1. This appeal by the assessee is directed against the order passed by the learned CIT(A) for asst. yr. 1986-87 confirming the addition of Rs. 11,46,432 being the amount claimed as bad debt written off during the year under consideration.
2. The AO has observed that the assessee has debited in its P&L a/c, an amount of Rs. 11,46,432 as bad debt. He has observed that the assessee has not furnished any evidence to show that the debt became bad and irrecoverable during the financial year in question. He, therefore, disallowed the same.
3. Before the CIT (A), it was contended on behalf of the assessee that the approval of the RBI for regularising write off from FERA angle was pending. The factum of irrecoverability of the debt was established from the evidence produced before the AO. The counsel further submitted before the AO that though the approval of the RBI regarding the said loss was still to be received, but the same was cleared by the High Power Committee of the Ministry of Finance, Government of India, where they agreed to allow the loss. The assessee, therefore, submitted that the loss as claimed by the assessee should be allowed. The CIT (A) observed that the specific letter of the RBI with regard to the loss claimed by the appellant has not been received so far. The Government of India, Ministry of Commerce, have only admitted that the joint venture company in West Germany, floated by the appellant, had undergone liquidation. The CIT (A), therefore, held that the loss claimed on this account cannot be allowed to the appellant since there is no positive evidence to show that the amount is irrecoverable. He further observed that only after getting the positive response from the RBI in this connection, the same should be considered in the year in which such letter is received. He accordingly confirmed the disallowance made by the AO on account of bad debt amounting to Rs. 11,46,432.
4. Before us Dr. S. Narayanan, the learned counsel for the assessee, submitted that this debt was due from Pearl Agencies GMVH, Germany.
This was a joint venture between the assessee-company and foreign non-resident Shri Satish Batra after due approval of the RBI. The garments were exported from India by the assessee on regular invoices and were sold by the joint venture in Germany. These debts represent the exports made vide following invoices issued during the financial year 1982-83 :Invoice No. Amount (Rs.)560, 557, 322, 327, 328, 336/88 2,95,989 A copy of account of Pearl Agency, GMVH, West Germany, for the financial year 1982-83 was also submitted in the compilation at pages 59 to 62 which gives details of various invoices debited in their account as well as the payments received from them in the financial year 1982-83 leaving an unpaid balance of Rs. 11,46,432 in the said account.
5. The learned counsel submitted that the said amount was written off as bad debt in the P&L a/c of the accounting year 1985-86 with a corresponding credit to bad debt reserve account. He pointed out that the assessee made all possible efforts for recovery of the said amount by pursuing legal remedies in the German Courts. The German High Court pronounced its decision on 21st March, 1986, as a result of which the amount became finally irrecoverable. A copy of the said judgment dt.
21st March, 1986, rendered by the German Higher Regional Court has been placed at pages 87 to 103 of the compilation submitted before us. He further submitted that necessary applications for approval of the RBI in respect of the loss arising due to irrecoverability of such export proceeds were submitted from time to time. Our attention was invited towards a letter dt. 25th January, 1988 sent by the assessee to the Manager, New Bank of India. Tolstoy Marg, New Delhi, relating to the aforesaid non-realisation of export proceeds with reference to RBI's letter dt. 10th December, 1987. The New Bank of India being the authorised agent exchanged certain letters with the RBI for getting approval of the RBI in respect of the said loss. The RBI finally granted approval vide their letter dt. 30th March, 1993, submitted at page 10 of the supplementary paper book. The RBI while according such approval had also forwarded a copy of the said letter dt. 30th March, 1993, of the Joint Controller of Imports and Exports for effecting necessary adjustments in the incentive entitlement earned/to be earned by the exporter (assessee) in relation to the export invoices in question aggregating to Rs. 11,46,432. The learned counsel submitted that the subsequent approval granted by the RBI further confirms the correctness of the decision taken by the assessee as a prudent trader, to write off the said debt as bad debt in the financial year 1985-86 relating to asst. yr. 1986-87. The German High Court had passed the judgment on 21st March, 1986, which falls in asst. yr. 1986-87. The debt has thus been proved to be irrecoverable and bad in the year under consideration.
6. The learned counsel further submitted that the credit given to the bad debt reserve account with a corresponding debt to the P&L a/c amounts to sufficient compliance of the conditions prescribed in s.
