1. BARIN GHOSH, J.---The following question as framed under section 256(2) of the Income Tax Act, 1961, is the subject-matter of this reference: "Whether, on the facts and .In the circumstances of the case, the Tribunal was justified in law in deleting the disallowance of the bad debts for the assessment year 1986-87 in respect of two debts, amounting to Rs.12,439 and Rs.1,23,277?"
2. The assessm ent year involved is 1986-87. The concerned previous year ended on October 30, 1985.
3. During the concerned previous year, the assessee wrote off, amongst others, a sum of Rs.12,439 and a sum of Rs.1,23,277, payable by Sarada Press, Bhagalpur, and Amit Agencies, Allahabad, respectively, treating the same to be bad debts and claimed deduction under section 36(1)(vii) of the Income Tax Act, 1961.
4. The assessee had filed a statement alongwith the return where it was contended that in spite of the best efforts made by the assessee, the aforementioned payments were not forthcoming. As appears from the assessm ent order, the assessee was requested to prove that the said sums had become bad debt during the relevant previous year. The assessee, therefore, produced certain correspondence made with the aforementioned debtors. During the course of hearing before the Assessing Officer, the assessee submitted that due to the smallness of the amounts, it was not considered worthwhile to take legal action to recover the subject debts.
5. The Assessing Officer found that the amount due and payable by Sarada Press, Bhagalpur, pertained to the period 1983-84. By a letter, dated April 1, 1985, addressed to the assessee, Sarada Press, Bhagalpur, contended that they would start sending the payments month by month from the month of April, 1985. The fact remained, however, that no payment was made by Sarada Press, Bhagalpur, to the assessee until the end of the previous year, that is to say, until October 30, 1985.
6. The Assessing Officer concluded that from the proposal of Sarada Press, Bhagalpur, contained in its letter, dated April 1, 1985, it appears that Sarada Press; Bhagalpur, is ready to make payments and, therefore, it is difficult to accept the contention of the assessee that the amount payable by the Sarada Press, Bhagalpur, has become bad during the relevant previous car.
7. Before the Commissioner of Income-tax (Appeals), the assessee contended that considering the comparative smallness of the amount and the costs which would have to be incurred, the appellant did trot take recourse to legal action for recovery. It was also contended that the Department cannot insist on demonstrative proof that a debt has become bad which must satisfy --the test of infallibility. It was also suggested by the assessee that it was required to make an honest judgment and on the facts as found by the Assessing Officer, it cannot be said that its judgment was not hottest. The Commissioner of Income-tax (Appeals) accepting those submissions of the assessee, accepted that the amount payable by Sarada Press, Bhagalpur, was a bad debt during the relevant previous year.
8. July 24, 1984, and September 22, 1984, whereupon he held that the assessee made an honest judgment in writing off the amount due to it by Amit Agencies, Allahabad, as irrecoverable.
9. The Tribunal dealt with the matter in the manner as follows: "After hearing both the parties and perusing the material on. Record we are of the opinion that the Commissioner of Income-tax, (Appeals) was justified in directing the deletion of the bad debts. In doing so, the Commissioner of Income-tax (Appeals) has relied upon the judgment of the Bombay High Court in 'the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT (1979) 120 ITR 792. We agree with the reasoning and conclusion of the Commissioner of Income-tax (Appeals) in deleting the disallowance of the bad debts in respect of two parties, Sarada Press and Amit Agencies, aggregating to Rs.1,35,666. His order is, therefore, upheld in this regard."
10. Section 36(1)(vii) of the Income Tax Act, 1961, as it stood at the relevant time, is as follows: "(vii) Subject to the provisions of subsection (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year. "
11. The word "bad." used in conjunction with the word "debt" means worthless. Therefore, a "bad debt" is a "worthless debt".
12. The assessee cannot say, as held in Devi Films Ltd. v. CIT (1963) 49 ITR 874 (Mad), that he become pessimistic about the prospect of recovery of the debt in question. At the same time, the Department, as held in Kamla Cotton Co. v. CIT (1997) 226 ITR 605 (Guj), cannot insist upon demonstrative and infallible proof that the debt become bad.
13. Therefore, in order to claim deduction under section 36(1)(vii) of the Income Tax Act, 1961, as it stood at the relevant time, the assessee was required to show that on the facts and circumstances pertaining to a particular debt, he has taken an honest judgment that the said debt has become a bad debt and if he could show that he has taken an honest judgment, the same would establish that the debt in question is a bad debt. The relevant considerations; therefore, would be honesty of the judgment, on the facts and circumstances pertaining to the concerned debt. If, on the facts and circumstances it could be established that the judgment was an honest judgment and not a convenient judgment, then the Department would not be able to insist on demonstrative or infallible proof.
14. The judgment must be established to have been taken on relevant facts and circumstances, which facts and circumstances 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 the 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 will not be an honest judgment which would establish that the debt has become a bad debt or a worthless debt.
15. The facts on which the judgment has to be taken by the assessee should reveal the irrecoverability of the debt from the angle of the debtor and not of the ability of the assessee to recover the same.
16. We, therefore, answer the question in the negative and in favour of the Department.
17. There is, however, a residuary matter. Learned counsel appearing on behalf of the assessee relying on the judgment of the Supreme Court in the case of Bank of Bihar Ltd. v. CIT (1962) 45 ITR 427, contended that whether a debt is a bad debt or not, is a question of fact and the Tribunal having founded its conclusion on facts, it is not open to the High Court in a reference to reopen, the fact for the purpose of re-appreciating the evidence. In the case of Bank of Bihar Ltd. v. CIT (1962) 45 ITR 427, the Supreme Court made the following observation (page 429): "The question whether a debt is a bad debt is one of fact, and if there is some evidence to justify the conclusion it is not open to the High Court in a reference under section 66 of the Indian Income-tax Act, to re-appreciate the evidence."
