income-tax (Appeals) has recorded the finding that the said doctor was connected with Mallya Hospital, Bangalore, to whom the appellant-company was making substantial supplies. The said doctor was connected with taking decisions regarding purchase of equipment from the appellant-company to the said hospital. Dr. Ramesh refused to pay the amount as he had got the orders to the assessee from Mallya Hospital. The said reason cannot be a ground for writing off the amount, as in any event it could only be treated as commission in kind.

15. The Tribunal in its turn has concluded that it was an admitted fact that there is nothing on record which might show that all these debtors were either financially not in a position to pay the debt or have ever refused or expressed a desire not to pay. On the contrary, the assessee was still carrying on business with all these debtors and receiving payments. It was the unilateral act on the part of the assessee to write off all these amounts as bad debts, without there being any material to show that the amounts are not recoverable.

16. On the face of the abovesaid factual position, except the unilateral act of the assessee to write off the debts as bad debts in the books of account for the previous year relevant to the assessment year, the assessee has not made out any case to regard the debts as irrecoverable. The judgment of the assessee in regarding the debts as bad debts is only regarded as a convenient judgment to suit his claim, but not an honest judgment having regard to the financial position of the hospitals. We are of the view that the Tribunal is right in law in holding that the debt claimed by the appellant as bad had not become bad and thus is not allowable as deduction under section 36(1)(vii) of the Income-tax Act. The appeal has to be dismissed and, accordingly, the same is dismissed.