Law:

Section:

Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debt - Assessment years 1983-84 and 1984-85 - Whether in order to establish a debt to be bad, on balance of probabilities, circumstances must indicate to reasonable and prudent business person that debt is unlikely to be recovered - Held, yes - Whether merely because legal steps for recovery are not taken, it can be inferred that debt is not bad - Held, no - Whether decision not to take legal action should be considered to be reasonable if it can be shown that anticipated cost of legal action is prohibitive in relation to amount of debt - Held, yes - Assessee-Electricity company claimed deduction of bad debts relating to textile mills which had fallen sick and despite disconnection of electricity supply did not move assessee-company for restoring supply by paying their dues - These mills having been taken over under provisions of Gujarat Closed Textile Undertakings (Nationalisation) Act, 1986, there were no assets from which assessee-company could have effected recovery of dues in any forcible manner and, therefore, assessee-company decided not to spend good money over bad money by attempting any legal remedies against those undertakings - Whether, on facts, assessee's claim for allowance of bad debt was allowable - Held, yes FACTS The assessee, engaged in the business of generation and supply of electricity, claimed deduction of bad debts relating to textile mills which even after disconnection of electricity supply did not approach the assessee-company for reconnection, and, thus indicating that they were unable to resume their business operations. No further legal steps were taken because the assessee-company perceived that it would amount to spending good money over bad money. The ITO, observing that though the mills were closed, they had considerable assets and further that the liquidation proceedings were not finalised, held that the debt could not be said to have become bad. The claim for deduction of bad debts was, therefore, disallowed. The Commissioner (Appeals), while accepting the assessee's claim in respect of small amount, rejected the balance claim on the ground that no legal steps were taken…

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