1964 (10) TMI 7 - SC - Income Tax

Whether on the facts and in the circumstances of the case the assessee is entitled to claim bad debts amounting to Rs. 38, 35, 654 or any lesser sum ? Whether on the facts and in the circumstances of the case the assessee is entitled to claim two sums of Rs. 10, 15, 000and Rs. 98, 892 as a business loss or as a deduction under section 10(2)(xv) of the Income-tax Act ? Held that - The appeal will therefore be partially allowed. The answer to the first question recorded by the High Court will be discharged and it will be recorded that the bank is entitled to claim under section 10 (2)(xi) Rs. 15, 00, 000 as bad debts in the year of account ending June 30 1947. On the second question the answer will be in the negative. Appeal allowed in part

Issues Involved:
1. Entitlement to claim bad debts amounting to Rs. 38,35,654 or any lesser sum.
2. Entitlement to claim Rs. 10,15,000 and Rs. 98,892 as a business loss or deduction under section 10(2)(xv) of the Income-tax Act.

Detailed Analysis:

1. Entitlement to Claim Bad Debts Amounting to Rs. 38,35,654 or Any Lesser Sum:

The primary issue was whether the bank could claim bad debts amounting to Rs. 38,35,654 or any lesser sum under section 10(2)(xi) of the Income-tax Act. The Tribunal and the High Court initially rejected the claim on the grounds that the bad debts were not written off in the books of account as required by the statute.

However, upon appeal, it was argued that writing off in the books of account is not an absolute condition precedent to the admissibility of allowance for bad debts. The Supreme Court examined section 10(2)(xi), which specifies that the Income-tax Officer may estimate irrecoverable debts but not exceeding the amount actually written off as irrecoverable in the books of the assessee. The Court noted that while the Income-tax Officer's power is restricted to the amount written off, the absence of such an entry does not necessarily preclude the allowance of bad debts if a reasonable explanation for the default exists.

The Court concluded that writing off in the books of account is not a condition for the allowance of bad debts, and it is within the Income-tax Officer's power to allow such deductions based on the facts and circumstances. Consequently, the Supreme Court ruled that the bank is entitled to claim Rs. 15,00,000 as bad debts in the year of account ending June 30, 1947.

2. Entitlement to Claim Rs. 10,15,000 and Rs. 98,892 as a Business Loss or Deduction Under Section 10(2)(xv) of the Income-tax Act:

The second issue concerned the claim of Rs. 10,15,000 and Rs. 98,892 as a business loss due to embezzlements by the bank's secretary. The departmental authorities and the Tribunal rejected this claim, stating that the embezzlements did not relate to the business of the bank and the loss was not suffered in the year of account as it was not ascertained in that year.

The High Court, upon further investigation, found that the loss did not occur when the fictitious entries were posted but much later when the embezzlements were discovered. The Supreme Court agreed with this view, emphasizing that a loss due to embezzlement does not necessarily result immediately upon the embezzlement but when it becomes certain and irrecoverable.

The Court noted that the embezzlements by the secretary took place in the year of account ending June 30, 1947, but the loss was not known until later. The Tribunal's supplementary report confirmed that the liquidator became aware of the embezzlements only after the accounting year. Therefore, the loss could not be considered to have occurred in the year of account.

The Supreme Court concluded that the amount of Rs. 10,15,000 was not a permissible deduction under section 10(1) as the loss did not occur within the relevant accounting year. Consequently, the appeal regarding this issue was dismissed.

Conclusion:

The Supreme Court partially allowed the appeal. The bank was entitled to claim Rs. 15,00,000 as bad debts under section 10(2)(xi) for the year ending June 30, 1947. However, the claim for Rs. 10,15,000 as a business loss was not permissible as the loss did not occur in the relevant accounting year. There was no order as to costs in this appeal.

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