Commissioner Of Income-Tax, Amritsar-Ii v. Khem Chand Bahadur Chand.

S.P Goyal, J.:— Two questions were referred to this court under s. 256(1) of the I.T Act, 1961, and one of them has since been answered against the assessee and in favour of the revenue by the Full Bench in CIT v. Khem Chand Bahadur Chand, [1981] 131 ITR 336, vide judgment dated June 4, 1981. The remaining question reads as under:

“(2) Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the debts due by, (i) Dhola Ram, (ii) Manghu Ram, and (iii) Jagdish Chemical Works were established to have become bad, is perverse because of presumption having been wrongly raised against the department?”

2. The Tribunal, relying on Lord's Dairy Farm Ltd. v. CIT, [1955] 27 ITR 700 (Bom), held that the three amounts having been written off as bad debts, a presumption arose in favour of the assessee that the same had become irrecoverable and as the department had not brought any material on the record to show to the contrary, the assessee was entitled to a deduction of the amounts of the said debts under s. 36(1)(vii) of the I.T Act.

3. The correctness of the view expressed in Lord's Dairy Farm's case, [1955] 27 ITR 700 (Bom) has been challenged by the learned counsel for the revenue on two grounds, namely, that the law has since been amended and now, under the said clause, the deduction could be allowed only if the debt is established to have become a bad debt in the previous year and that the rule laid down runs counter to the earlier decision of the same court in Raja Bahadur Mukundlal Bansilal v. CIT, [1952] 22 ITR 94, which was based on a Privy Council decision in CIT v. Chitnavis, [1932] 2 Comp Cas 464; LR 59 IA 290; AIR 1932 PC 178.

4. There are 3 items in dispute; two are of Rs. 160 and Rs. 170. So far as these two items are concerned, the same are such paltry amounts that keeping in view the amount of labour and expenses required for their recovery, a presumption of their having become bad debts could reasonably be raised from the fact of their having been written off by the assessee. No serious dispute was raised even by the learned counsel for the revenue regarding these items and the question to this extent is answered in favour of the assessee.

5. As regards the proposition of law concerning the third item, we are of the view that no presumption can be raised that it has become a bad debt in a particular year simply because the assessee has chosen to write it off. In Chitnavi's case, [1932] 2 Comp Cas 464; LR 59 IA 290; AIR 1932 PC 178, their Lordships of the Privy Council observed (p. 181 of AIR)(see also p. 471 of 2 Comp Cas):

“Whether a debt is a bad debt and, if so, at what point of time it became a bad debt, are questions which, in their Lordships' view, are questions of fact, to be decided in the event of dispute by the appropriate Tribunal, and not by the ipse dixit of any one else.”

6. These observations were followed by Chagla C.J, who spoke for the Bench in Raja Bahadur Mukundlal Bansilal's case, [1952] 22 ITR 94 (Bom), and it was held that the writing off of the bad debt by itself was not sufficient and the assessee must further satisfy the ITO that, in fact, the debt or loan had become irrecoverable in the year of account. This decision was not noticed in Lord's Dairy Farm's case, [1955] 27 ITR 700 (Bom), the judgment in which was also written by Chagla C.J A Division Bench of the Lahore High Court in Shyam Chambers Ltd. v. CIT, [1941] 9 ITR 224 also took the view that the mere fact that a debt had been written off in the books of ihe company does not prove that the debt was irrecoverable. That apart, the decision relied upon by the Tribunal was rendered keeping in view the phraseology as contained in s. 10(2)(xi) of the Act. This provision of law has since been differently phrased in s. 36(1)(vii), according to which a deduction could be claimed only with respect to a debt which is established to have become a bad debt. There can be no doubt about the intention of the Legislature in bringing about this change which could be nothing but to require the assessee to establish that the debt has become, in fact, a bad debt and that a mere writing off of the debt in the books would not be sufficient to claim the deduction under the said clause. The Tribunal, therefore, was hot justified in holding the amounts of the debt due from M/s. Jagdish Chemical Works as a bad debt simply on the ground that it had been written off by the assessee in its account books. However, as there were other facts and circumstances also available on the record, which were relied upon by the assessee to show that the amount due had become a debt and the same were not taken into consideration, this case is remanded to the Tribunal for fresh decision in the light of the observations made above.

J.V Gupta, J.:— I agree.