TMI Blog1939 (10) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... terial before the Income-tax Officer to justify his refusal to allow the assessee to write off ₹ 23,039 in the year of account ? C.K.N. Sons had large assets but the schedule showed that their liabilities were larger. The adjudication of the firm was followed by much litigation. The Mercantile Bank of India, Limited, and the Central Bank of India, Limited claimed to be secured creditors for large amounts. In the course of the argument it has been stated that the amounts claimed by the banks were in the region of ₹ 20,00,000. The Official Assignee refused to accept the contention of the banks that they were entitled to rank as secured creditors and the case was carried to the Privy Council. The Official Assignee won before the trial Court but the judgment was reversed on appeal. The Privy Council confirmed the appellate decision on the 15th October, 1934. (Official Assignee of Madras v. Mercantile Bank of India, Limited, 58 Mad. 181). The Port Trust was also a creditor for a very large amount and claimed priority under Section 49(1) of the Presidency Towns Insolvency Act. This question came before the Judge sitting in insolvency (Mockett, J.) on the 11th October 193 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k there is any likelihood of a dividend . When the Official Assignee wrote this letter an appeal had been presented against the judgment of Mockett, J., but the assessee was not informed of this and there is no evidence that he ever became aware of the fact. As the result of the Official Assignee's letters to him the assessee on the 12th April 1936 wrote off the amount due to him by the insolvent firm as a bad debt. The correspondence between the assessee and the Official Assignee was placed before the Income-tax Officer, who was also made aware of the litigation between the Official Assignee and the banks and the Official Assignee and the Port Trust. The Income-tax Officer, however, held that the assessee had postponed the writing off of the debt till the year 1935-36 with the object of setting it off against the profit from a contract (referred to in the proceedings as the Vellar Bridge Contract) and for this purpose created evidence to show that the debt of C.K.N. Sons became bad only in 1935-36 and notearlier . The words now quoted are from the statement of the case presented by the Commissioner of Income-tax who agreed with the Income-tax Officer's decision. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mockett, J., the assessee wrote to the Official Assignee and inquired what the position was. The Official Assignee told him that there was then no hope of any dividend as all the big cases which he had fought on behalf of the creditors had been decided against him. On the facts as presented to the Court it is certainly not possible to say that the assessee should have written the debt off at an earlier stage. If the case had proceeded on different lines, it might have become apparent that the assessee should have taken the action which he did earlier but the Court cannot be asked to decide the case on speculation of this nature. In these circumstances, I consider that the Income-tax authorities should have allowed the deduction for the whole amount claimed and I would answer the reference in this sense. The assessee having succeeded is entitled to his costs, ₹ 250. He is also entitled to the refund of the ₹ 100 which he deposited when he applied for the reference. Mockett, J.- I agree. We are not deciding whether on the materials we agree with the decision of the Income-tax Officer, but whether there were in fact materials before him on which he could have arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency. Now, in this state of flux it might well be a matter of greatest difficulty for any creditor to know whether he was or was not going to get a dividend or whether his debt became bad or not. Eventually, the decision must be with the Income-tax authorities and not with the creditor but the conduct of the creditor must clearly be relevant and be considered in the ultimate decision. None of these matters weighed with the Income-tax Officer who stated that in his opinion as soon as the assessee had notice of the insolvency he should have known that only a portion of the debt if at all could be realized by him in the shape of a dividend. That opinion it will be noticed is based on the assumption that the whole of the ultimate decisions of the Privy Council, the appellate Court of Madras and the Original Side of this High Court could have safely been prognosticated by the creditor. My Lord the Chief Justice has stated the facts and I have only added these observations because I want to make it perfectly clear that in my opinion apart from matter of conjecture to which I have alluded there was in fact no material whatever on which the Income-tax authorities could have arrived at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1929 in which the insolvents were adjudicated. He took the view that as it was possible for the assessee from the schedule of assets and liabilities, to calculate the approximate rate of dividend, he should have written off the balance in that year. This reasoning is quite unsound and has not been pressed before us. The Assistant Commissioner did not disagree from the Income-tax Officer and both of them came to the conclusion that the assessee had deliberately manufactured evidence for the purpose of writing off the debt in the year of account in which there were profits, instead of doing so in the year in which the prospect of recovering the debt had vanished or considerably diminished. True, the Assistant Commissioner did refer to the decision of the Privy Council in the Mercantile Bank case. But the reference was apparently made not for the purpose of supporting the decision of the Income-tax Officer, nor for the purpose of holding that the write off in the year of account was improper, but for the purpose of repelling an argument of the assessee based on the Privy Council decision. The position might have been, as my Lord pointed out, different if that decision had been relied ..... X X X X Extracts X X X X X X X X Extracts X X X X
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