This is appeal by assessee against order of Commissioner (Appeals), dated 5-10-1982. only issue for our consideration in this appeal is whether Commissioner (Appeals) has erred in holding that writing off of bad debts of Rs. 28,077 of Dwarkaprasad Bhojnagarwala of Calcutta in year under consideration would be premature. 2. facts in short are that balance outstanding from Dwarkaprasad Bhojnagarwala, debtor, at beginning of Samvat Year 2035, was Rs. 49,920 and sales of Rs. 85,012 were made to said firm by assessee during this year. Certain payments were also received but three drafts of Rs. 11,532, Rs. 5,117 and Rs. 3,010 were dishonoured. assessee enquired through General Cloth Trading Co. of Calcutta and learnt that Dwarkaprasad Bhojnagarwala had stopped functioning and it was not possible to recover any dues from them. Therefore, assessee has written off said amount as bad debt. ITO did not agree with claim of assessee. According to him, assessee has received huge amount from Dwarkaprasad Bhojnagarwala of Calcutta in year under consideration and merely on information from General Cloth Stores of Calcutta, debts cannot be said as bad and, therefore, when there are dealings and assessee has received certain payments, no question of bad debt arises. 3. In appeal, view taken by ITO has been confirmed by Commissioner (Appeals), saying that writing off of debts in this year would be premature. 4. Being aggrieved, assessee came in appeal before us. submission of learned counsel for assessee, Shri J.P. Shah, was that assessee has inquired from its known firm and it is said that assessee has closed down its business and Dwarkaprasad Bhojnagarwala & Sons have gone into insolvency. There is no hope of recovery of amount and till today assessee has not recovered any further amount. He filed copy of accounts of Dwarkaprasad Bhojnagarwala also. same is placed at page 1 of assessee's paper book. On other hand, learned departmental representative, Shri Harne, submitted that new credits were received from same party, i.e., Dwarkaprasad, and this is not new party. It is old party, which has dealings in lakhs in earlier year also. Therefore, by mere letter from s o m e known firm, it cannot be said that debt is not recoverable from Dwarkaprasad. Therefore, written off of debt is premature. 5. We heard rival submissions and considered material on record. It is clear that opening balance in Samvat Year 2035 was Rs. 49,920 and assessee has received payment from that firm in this year of Rs. 1,06,856 and assessee has dealings in this year. basis of writing off of debt is only that one of parties, i.e., General Cloth Stores, has written letter to assessee that debt is not recoverable. In our view, it is not enough to write off debt. At least in year under consideration, assessee has not made enquiry about whereabouts of partners of Dwarkaprasad Bhojnagarwala. After all debtor which has dealings in lakhs with assessee several years, assessee must know whereabouts of partners of Dwarkaprasad Bhojnagarwala. Nothing has been said that assessee has facts in his personal knowledge that Dwarkaprasad is not in position to pay debts in assessment year under consideration and partners of Dwarkaprasad have no property from which debts can be recovered. Therefore, when there are business dealings in year under consideration and assessee has received payment from that party of about Rs. 1,06,856, in our view, there is no infirmity in order of Commissioner (Appeals). 6. In result, appeal is dismissed. Per Shri Anand Prakash, Accountant Member --- I have had benefit of going through order of my learned brother, Judicial Member. Inasmuch as it has not been possible for me to persuade myself to agree with his conclusion, I am writing separate order as follows: 2. assessee is firm. Its accounting period for assessment year 1980-81 ended on Diwali of Samvat Year 2035. During said accounting year, assessee wrote off Rs. 28,077 as bad debts, which were recoverable by assessee-firm from Dwarkaprasad Bhojnagarwala of Calcutta. From copy of account of said party in books of assessee of Samvat years 2032-2035, it appears that assessee used to sell goods to said party and remittances were received by assessee from him. In accounting period corresponding to assessment year 1977-78, sales to extent of Rs. 1,06,118 were made by assessee to said party and payments in respect o f entire sum were received by assessee-firm during accounting period itself. 