18. The Supreme Court, therefore, said that if there is some evidence to justify the conclusion that a debt is a bad debt then the High Court in a reference cannot re-appreciate the evidence.
19. The evidence in the instant case does not justify the conclusion. In that view of the matter, there is no substance in the submissions of learned counsel appearing on behalf of the assessee.
20. SHYAMAL KUMAR SEN, J.--While agreeingwith the finding of my learned brother, I would like to make the following observation.
21. The question for consideration really is when a debt becomes bad or irrecoverable. It is. Not always necessary to institute recovery proceedings by way of suit or other procedure. What is required is to find out if there was any chance of recovery of the dues from the debtor. For example, when the liability of the debtor far exceeds its assets and the assessee's chance of recovery of the amount appears to be bleak, that alone is sufficient to justify the action of the assessee in writing off the debt as a bad debt.
22. It is quite true that 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 and accordingly when a creditor bona fide writes off the debt because it appears that there is no chance of its recovery in the foreseeable future or where the recovery proceedings would be so cumbersome and expensive as to outweigh any advantage of instituting any recovery proceedings, the assessee discharges the onus and would be entitled to claim deduction of the bad debt under clause (vii) of section 36(1) of the Income Tax Act, 1961.
23. It is a necessary requirement under the statute that the debt has become a bad debt and irrecoverable. Whether a debt becomes a bad debt is an objective fact to be determined objectively. In the instant case, there was no evidence before the Tribunal to hold that the debt had become bad or the same had been established to be irrecoverable. Merely because the amount payable by the debtor is small or the debtor has acknowledged its liability to make payment but fails to keep up its promises, does not mean that the debt has become bad or irrecoverable for the purpose of allowance of deduction under the Income-tax Act.
24. The said decision, however, cannot assist the assessee in any manner.
25. There is no material, however, in the instant case to arrive at the conclusion that the debt has become irrecoverable or bad and as such the writing off of the debt for the purpose of claiming deduction cannot be said to be an honest judgment on the part of the assessee.
26. For the purpose of ascertaining if a debt has become bad and doubtful, and if so when, the categories of acts 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 recoverability of the dues, should be considered. In this connection, the judgment and decision in the case of Devi Films Ltd. v. CIT (1963) 49 ITR 874 (Mad) may also be taken note of. In the aforesaid decision, Devi Films Ltd., the assessee was carrying on business as financier of production of motion pictures and as dealer in cinematographic machines and spare parts. The assessee entered into an agreement on July, 1955, with a certain Dinshaw K. Tehrani who had ventured upon the production of a cinema film called "Raja Rani". Under this agreement, the assessee agreed to lend Tehrani a sum of Rs.3,80,000. The money was lent as per the terms of the agreement, but Tehrani could not complete the production due to lack of funds. The assessee entered into a further agreement with Tehrani on January 31, 1956, and agreed to provide him with further funds to the extent of Rs.1,50,000. In all, the assessee advanced to Tehrani the sum of Rs.5,57,022-10-1 in pursuance of the two agreements aforesaid. The picture, after release, proved to be a flop and the expectations of the assessee to make profit out of the financing agreements failed. The assessee was, however, able to realise by collections from exhibitions and by sale of distribution rights, in all a sum of Rs.4,91,001-12-3. There remained a balance of Rs.65,950-13-10 due and payable by Tehrani to the assessee. It ,appears that this Tehrani was not a person of large means. He had a house in the city of Madras, purchased in the name of his wife. He held 100 shares is Newton Studios Ltd. Of the face value of Rs.10,000. Notwithstanding the indebtedness of Tehrani to the assessee, it entered into an arrangement with Tehrani on April 1, 1957, by which Tehrani pledged his shares in Newton Studios as security for a sum of Rs.10,000 on condition of the assessee waiving the balance of Rs.55,950-13-10. As stated already, Tehrani's liability to the assessee on that date was Rs.65,950-19-10. In the year of assessment 1957-58, in respect of the previous year ended April 12, 1957, the assessee wrote off this sum of Rs.55,950-13-10 as bad and doubtful debts and claimed it as a proper deduction under section 10(2)(xi) of the Indian Income-tax Act in computing its income. The Income-tax Officer rejected the assessee's claim holding that the assessee had not taken any legal proceedings for the recovery of the amount, that it had not exhausted his remedies for the recovery of the debt and that it was premature to write off the debt as a bad debt. The assessee, nevertheless, reiterated its claim for deduction of this amount as a bad debt for the subsequent assessm ent year 1958-59. Again the Officer rejected its claim.
27. The claim of the assessee was rejected up to the stage of the Tribunal. Thereafter, the matter came up on reference to the Madras High Court. The Division Bench of the Madras High Court held (head note) that the expression "bad and doubtful debt" is descriptive of a debt, which cannot reasonably be expected to be realised. It is not sufficient for the assessee to say that he became pessimistic about the prospects of recovery of the 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.
28. As already observed there is no material on record, in the instant case, on the basis of which it can be held that the debt is "a bad and doubtful debt" and as such the act of the assessee in writing off the said debt cannot be said to be an exercise of honest judgment.
29. With the observation as above, I agree with the finding of my learned brother.