The central legal point established in the judgment is that the decision to claim deduction for bad debts should be based on the conditions existing at the time of write off, and subsequent events should not be considered to decide whether it is a bad debt or not.

N. Kumar, J.—This is an appeal by the revenue, challenging the order passed by the Tribunal, which set aside the order passed by the authorities and granted the benefit of deduction under the heading 'bad debts' under Section 36 of the Income Tax Act, 1961 ('the Act').

2. The Assessee entered into an agreement with Vinayaka Enterprises, to develop and handover 84 Acres and 23 Guntas of land in Jakkur and Shivanahalli village around Bangalore, under an agreement dated 1-2-1995. Subsequently, on 27-6-1998, the earlier agreement came to be terminated and yet another agreement of even date came into existence under which, Vinayaka Enterprises agreed to repay Rs. 12 crores and an additional compensation of Rs. 6 crores and out of Rs. 12 crores, a sum of Rs. 2 crores was repaid by Vinayaka Enterprises. The balance amount was not paid. Therefore, the Assessee filed a return of income for the assessment year 2001-02 claiming the following debts as written off:

3. The Assessing Officer who processed the returns disallowed the claim of the Assessee in respect of the bad debt claimed on the ground, that the debtor had not become insolvent and had resources to pay money and had also not stopped payments as they had made part payment and that they were not disowning the liabilities but on the contrary, they had admitted the liability had issued cheques and were trying for settlement with the Assessee and that civil and criminal proceedings were initiated to recover the said amount. Thus, in the view of the Department, the debt bad not become time-barred. Aggrieved by the same, the Assessee preferred an appeal before the Commissioner of Income Tax. The said appeal came to be dismissed upholding the order of the Assessing Officer. It is against these two orders that the Assessee had preferred an appeal before the Tribunal. The Tribunal held that the action of the authorities are contrary to the provisions of Section 36(1)(vii) of the Act and the position has to be looked into as on the date of write off and not on the possibility of recovery of a subsequent uncertain date, since till the date of filing of the return of income, nothing was received, therefore, there was no hope of recovery. The initiation of legal proceedings is not a condition precedent for claim of bad debt. There is no prohibition for initiation of legal proceedings after the debt is written off. The decision has to be arrived at on the common sense and as to what a prudent businessman would arrive at and therefore, it held that in view of the amended provisions to the Income Tax, once the Assessee in his accounts writes off a debt there is sufficient compliance of the legal requirement and the legality or the correctness of the said writing off cannot be gone into in these proceedings. Therefore, it allowed the appeal, set aside that portion of the order, refusing to grant deduction under the heading 'bad debts' and the said claim was upheld aggrieved by the said order, the revenue is in appeal.

4. On 23-8-2006, when this appeal was admitted, the following questions of law were framed:

(i) Whether, the Tribunal was correct in holding that a sum of Rs. 19,24,09,280 amount payable by Vinayaka Enterprises to the Assessee should be written off as a bad debt during the current assessment year by allowing the principle sum as a loss under Section 28 read with Section 27 of the Act and the interest component under Section 36(1)(vii) read with Section 36(2) of the Act?

(ii) Whether, the Tribunal took into consideration facts like two agreements not being honoured by Vinayaka Enterprises and some cheques issued by Vinayaka Enterprises being dishonoured and the write off having taken place under a bona fide belief as a prudent businessman by taking a common sense view without actually specifying the specific instances and its correlation to the provisions of the Act and consequently recorded a perverse finding?

(iii) Whether, the Tribunal failed to take into consideration the fac