3. In accounting period corresponding to assessment year 1978-79, value of goods sold came to Rs. 1,65,987 as against which said party (the Calcutta party) paid to assessee Rs. 1,55,218. Rs. 10,701 remained by way of balance, which were carried over by assessee to next year. In accounting period corresponding to assessment year 1979-80, sales made by assessee to Calcutta party aggregated to Rs. 3,00,670 as against which receipts from said party were to extent of Rs. 2,61,451. Rs. 49,920 remained recoverable from said party at end of accounting period in question. In accounting period under consideration, sales made amounted to Rs. 85,012 only. opening, balance amount due from said party was Rs. 49,920. total recoverable amount from said party, thus, was of Rs. 1,34,932, as against which payments received from said party aggregated to Rs. 1,06,856. Towards part discharge of remaining debt, Calcutta party issued to assessee B.P. Drafts for Rs. 11,532, Rs. 5,117 and Rs. 3,010 on 21-3-1979, 7-5-1979 and 6-6-1979, respectively. All three B.P. Drafts were, however, dishonoured. 4. assessee thereupon caused enquiry made with regard to financial position of Calcutta party through General Cloth Store, 196, Cross Street, Calcutta, who advised assessee on 13-10-1979 that " local party, Dwarkaprasad Bhojnagarwala & Sons, has wound up its working since last four months and they have gone into insolvency and they have stopped payment since last four months which we have known here, which please note." One more communication was received by assessee from Cloth Traders Co., wherein said party also gave following information about Dwarkaprasad Bhojnagarwala & Sons: " Party M/s Dwarkaprasad Bhojnagarwala & Sons, has failed and they have lost their capacity to pay to creditors and they have been totally ruined, which is 100 per cent fact. Every creditor has got different views and initiated legal steps ... nobody is going to stop it. But in case if somebody takes legal steps, nothing is going to be realised; which we say definitely and with confidence." 5. Faced with above position, assessee-firm decided to write off amounts in question as irrecoverable and did not initiate any legal steps against said party. It was obvious that such steps will bring forth no result. 6. In face of aforesaid factual position, it has to be determined whether assessee's claim for bad debt is acceptable or not. In my opinion, assessee's claim is valid because after its hundis were dishonoured and after it had known from its correspondents in Calcutta that financial position of Calcutta party was such that nothing would be realised from it, even if legal steps were taken, it had lost hope of recovering anything from said party. In order that debt becomes bad, it is not necessary that legal steps must be initiated by party against debtor before it can claim bad debt. Whether or not assessee would spend its good money in order to recover something which has already, in its opinion, become bad, has to be left to judgment of businessman, who is carrying on his business and bona fides of his decision should not normally be challenged unless there is material to show some collusive action. In present case, it is not department's stand that assessee was in any way or in some way related with Calcutta party and that write off is result of collusive action on part of two. Their Lordships of Gujarat High Court considered principles, which should be applied while evaluating claim of bad debt in case of Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166. According to their Lordships, " when businessman writes off amount, there is prima facie evidence that amount is irrecoverable ". department can, of course, rebut prima facie inference by drawing attention to circumstances or by leading some evidence to suggest that position taken up by assessee was not correct. Such rebuttal has not been done by revenue in present case. Taking into account facts and circumstances of present case, as stated above, I am of opinion that assessee's claim for bad debt is entirely correct and as such, I allow it. 7. In result, assessee's appeal succeeds. ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT, 1961 -- Inasmuch as it has not been possible for us to come to agreed conclusion in IT Appeal No. 65 (Ahd.) of 1983, we refer following question for opinion of Third Member: " Whether, on facts and in circumstances of case, claim of assessee for bad debts amounting to Rs. 28,077 due from Dwarkaprasad Bhojnagarwala of Calcutta in Samvat Year 2035 relevant to assessment year 1980-81 is allowable?" THIRD MEMBER ORDER Per Dr. V. Balasubramanian, Vice President --- During accounting year relevant to assessment year under appeal, assessee-firm wrote off bad debt of Rs. 28,077. amount was due from one Dwarkaprasad Bhojnagarwala of Calcutta. assessee was selling goods to said Calcutta party. Remittances were regularly received from that party. During accounting year relevant to assessment year 1977-78, assessee made sales of Rs. 1,06,118 to Calcutta party. During next year, sales came to Rs. 