36(2) of IT Act, 1961, as it existed in the year under consideration.
The credit was given to bad debt reserve account instead of crediting the amount in the debtor's account and was made on account of the relevant provisions contained in the FERA Act as well as in the Exchange Control Manual which requires obtaining of approval from RBI in relation to loss arising due to irrecoverability of export proceeds.
The account of the debtor could be closed only after obtaining the approval from the RBI. Therefore, the amount was so credited in the bad debt reserve account and not in the debtor's account. However, such writing off the bad debt by debiting the amount in the P&L a/c and the crediting of bad debt reserve account has been held to be sufficient compliance of the conditions prescribed in s. 36(2). He invited our attention towards the relevant provisions contained in s. 36(1)(vii) r/w s. 36(2) and various decisions referred to in the Income-tax Law by Chaturvedi and Pithisaria at page 1455, Vol. II.7. The learned counsel thus strongly urged that the deduction in respect of bad debt should be allowed in the year under consideration.
8. The learned senior Departmental Representative submitted that the onus lies on the assessee to prove that the debt in fact had become bad and irrecoverable in the year under consideration. He submitted that this is a loss in the joint venture which cannot be treated as bad debt. Furthermore, the amount cannot be written off as bad debt without obtaining prior approval from RBI in accordance with the provisions contained in FERA Act as well as Exchange Control Manual. The very fact that there is a statutory prohibition for writing off a debt in relation to export proceeds as a bad debt without obtaining prior approval from RBI itself proves that the assessee could not validly write off the amount as bad debt until the approval was granted by the RBI. In the present case the approval has been granted on 30th March, 1993. The debt, if it is treated as bad debt, it became bad and irrecoverable only in the year in which the RBI had accorded approval for the same. He placed reliance on decision in ITO vs. Oswal Emporium (1989) 80 ITD 241 (Del) and Pradeshiya Industrial & Investment Corps.
of India Ltd. vs. CIT (1996) 54 TTJ 438 (All).
9. In the rejoinder, the learned counsel for the assessee submitted that the permission for joint venture with the foreign company was granted by the concerning Government authorities. Copy of approval granted for the joint venture was also placed at page 9 of the paper book. Pursuant to the aforesaid permission granted by RBI, a joint venture company for trading and marketing in West Germany in collaboration with Dr. Satish Batra, West Germany, was formed.
Therefore, the contention of the learned Departmental Representative that loss in joint venture is not allowable is not correct. The bad debt has been written off in respect of irrecoverability of the amount of sale proceeds which were duly taken into account as income in the year of sale vide export invoices debited in the account of the said debtor with a corresponding credit to export sales. This was not the ground on which the disallowance was made by the AO or was confirmed by the CIT (A). Therefore, such a contention of the learned senior Departmental Representative has no merit. As regards the submissions made by the learned senior Departmental Representative based on the provisions of FERA and Exchange Control Manual, the learned counsel submitted that the debt in fact had become bad and irrecoverable in the year under consideration because the German High Court had finally rendered a decision against the assessee on 21st March, 1986, which falls in this year. The formality of obtaining approval from RBI can be obtained only after making all possible efforts for recovery of the export proceeds. The RBI grants approval after its being satisfied about the reality of the loss in question. The subsequent approval granted by the RBI instead of supporting the Revenue's case, fully supports the assessee's contention that the bad debt had in fact become bad with the passing of order by the German High Court and such a claim of loss has been found by the RBI as a genuine loss. Such subsequent approval would further support the action of the assessee of writing off the debt as bad debt in question and also conclusively prove the reality of the loss. He also invited our attention towards judgment reported in Assam Roller Flour Mills vs. CIT and Jethabhai Hirji & Jethabhai Ramdas vs. CIT (1979) 120 ITR 792 (Bom).
10. At this stage the Bench required the learned counsel for the assessee to state as to whether deduction under s. 8OHHC was granted to the assessee in the year in which the export sales were made and if so, what would be the effect of grant of such deduction under s. 8OHHC in relation to fulfilment of conditions prescribed in s. 36(2). The learned counsel was also required to give certain details regarding the fact as to whether the amount of various export incentives earned by the assessee in respect of these exports were paid back to the concerning authorities or not, as indicated in the letter of approval granted by the RBI on 30th March, 1993. The learned counsel submitted that these details and documents will be submitted within couple of days. The documents and details so required were furnished by the learned counsel for the assessee on 12th August, 1996. After submission of these papers, it was considered necessary in the interest of justice to both sides to hear them in relation to further documents submitted on 12th August, 1996. The matter, therefore, was again fixed for hearing on 21st August, 1996. We have heard the learned counsel for the assessee and the learned Departmental Representative on 21st August, 1986.
