MANKAD, J. -
(1.)THE question that arises in this reference is whether the assessee, a public limited company, is
entitled to a deduction of Rs. 2,37,537 in the computation of its income for the asst. year 1971 72,
the year of account being the calendar year 1970.
(2.)THE above question arises in the background of the following facts. The assessee company entered into a contract with one Madhu Wool Spinning Mills, a partnership firm (hereinafter
referred to as "the firm"), for the purchase of right to import staple fibre of non viscose origin.
Under the terms of the contract, it paid Rs. 1,68,000 to the firm by way of premium for the
purchase of the said right. Out of this premium paid to the firm, the firm paid back Rs. 18,140 to
the assessee company. Thus after deducting the amount paid back by the firm, the premium paid
by the assessee company to the firm in round figures came to Rs. 1,50,000. The above contract
came to be cancelled or terminated and the firm gave three cheques of Rs. 50,000 each to the
assessee company for the repayment of the balance of the premium received by it in March, 1965.
All the three cheques were dishonoured and its appears that after the cheques were dishonoured,
no payment was received by the assessee company from the firm towards the dishonoured
cheques or the balance of the premium which the firm was required to pay back to the assessee
company. The assessee company, therefore, filed a suit being Summary Suit No. 532 of 1966 in
the Bombay High Court for the recovery of Rs. 1,50,000, the amount due under the dishonoured
cheques and interest. It appears that there was a compromise between the assessee company and
the firm and consent decree was passed in the suit. Under the consent terms, the assessee
company had agreed not to execute the decree for a period of one year. The firm, however, failed
to pay the decretal amount after the expiry of the period of one year and, therefore, the assessee
company took out Chamber Summons on 13th July, 1968, seeking permission of the Court to
execute the decree. The decree, however, could not be executed till the end of the calendar year
1970, which is the year of account relevant to the assessment year under reference.
In the year 1965, in addition to the payment of premium of Rs. 1,68,000 as stated above, the assessee company paid Rs. 2,73,000 to the firm by way of advance for the purchase of staple fibre
for which it had entered into a contract with the firm. The assessee company received goods worth
Rs. 1,85,313 towards the advance payment made by it to the firm. After given credit for this
amount which represented the price of the goods received, Rs. 87,687 remained with the firm. The
firm failed to pay this amount back to the assessee company. The assessee company, therefore,
filed a suit being Summary Suit No. 1129 of 1969 in the Bombay High Court for recovery of this
amount of Rs. 87,687 from the firm. This suit, we are told, was decreed on 30th Oct., 1970.
(3.)IT will be seen from the above facts that the total principal amount which remained due and payable by the firm to the assessee company came to Rs. 2,37,537. This debit balance of Rs.
2,37,537 in the firm's account was carried forward from year to year up to the end of the calendar year 1970. While finalising the account for the calendar year 1970, the assessee company decided
to write off this amount of Rs. 2,37,537 due from the firm. It appears that there was a credit
balance of Rs. 33,208 in the Doubtful or Bad Debt Reserve Account at the end of the calendar year
1969. Having regard to this credit balance of Rs. 33,208 in the Bad Debt Reserve Account, the board of directors of the assessee company by a resolution passed at its meeting held on 30th
March,1971, resolved to make a provision of Rs. 2,35,000 against doubtful debts and advances by
crediting the said amount to the Bad Debt Reserve Account and debiting it to the profit and loss
account of the company for the year 1970. This decision, it appears, was taken in pursuance of the
decision to write off the aforesaid amount of Rs. 2,37,537 due from the firm. As a result of the
credit entry of Rs. 2,35,000 made in the Bad Debt Reserve Account, the total credit balance in that
account came to Rs. 2,68,028. Rs. 2,60,918, which included Rs. 2,37,537 written off as stated
above, were debited to the said account leaving a credit balance of Rs. 7,110 in the said account at
the end of the account year 1970.Rs. 2,35,000, provision made against doubtful debts and
advances were debited to the profit and loss account for the year 1970.