TMI Blog1967 (6) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions entered into by the assessee resulted in profits, and since the method of accounting of the assessee was based on mercantile system, he had, on accrual basis, shown these amounts as income from speculative business, and, it is not denied, they were assessed and made liable to income-tax. These facts are not in dispute, and both sides as well as the statement of the case assume them to be correct. The assessee, however, claimed these amounts as bad and doubtful debts, when they were not paid and became irrecoverable. The Income-tax Officer wrote to the seven debtors enquiring whether they are intending to pay the amount ; but except in the case of one person, Srikishan Narayanadas, in respect of a sum of Rs. 3,164, no reply was received from the others. Srikishan Narayanadas stated that he was unable to pay the debt. The Income-tax Officer disallowed all these debts including that of Srikishan Narayanadas, on the ground that the assessee on whom the primary responsibility of proving the claim rests, has not discharged the burden of proof. In respect of the reply received from Srikishan Narayanadas also the Income-tax Officer stated that the version given by him and the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner also has treated one of the debts as a bad debt which can only be on the basis that it was incurred as a trading debt. The Tribunal also in its order stated that the assessee had entered into certain speculative transactions in oil seeds which were prohibited under the law, with certain parties. In a mercantile system of accounting, as is well known, the accounts are maintained on the basis of accrual. If goods are sold but the amount is not received, it is deemed to have been received on the date when the goods were sold, and the amount entered as if received, i.e., a credit will be shown of this amount in the books of the firm or individual, while a corresponding debit will be shown in the ledger of the person to whom the goods have been sold. In other words, the buyer becomes a debtor to the company in respect of that transaction as soon as the goods are sold. It is difficult to support the assumption of the income-tax authorities that there were no debts and that the entries made in respect of each of the debtors in the books of the assessee are not proof of those debts. There is little doubt that the debts due from the 7 persons were incurred in the course of their bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's accounts in resect of any part of the business, vocation or profession are maintained on any basis other than cash basis. Mercantile accounting is one such basis. Section 10(2)(xi) clearly envisages debts arising out of transactions of the nature which we are considering. It is not denied that debts arising in a speculation business prohibited under law are unenforceable. No suit can be filed for the recovery thereof, though it cannot be said in all cases that they are irrecoverable. If a debtor under moral obligation or to maintain his good name, pays off the debt, it is a recoverable debt. Mr. Srinivasa Rao contends that every unenforceable debt must be treated as a bad debt,--a proposition which we cannot accept without the further qualification that there must be some proof that that debt, notwithstanding the fact that it is unenforceable, was, in fact, not realisable. In support of his proposition, Mr. Srinivasa Rao has cited Commissioner of Income-tax v. Pranlal Kesurdas and Mr. Venkatappa, appearing for Sri Kondaiah on behalf of the department, cited several decisions in support of the proposition that there must be proof that the debts are not recoverable. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or refused to pay them because of the legal disability on the part of the assessee to recover them, the loss resulting from the transactions could be said to have fallen on the assessee at the point of time when the inability of the constituent or his refusal to pay occurred. It would be observed from this finding that the point of time at which the inability of the constituent or his refusal to pay occurred, is again a question of fact, the onus of which is upon the assessee to establish. In the result, the Bench held that the assessee was entitled to have the amount allowed as a deduction. Desai J. at page 938, while considering the arguments of the departmental representative, that inasmuch as losses have arisen out of transactions which were forbidden by law and rendered illegal by providing a penalty for persons entering into such transactions in breach of the prohibition order, the losses could not get the character of debts at all, and consequently, there would be no question of their becoming bad or irrecoverable at a subsequent stage, observed : " For one thing, if a specific head is provided under section 10(2) and an item is not allowable under that head, it could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as amounts which had become bad and irrecoverable, but the claim was disallowed by the Income-tax Officer on the ground that since the debts were not enforceable under law they could not be considered to have become bad and were, therefore, not allowable for income-tax purposes. The Appellate Tribunal, however, took the view that the assessee's claim for deduction of this amount could be allowed either under section 10(2)(xi) of the Indian Income-tax Act, 1922, or on general principles governing the computation of profits under section 10(1). The Bench held that the Tribunal was entitled to grant relief to the assessee not merely under the head under which the assessee had made its claim, but even in the alternative under another head, namely, by way of commercial losses under section 10(1) of the Act. It also observed that the legal unenforceability of the assessee's claim did not prevent the amounts from being bad and irrecoverable debts for the purposes of the computation of the taxable income of the assessee, and, therefore, the amounts could also be allowed as bad and irrecoverable debts under section 10(2)(xi). These two cases are an authority for the propositio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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