The main legal point established in the judgment is that advances laid out or expended wholly and exclusively for the purposes of the business are allowable to be deducted under Section 37 of the Income Tax Act.

M.L. Mehta, J.

1. This is an appeal under Section 260A(1) of the Income Tax Act, 1961 (for short "the Act") against the order of the Income Tax Appellate Tribunal (for short "the Tribunal") dated 3rd January, 2005 for the assessment years 1986-87. The Appellant/Assessee is engaged in the manufacturing of liquor, beer, juices, canned products and glass bottles etc. During the relevant assessment year 1986-87, the Assessee filed revised return wherein beside other things it had claimed deduction of Rs. 4,48,462/ - as un-recovered bad debts. This amount comprised of various small amounts and also a sum of Rs. 4,22,114/ - shown against Kanpur Boot House. Regarding small amounts, it is seen that they represented mostly advances given to various parties and the Assessee tried to recover but could not do so. The Assessing Officer allowed deductions of those small amounts, but declined that of Rs. 4,22,114/ - in respect of M/s. Kanpur Boot House of Shri Bhagwan Dass. He was not satisfied with the explanation given by the Assessee with regard to the reasons for being unable to recover the said amount. He disallowed the deduction observing that the Assessee had failed to produce any evidence regarding efforts made for the recovery of the said amount and thus had not established that it became bad during this year.

2. In appeal, the CIT(A) reversed the order of the Assessing Officer and allowed the said deductions holding the debt having become bad and thus irrecoverable against deceased Bhagwan Dass or his legal heirs. The Tribunal reversed the order of the CIT(A) and maintained that of the Assessing Officer vide its impugned order dated 3rd January, 2005. It is against this order that the Assessee is in appeal before us. The following substantial question of law arises for consideration:

Whether the ITAT erred in disallowing deduction of Rs. 4,22,114/ - to the Assessee as bad debts for the assessment year 1986-87?

3. Before proceeding to deal with the legal aspect of the matter, we may note that in its reply dated 9th March, 1989 addressed to the Assessing Officer, the Assessee had stated that they had established an export division for the export of various items including leather products. After exploring the markets abroad, they established business contacts with M/s. Comtec Commercial Corporation of USA. They obtained huge orders from them and had exported goods of aggregate value of Rs. 63.15 lakhs to the said Corporation. To maintain their commitment for the supply of hand-made leather shoes, they entered into an agreement with M/s. Kanpur Boot House (sole proprietorship firm of Bhagwan Dass) for carrying out the necessary manufacturing of hand-made leather shoes. As the quantity and the value involved in the transaction was substantial and to ensure regular supplies, they had to advance from time to time different amounts to M/s. Kanpur Boot House to enable them to keep their supplies in time. Since they could not realize Rs. 25.32 lakhs from said Corporation, they had to suspend the supplies to them and ultimately had to suspend the orders placed by them on M/s. Kanpur Boot House. In view of this development, Kanpur Boot House showed its inability to refund the advances and pleaded inability stating that they had in turn given substantial advances to the workers engaged by them. They also stated that a lot of amount was also invested on the wooden blocks made for the types of shoes ordered by them. Mr. Bhagwan Das also pleaded that all these wooden blocks are of no use and value in case further orders were to be cancelled. In the meantime, Shri Bhagwan Das, sole proprietor of said Kanpur Boot House was diagnosed for Cancer and ultimately died on 19th October, 1985. The Assessee stated that they could not take legal action against Bhagwan Das or his legal heirs in view of the fact that they would have made counter claims on account of the firm orders placed having been cancelled. Since they also failed to recover the outstan