11. The learned counsel submitted that the assessee claimed deduction under s. 8OHHC in the year in which the exports were made in accordance with the provisions of s. 8OHHC, as it existed in that year. He further submitted that grant of deduction under s. 8OHHC will not in any manner affect the assessee's claim for grant of deduction in respect of bad debt. He submitted that s. 36(2) provides that in making any deduction for a bad debt or part thereof, one of the conditions prescribed in s.
36(2)(i) is that no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. The export sales made in financial year 1982-83 were taken into account in computing the income of the assessee for that relevant year. The total sale proceeds were credited as export sales in the trading/P&L a/c. The profit on sale is a small fraction of the amount of sale. Out of such small fraction of the export turnover which represents profit on export sales, only part amount of such profits qualifies for deduction under s. 8OHHC. The claim for bad debt is in respect of the entire amount of bad debt in respect of non-realisable export sale proceeds. The grant of deduction under s. 8OHHC for asst. yr. 1983-84 did not require actual receipt of foreign exchange but assessee was entitled to grant of deduction under s. 8OHHC if it, inter alia, proves that the export proceeds were receivable in convertible foreign exchange. The law was subsequently amended with which we are not concerned. The words "receivable" used in s. 8OHHC(2)(a) was substituted by the words "received in or brought into India" by the Finance Act, 1990, w.e.f.
1st April, 1991. The learned counsel also invited our attention towards judgments A. V. Thomas & Co. Ltd. vs. CIT (1963) 48 ITR 67 (SC), CIT vs. Birla Bros. (P) Ltd. (1970) 77 ITR 751 (SC) as well as the circular published in (1990) 186 ITR 28 (St). He submitted that all the conditions prescribed in s. 36(2) have been fully complied with. The assessee is clearly entitled to grant of deduction in respect of the aforesaid bad debts.
12. The learned Departmental Representative submitted that the profit on export sales have not formed part of income chargeable to tax in its entirety. Therefore, it cannot be said that the same was taken into consideration in computing the income of the year when such export sales were made. The learned Departmental Representative further submitted that in view of the principle of law laid down by the various Courts, the deduction in respect of bad debt on such facts and circumstances, cannot be allowed. He relied upon the judgments reported in Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj), CIT vs. Sri Vinayaga Pictures (1986) 161 ITR 65 (Mad), G. P. Singhi vs. CIT (1986) 158 ITR 782 (Del), N. Annajee Rao & Bros. vs. CIT (1974) 97 ITR 265 (AP). He submitted that in view of elaborate reasons given by the CIT (A), the disallowance of bad debt should be confirmed.
13. We have carefully considered the submissions made by the learned representatives of the parties and have also gone through the orders of the learned Departmental authorities. We have also carefully examined the various documents submitted in the compilation to which our attention was drawn during the course of hearing. We have also carefully gone through all the decisions cited by the learned representatives of both sides.
13.1 A perusal of s. 36(1)(vii) r/w s. 36(2) as it existed in the year under consideration clearly reveal that the following conditions will have to be fulfilled for grant of deduction in respect of bad debt under s. 36 of IT Act, 1961 : (i) The debt or loan should be in respect of a business, which should be carried on by the assessee in the relevant year under consideration.
(ii) The debt should have been taken into account in computing the income of the assessee of the accounting year or of an earlier accounting year.
(iii) The amount of debt should have really become bad in the year under consideration; and (iv) The amount should have been written off as irrecoverable in the accounts of the assessee for the accounting year in which such a claim for deduction in respect of bad debt is made.
13.2 So far as condition No. (i) is concerned, the said condition clearly stands fulfilled because the debt was incurred in respect of the business carried on by the assessee and such a business continued to be carried on by the assessee in the year under consideration.
Hence, condition No. (i) stands fulfilled in the present case.