1,65,987. Against this, assessee received payment of Rs. 1,55,218 leaving balance of Rs. 10,701. In subsequent year, as against sales of Rs. 3,00,670, assessee received Rs. 2,61,451 leaving balance of Rs. 49,920. During accounting year relevant to year under appeal, sales amounted to Rs. 85,012. As against total amount due of Rs. 1,34,932, assessee received Rs. 1,06,856 leaving balance of Rs. 28,077, which was written off during year. facts also indicate that Calcutta party issued three bills payable to assessee of Rs. 11,532, Rs. 5,117 and Rs. 3,010 on 21-3-1979, 7-5-1979 and 6-6-1979, respectively. These bills were dishonoured. assessee seems to have made enquiries about financial position of Calcutta party through one General Cloth Stores. assessee was advised on 13-10-1970 that Calcutta party had wound up its business and gone into insolvency. For more than four months, payments had been stopped by party. In subsequent communication, assessee was informed that since Calcutta party had absolutely no capacity to pay creditors, no purpose would be served by taking legal action. On strength of above communications, assessee wrote off sum of Rs. 28,077 as irrecoverable debt. ITO rejected claim of bad debt on ground that assessee had not initiated any legal steps against debtor. Commissioner (Appeals) confirmed order of ITO. 2. When matter came on appeal to Tribunal, two members having differed on question of allowability of bad debt, following point of difference has been referred to me as Third Member for resolution: " Whether, on facts and in circumstances of case, claim of assessee for bad debts amounting to Rs. 28,077 due from Dwarkaprasad Bhojnagarwala of Calcutta in Samvat Year 2035 relevant to assessment year 1980-81 is allowable?" 3. learned counsel for assessee has pointed out that every possible step was taken to realise amount. It was written off only when recovery was impossible. bills payable were dishonoured. That debtor has gone into insolvency is also known. outstandings related to earlier year. Till today nothing has been recovered. It is on basis of these facts that assessee has properly written off bad debt during this year. It is not always necessary to take legal staps against debtor when facts were clear. T h e department has not either alleged or pointed out any collusive action between assessee and debtor. Reliance is also placed on observations of Gujarat High Court in Sarangpur Cotton Mfg. Co. Ltd.'s case. 4. For department, it is pointed out that broad principles laid down in Sarangpur Cotton Mfg. Co. Ltd.'s case would not apply to facts of present case. case of department is not that there is any collusion between parties but that even if debt has become bad, writing off was premature. There is absolutely no evidence of assessee having entered into even any correspondence with debtor. writing off has been done mainly on assertions of third parties. It cannot be left to ipse dixit of assessee to write off bad debt whenever he liked. Reference is made to decision in Chettinad Co. (P.) Ltd. v. CIT [1984] 147 ITR 724 (Mad.). learned counsel has stressed point that assessee himself must know about whereabouts of debtor or his capacity to repay. This knowledge is not available in present case. 5. That debtor has been having business with assessee over long time is not in dispute. debtor has been paying amounts also fairly regularly in past. assessee had transactions running to lakhs of rupees from year to year. amount written off during year comes to only Rs. 28,077. There is no allegation that debtor and assessee are related. There is no allegation of collusive action either. On contrary, three bills payable issued by debtor on three different occasions have been dishonoured. There is information from Calcutta parties, relied on by assessee, that debtor has gone into insolvency. It is not necessary in every case that assessee writes to debtor or establishes his whereabouts. Where that is not known, it is not that he can regard debt as irrecoverable. As matter of fact, till today, no amounts have been recovered out of sum of Rs. 28,077 outstanding. For prudent businessman all these would be sufficient indications that outstandings cannot be recovered. At any rate, chances of recovery are remote. income of assessee is in neighbourhood of Rs. 5 lakhs. It is also fairly steady income from year to year. Taking all these facts into account, it cannot be stated that as matter of fact no prudent businessman can write off outstanding debt as bad during year. I agree with learned Accountant Member that bad debt should be allowed during accounting year. matter will go back to Bench, which heard case for proper disposal. *** RAMNARAYAN HARIPRASAD v. INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX