TMI Blog1932 (4) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... leave to appeal to His Majesty in Council, and in response to that application the Court certified that the requirements of section 109(c) of the Code of Civil Procedure, 1908, were fulfilled, inasmuch as a question of great public importance is involved in the case. Their Lordships draw attention to this aspect of the case at the outset in view of the contentions which were advanced before them on behalf of the respondent. The facts of the case may now be stated. Sir Shankar Rao Chitnavis (who will be referred to as the assessee for the purpose of assessment to income tax for the year 1926-27 had, under section 22, of the-Act, to make a return of his total income during the year 1925-26. He returned that income at ₹ 74,668. The Income-tax Officer, proceeding under section 23 of the Act, by his order, dated the 17th January 1927, assessed the total income at a figure of ₹ 1,16,480. In arriving at this figure the Officer had (inter alia) disallowed certain deductions which had been made by the assessee. The assessee appealed, under section 30 of the Act, against the assessment to the Assistant Commissioner, who, by his order dated the 25th April, 1927, reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he debtors he is unable to recover them ? Can the Income-tax authority deprive the assessee of this option? Should not the Income-tax Officer and the Assistant Commissioner have allowed ₹ 7,481-13-9 to the assessee on the same considerations on which the remaining amount out of ₹ 17,982 claimed by him was allowed? An oral affirmation was made by the general agent of the assessee, which contained the following statement in regard to the bad debts: - The bad debts, amounting in ₹ 7,481, had already gone bad, owing to their being time-barred much before the account year. That, is they had gone time-barred in previous account years. But we did not write them off in the hope that they would be collected later on. But as they did not come to be so collected, they were written off during the account year. The Commissioner, in accordance with section 66(2) of the Act drew up a statement of the case and referred it, with his own opinion thereon, to the Court of the Judicial Commissioner. The statement contains two passages which require to be set out. The first is this: - Rs. 7,481-13-9. In all, the assessee had claimed a deduction of ₹ 17,982 on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The grounds for this decision are contained in the opinion delivered by Mr. Kinkhede, Additional Judicial Commissioner, with which the two other members of the Court merely expressed their agreement. He took the view as their Lordships read his opinion, (1) that an assessee is entitled in ascertaining his profits for a year to deduct such debts as he adjudges to be in that year bad debts ; (2) that in assessing the taxable profits for any account year the assessee is entitled to have deducted the whole amount which the assessee has in fact written off as irrecoverable in his accounts of that year; and (3) that in this regard the assessee is the sole arbiter, and that his decision is final. That this correctly represents the view of the Judicial Commissioner may be seen from the following passages in his opinion. After stating that the argument of the assessee's Counsel (based upon some official Manual) was correct, he said : - It entitles the assessee to urge that in deducting the taxable income in the shape of book profits of the account year, the whole of the amount of bad debts written off by him in his account as irrecoverable in the account year must be ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... What are chargeable to income-tax in respect of a business are the profits and gains of a year ; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains. But the losses must be losses incurred in that year. You may not, when setting out to ascertain the profits and gains of one year, deduct a loss which had in fact been incurred before the commencement of that year. If you did, you would not arrive at the true profits and gains of the year. For the purpose of computing yearly profits and gains, each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant. It thus follows that a debt, which had in fact become a bad debt before the commencement of a particular year, could not properly be deducted in ascertaining the profits of that year, because the loss had not been sustained in that year. Whether a debt is a bad debt, and, if so, at what point of time it became a bad debt, are questions which in their Lordships view are questions of fact, to be decided in the event of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciples. The questions for reference under section 66 of the Act (which were framed by the assessee are, perhaps, not very happily worded; but the use of the word option and the question whether the Income-tax authority can deprive the assessee of the alleged option help to throw light upon what was the real issue between the parties. Their Lordships feel no doubt as to what that issue was, and how it arose. The officer (under section 23 of the Act), after considering the evidence and account books produced, disallowed the deduction; and the Assistant Commissioner confirmed the disallowance. The argument on behalf of the assessee is apparent in the order of the Assistant Commissioner. He states therein that the pleader for the assessee argues that it should be left to the assessee to declare when the debts were bad, and the Income-tax Officer should not go on the presumption that the amount had because time-barred in previous years. From this their Lordships are satisfied that the attitude adopted by the assessee, when challenged, was to decline to establish by evidence that these old debts had not already become bad debts before the commencement of the year of account, an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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