13.3 The second condition is whether the debt in question was taken into account in computing the income of the assessee of the accounting year or of an earlier accounting year. In the present case, the debt represents unrealised export sale proceeds. The export sales, as and when those were made in the year 1982 and 1983 were duly accounted for as export sales and those export sales were credited in trading/P&L a/c. The entire amount of such export sale proceeds aggregating to Rs. 11,46,432 form part of trading receipt of the assessee in the respective years when such export sales were made. The question as to whether the fact of grant of deduction under s. 8OHHC in relation to part of the export profit in the year when export sales were made would in any way adversely affect the assessee's claim for grant of deduction as bad debt will require reconsideration for answering as to whether condition No. (ii) stands fulfilled in the present case or not.
13.4 The provisions of s. 8OHHC inserted by Finance Act, 1983, w.e.f.
1st April, 1983, inter alia, provided that where an assessee, who is resident in India exports out of India any goods, it shall be entitled to grant of a deduction while computing its total income of a sum calculated @ 1 per cent of the export turnover of such goods and a deduction equal to 5 per cent of the amount by which the export turnover of such goods during the previous year exceeds the export turnover of such goods during the immediately preceding year. One of the conditions for grant of deduction under s. 8OHHC was that the sale proceeds of such goods exported by the assessee should be receivable by the assessee in convertible foreign exchange. The expression 'receivable' was substituted by the words 'received in, or brought into India' by the Finance Act, 1990, w.e.f. 1st April, 1991. The assessee got deduction under s. 8OHHC in the relevant years when the export sales were made in accordance with the provisions of s. 8OHHC, as were in force in those years.
13.5 The provisions of s. 36(1) as it existed prior to its amendment made by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989, stood as under : "In making any deduction for a bad debt or part thereof the following provisions shall apply - (i) no such deduction shall be allowed unless such debt or part thereof - (a) has been taken into account in computing the income of the assessee of that previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year." The aforesaid provision does not prescribe any condition that the entire income derived on such debt should have been charged to tax or should have formed part of taxable income of the assessee. There is no specific provision in the IT Act which provides that if a debt in relation to export sales turns out, at a later point of time to be irrecoverable the deduction already granted under s. 8OHHC will be withdrawn and there is also no provision that in such a situation the amount of bad debt in full or in part will be disallowed because a small fraction of that debt has been allowed as deduction under s.
8OHHC in the year when such export sales were made. There is no doubt about the fact that the entire amount of debt in question was taken into account in computing the income of the assessee of the years when those export sales were made. Such export sales formed part of the income of the assessee both as per books of accounts and also for the purposes of computing the total income of the assessee. It may be imperative to make a useful reference to the provisions like s. 155(4A) or 155(5) which provides that where an allowance by way of investment allowance or development rebate has been made, it will be deemed to have been wrongly allowed in case the plant or machinery is sold or otherwise transferred before the expiry of the 8 years or 10 years period as prescribed in the relevant sections. No such provision has been made in IT Act for withdrawal of deduction granted under s. 8OHHC if it is found that the export sales proceeds could not be recovered.
In view of the aforesaid clear interpretation based on the plain language of s. 36(2)(i), we are of the considered opinion that condition No. (ii), namely, that the debt in question was taken into account in computing the income of the assessee of the earlier years when those exports were made clearly stands fulfilled in the present case.
13.6 The most controversial aspect in the present case is whether the condition No. (iii) stands fulfilled in the present case or not. The AO as well as the CIT (A) have held that the debt in question did not become bad and irrecoverable in the year under consideration because the approval of the RBI was not accorded till the end of the relevant accounting year and the matter relating to grant of such approval was then pending. The approval in fact has been granted by the RBI only vide their letter dt. 30th April, 1993. The learned Departmental authorities therefore, held that the claim was premature and its allowability could be considered only in the year when the RBI accorded its approval. The learned senior Departmental Representative had further made a very strong submission in this regard. He submitted that there is a statutory prohibition for writing off a debt in respect of irrecoverable export sale proceeds under the FERA Act and under the Exchange Control Manual. Such a debt can be written off only after the RBI accords its approval for this purpose. This submission was made by the senior Departmental Representative both with regard to condition No. (iii) and No. (iv). According to the learned senior Departmental Representative the assessee could not validly treat that debt as a bad debt and could not in law write it off without obtaining prior approval of RBI. Hence, condition Nos. (iii) and (iv) according to him, have not been fulfilled in the present case.
