SEN,J. - (1.) THE Tribunal has referred the following two questions of law to this Court under s. 256 (1) of the IT Act 1961 ('the Act') :-- "Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the provisions of s. 36 (2) of the IT Act, 1961, the Tribunal was right in allowing the assessee's claim for bad debts of Rs. 25,67,488? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in accepting the assessee's claim that once the amount of the debt is debited to the P&L A/c it is immaterial which account, has been credited and that mere passing of the entry into the debt side of the profit and loss account tantamounts to writing off of the bad debts?'
(2.) THE facts found by the Tribunal are as order:-- "The assessee is Union Carbide India Ltd. And the assessment year involved is 1979-80. The assessee-company debited a sum of Rs. 25,67,438 in its P&L A/c as debts and credited the provisions for doubtful debts, to that extent. The assessee claimed the debts as bad debts. The ITO held that the debts claimed as bad had not been written off in the books of the assessee in terms of the provisions of s. 36 (2) of the Income-tax, Act, 1961. The ITO, therefore, did not allow the claim of the assessee. On appeal, the CIT (A) analysed the conditions of s. 36 (2) and took into Consideration in the decisions reported in Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 21 CTR (Guj) 190 : (1981) 130 ITR 95 (Guj.) , Smt. Tarulata shyam vs. CIT 1977 CTR (SC) 275 : (1977) 108 ITR 345 (SC) and CIT vs. Mddho pd. Jatia 1976 CTR (SC) 438 : (1976) 105 ITR 179 (SC) and came to the conclusion that the assessee did not satisfy the conditions of s. 36 (2) (i) (b) of the Act. Consequently, the disallowance made by the ITO was confirmed by the CIT (A) . Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal observed that, according to the principles of accountancy, the writing off denotes the charging of the amount in the P&L A/c. According to the Tribunal, once the amount is charged in the P&L A/c, the amount which is charged in the P&L A/c vanishes from the books of the assessee and an adjustment entry may appear under another head. The Tribunal held that if this accountancy principle was applied to the entries made by the assessee, the assessee had written off the debts in its books of account. The Tribunal, therefore, allowed the assessee's claim." The Tribunal has recorded the arguments made on behalf of the assessee as under:-- "At the time of hearing of the appeal, Sarvashri V.K. Kalra and K.S. Ramachandran drew my attention to the fact that the primary and most important requirement for the allowance of bad and or irrecoverable debts is that the same has become bad and/or irrecoverable in the relevant accounting year, in which respect the onus is on the assessee to establish the claim. It has been vehemently urged before me at the time of hearing of the appeal that this onus of the appellant has been fully discharged before the ITO during the course of assessment proceedings in regard to justifying claim for deduction of the debts in question which have become bad and/or irrecoverable in the accounting year relevant to the asst. yr. 1979-80. Continuing their submissions, Sarvashri V.K. Kalra and K.S. Ramchandran pointed out to the relevant portion contained in para 12 of the impugned assessment order, wherein the ITO has clearly stated that-- 'Detailed statement giving particulars of the debts in question is on record. Assessee has produced relevant records and documents and established that all the debts in question have become bad during the previous year ended 25th Dec., 1978. The debts have been taken into account in computing the income of earlier years.' In view of the above, it has been stated on behalf of the appellant-company that the ITO has not doubted the factual position of the debts in question, viz, that the same had become bad and/or irrecoverable in the accounting year relevant to the asst. yr. 1979-80. However, the ITO has not allowed the claim of the appellant-company on the point that the appellant has not satisfied the requirements of s. 36 (2) (i) (b) of the IT Act, 1961 as the debts have not been written off in the accounts of the respective parties. Against this conclusion of the ITO it has been contended that the posting of debts entries in the P&L A/c and credit entries in bad debts reserve account are sufficient and are also in conformity with the requirements of the IT Act so as the meaning of the words 'write off' is concerned and that it is not necessary for the purpose of claim of deduction pertaining to bad debts, to post corresponding entries in ledger accounts of the concerned parties and to close their accounts, on reference to s. 36 (2) (i) (b) of the IT Act, 1961 based on which the ITO has made the instant addition. In this regard, reference has been invited to the Gujarat High Court judgment in the case of Vithaldas H. Dhanjibhai Bardanwala vs. CIT (supra), wherein, it has been claimed on behalf of to appellant-company, that the facts, which are exactly similar to the point presently under appeal, have been decided in favour of the assessee and against the Revenue." The Tribunal following the aforesaid judgment of the Gujarat High Court held that the assessee can be said to have actually written off its claim for bad debt of Rs. 25,67,488 in its accounts and as such was entitled to succeed in the appeal on this point. The only question that arises for consideration in this case is whether debiting of P&L A/c and crediting 'provisions for doubtful debts account' amount to writing off the debts as irrecoverable. It has been held by the Supreme Court the whether a debt has become bad and irrecoverable are essentially questions of fact. Unless a question of perversity is raised that question cannot be gone into by the Court.
(3.) MR . Bagchi, advocate appearing for the Revenue has, however, contended that even assuming that a debt has become irrecoverable the assessee is not entitled to get the benefit of s. 36 (2) of the Act unless he actually writes off the debt in his books of account. Sec. 36 (2) provides that in making a deduction of a bad debt or a part thereof, certain conditions will have to be fulfilled. One of the conditions is that the amount of debt will have to be written off as irrecoverable in the accounts of the assessee for the previous year. Now the question is whether the 'writing off' in the instant case can be said to have taken place in the facts of the case. In other works, whether the posting of debit entries in 'P&L A/c and credit entries in the bad debts reserve account' are sufficient to constitute the writing off of bad debts in the accounts of the assessee. No book on accounting practice has been cited before this Court to show that what the assessee has done will not be sufficient to constitute the writing off bad debt.;