13.7 The learned counsel for the assessee, on the other hand, submitted that the assessee had made all possible efforts to recover the said amount from the foreign buyers. Necessary legal proceedings were also taken. The assessee lost their case before the Higher Regional Court of Germany vide their order dt. 21st March, 1986. The judgment of Higher Regional Court dt. 21st March, 1986, was accepted by the assessee and no further appeal was made before the Supreme Court at Germany as the assessee had to incur substantial money on litigation in Germany and the assessee was not able to remit foreign exchange for advocate's fee and other charges. The assessee, therefore, had no ray of hope of any recovery of the said amount after the order of Higher Regional Court of Germany which was delivered on 21st March, 1986. The decision to write off the said amount in asst. yr. 1986-87 was based on such an honest and careful consideration by the assessee of the entire facts and circumstances which clearly establish that nothing can be recovered out of the said amount. The debt, according to the learned counsel clearly became bad and irrecoverable in the year under consideration. As regards the provisions relating to FERA and Exchange Control Manual, the learned counsel submitted that the assessee or their authorised agent, namely, the New Bank of India, in the present case, could approach the RBI only after all efforts have been made by the exporter to realise the dues and it has to be established before the RBI that no recovery could be made in spite of all possible efforts. The approval can be obtained only after the debt has really became bad and irrecoverable. The RBI has to be satisfied bout the reality and genuineness of the loss in question. The very fact that the RBI after making necessary enquiries have finally accorded its approval vide order dt. 30th March, 1993, confirms the correctness of the decision of the assessee to write off the debt in asst. yr. 1986-87 when the Higher Regional Court of Germany had rejected the assessee's contention.
13.8 The claim of bad debt of Rs. 11,46,432 relates to exports made in the year 1982-83 as per the various export invoices, the details of which have been given in earlier part of this order. Certain other uncontroverted facts stated by the assessee before the authorities below are also noteworthy for deciding the point in question. Out of the aforesaid amount of Rs. 11,46,432, the bills amounting to Rs. 9,46,432 were drawn under letter of credit opened by the German party and the balance Rs. 2 lakhs was due on collection basis. The assessee tried to recover the amount covered under letter of credit opened by the foreign buyer through New Bank of India. The New Bank of India started recovery proceedings and lodged claims of recovery with German bank. Dr. Satish Batra with whom the joint venture company was formed in Germany stalled the recovery proceedings lodged by New Bank of India by filing a complaint in the District Court, West Germany, on the ground of recovery of the share of losses of the appellant company in the joint venture company formed at West Germany. Dr. Batra obtained a distress warrant from that Court on 6th September, 1983, by which the recovery proceedings, were stalled against the letter of credit issued by the German banks in favour of the New Bank of India. The assessee moved an application for quashing of the attachment order before the District Court, Aachen, West Germany. The case of the assessee was dismissed by the District Court vide order dt. 15th January, 1985. The assessee preferred further appeal before Higher Regional Court in Germany. The Higher Regional Court vide its order dt. 21st March, 1986, again dismissed the appeal of the assessee for recovery of debts due from Pearl Agencies, GMVH, Germany. The assessee accepted. The said decision dt. 21st March, 1986. No further appeal was made before Supreme Court at Germany, as the assessee did not consider it wise to throw good money for recovering bad money, particularly in view of the fact that the assessee had lost its case upto the High Court of Germany and the debtor joint venture company was left with no assets and had already became defunct company but that time on account of losses. All these facts were submitted on behalf of the assessee before the learned authorities below. Those have been submitted in the written submissions dt. 4th October, 1989, submitted before the CIT (A), a copy whereof has been placed at pages 1 to 8 of the paper book. These facts have not been controverted by the AO or by the CIT (A) in their respective orders nor by the learned Departmental Representative before us during the course of hearing.
13.9 A perusal of the copy of account of the said debtors M/s. Pearl Agency, GMVH, West Germany, submitted at pages 59 to 62 of the paper book shows that a sum of Rs. 11,46,432 remained as an outstanding balance against that concern as on 31st March, 1983. This represents the unpaid amount of the various export invoices debited in this account in the financial year 1982-83. There was also an opening balance of Rs. 28,84,021 in this account. Exports made during this year from time to time were debited. The realisation made during the financial year 1982-83 were credited and there remained an unpaid balance of Rs. 11,46,432. This amount was not recovered in spite of all efforts made by the assessee and by their authorised agent, New Bank of India till the accounting year pertaining to asst. yr. 1986-87. Nothing has been realised even thereafter till the date of hearing of this appeal in the month of August, 1996. The reality of the loss due to aforesaid amount becoming irrecoverable and bad has been accepted by the RBI as is evident from the approval accorded by the RBI vide its letter dt. 30th March, 1993. All the aforesaid facts conclusively prove that the amount in question has really became bad and irrecoverable.
The reality of the loss cannot, therefore, be validly disputed or doubted by anyone. The only question is as to which is the appropriate year of its allowability as a bad debt. It is also an undisputed fact that the litigation in relation to recovery of the said amount with the German company came to an end after the Higher Regional Court of Germany rendered its decision on 1st March, 1986, against the assessee.
The date of this decision, namely, 21st March, 1986, falls in the year under consideration, namely asst. yr. 1986-87. The assessee accepted that decision dt. 21st March, 1986, and did not file any further appeal before the Supreme Court at Germany. Such a decision was taken by the assessee as a prudent trader after taking into consideration the entire relevant facts and circumstances. The assessee honestly and rightly came to the conclusion that after the decision of the Higher Regional Court dt. 21st March, 1986, there was no ray of hope of recovering any amount out of the aforesaid debt. In view of the aforesaid facts, we are of the considered opinion that the debt in question really became bad and irrecoverable in the year under consideration.
13.10 Now, the question which further requires our consideration is whether the assessee could write off the said amount as bad debt without obtaining prior approval of RBI. The provisions of IT Act requires the assessee to inter alia, prove that for claiming deduction in respect of bad debt, the assessee must establish that the debt in question had in fact became a bad debt in the relevant year when such a claim is being made. The question whether a debt has become bad or not must be decided from the point of view of possibility of the realisation of the debt. The assessee should be honestly convinced that there is no hope of any recovery of the debt in question. What is required is an honest judgment on the part of the assessee at the time when he makes the write off in the light of the events upto that stage when the amount was written off. In the present case, the Higher Regional Court of Germany rendered a decision against the assessee on 21st March, 1986. That judgment achieved finality as no further appeal was preferred before the Supreme Court of Germany after a very careful consideration of the entire relevant facts and circumstances made by the assessee in that regard. The decision of the assessee to write it off as a bad debt after the order of the Higher Regional Court of Germany was delivered, was a bona fide decision and the action of the assessee to write it off as a bad debt by no stretch of imagination can be treated as premature or erroneous in any manner. The assessee has brought adequate material on record to prove that the debt had become bad and irrecoverable in the year under consideration.
13.11 In making an objective determination whether a debt has become bad in the year claimed by the assessee, the subsequent events may also be taken into consideration, which may go to show that in such a situation and under such circumstances, a reasonable prudent man would come to such a conclusion after the case was decided against the assessee by the Higher Regional Court of Germany. The order granting approval by the RBI dt. 30th March, 1993, is an important and vital subsequent event which confirms the correctness of the decision taken by the assessee to write off the said amount as bad debt after losing the legal battle vide order dt. 21st March, 1986, rendered by the Regional Higher Court of Germany.
13.12 Let us examine the requirements of FERA and Exchange Control Manual in this regard. The relevant clauses from the text of RBI Manual on Export of goods are reproduced hereunder : 6C. 14 (i) In cases where the exporter has not been able to realise the outstanding export due despite his best efforts, he may approach the authorised dealer, who had handled the relevant shipping documents, with appropriate supporting documentary evidence with a request for write off of the unrealised portion. Authorised dealers may accede to such requests (the branch concerned should obtain the approval of its controlling office) subject to the undernoted conditions : (a) The relevant amount has remained outstanding for 360 days or more.
(b) the aggregate amount of write off allowed by the branch of the authorised dealer during a calendar year should not exceed 5 per cent of the total export proceeds realised by the concerned exporter through its medium during the previous calendar year.
(c) Satisfactory documentary evidence has been furnished in support of the exporter having made all efforts to realise the dues but has been unsuccessful due to reasons beyond his control.
(v) The unrealised amount represents the undrawn balance of an export bill (not exceeding 10 per cent of the invoice value) and has remained outstanding and turned out to be unrealisable despite all efforts made by the exporters. The authorised dealer should take into consideration the track record of the exporter, documentary evidence/correspondence showing that there is no possibility of recovery of the undrawn balance, frequency of similar cases considered in the past and the antecedents of the overseas buyer, if available, before allowing the closure.
(vi) The cost of resorting to legal action would be disproportionate to the unrealised amount of the export bill or where the exporter even after winning the Court case against the overseas buyer could not execute the Court decree due to reasons beyond his control and sufficient documentary evidence is produced to fully satisfy the authorised dealer.
(e) The case is not the subject-matter of any civil or criminal suit which is pending.
(f) The exporter has not come to the adverse notice of the Enforcement Directorate or the Central Bureau of Investigation or such other law enforcement agency.
(g) The exporter has surrendered proportionate export incentives, if any, availed in respect of the relative shipments." The aforesaid clauses of the Manual on Export of goods clearly shows that the approval can be obtained only after the exporter has not been able to realise the outstanding export dues despite his best efforts.
The exporter has to produce satisfactory documentary evidence to prove that all efforts to realise the dues were made and the exporter has been unsuccessful due to reasons beyond his control. One of the conditions is also that the case is not the subject-matter of any civil or criminal suit, which is pending. The object of obtaining the approval from RBI is to ensure that no exporter is allowed to make a fictitious and false claim in relation to non-recovery of export proceeds and thereby deprive the country of valuable foreign exchange.
All these conditions indicate that the exporters have to establish and to prove beyond doubts that the export sale proceeds could not be realised in spite of all possible efforts and the reasons of non-recovery wore beyond the control of the exporter. In the present case, the litigation came to end on 21st March, 1986. The assessee had to prove the reality of the loss due to non-realisation of export dues both before the IT authorities as well as before the FERA authorities and the RBI. The fact that the RBI finally accorded its approval for final closure of the account proves that the claim made by the assessee was real and genuine. The requirement for write off of the unrealised portion of the export sale proceeds from FERA angle has to be decided by the concerning FERA authorities or by the RBI on the fulfilment of various stringent and strict conditions. The permission to close the debtor's account for the purposes of FERA and requirement of RBI Manual are more rigid and strict. The assessee has fulfilled all those strict and rigid conditions. The RBI after satisfying themselves about the fulfilment of all such rigid, numerous and strict conditions has found the assessee's claim to be absolutely real, genuine and perfectly correct. Such a permission granted by the RBI strongly confirms the correctness of the action of the assessee to treat that amount as irrecoverable after passing of the order dt. 21st March, 1986, by the Regional Higher Court of Germany. The requirement of FERA in no way prohibits the assessee to make a claim for grant of deduction in respect of bad debt in the year in which the assessee had finally lost in the legal battle. We are, therefore, of the opinion that the debt in question became bad and irrecoverable in the year under consideration.
Condition No. (iii) therefore, clearly stands established in favour of the assessee.
13.13 Now remains the last condition, namely, as to whether amount can be said to have been written off as irrecoverable in the account of the assessee for the accounting year relevant to asst. yr. 1986-87. The amount in question was debited in the P&L a/c with a corresponding credit to bad debt reserve account. It has been held by various Courts that it is not essential that the debtor's individual account should be squared off by an appropriate credit entry. Even if the credit is made in a bad debt reserve account against debit to the P&L a/c indicating that the entry refers to the amounts due by the particular debtor or debtors, the writing off would be complete in accordance with the relevant provisions of IT Act, 1961. Such a view is clearly fortified by the judgments in Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 130 ITR 95 (Guj), CIT vs. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom) and Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj). We have already discussed hereinbefore that the provisions of FERA Act and Exchange Control Manual does not in any manner effect such valid writing off of the debt as bad debts in accordance with the provisions of IT Act. If the debt in question really became bad in the year in which such a claim is made and the amount is debited in the P&L a/c with a corresponding credit to either the individual account of the debtor or to account like bad debt reserve account indicating the amount due by the particular debtor, it would be a sufficient compliance with the provisions of the statutory requirement for writing off as irrecoverable the concerned debt in the books of the assessee for the purposes of IT Act, 1961. Hence, conditions No. (iv) also stands fulfilled in the case of the assessee.
14. In view of the aforesaid facts and discussions, we are clearly of the opinion that the assessee is entitled to grant of deduction of a sum of Rs. 11,46,432 claimed as bad debt in the year under consideration.