TMI Blog1977 (11) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... -59 ? 3. Whether in any event, on the facts and in the circumstances of the case, the Tribunal having found that the said property was used for the assessee's business in the past and also having found that the business was in existence during the accounting year relevant to the assessment year 1958-59 was justified in rejecting the assessee's claim for allowing the loss of Rs. 30,988 on sale of the said property under section 10(2)(vii) ? " For the purpose of our judgment we will have to deal with question No. 1 separately from questions Nos. 2 and 3, and it is desirable that the facts pertaining to these two sets should be separately stated. However, there are certain preliminary stages which may, be indicated. We are concerned in this reference with the assessment year 1958-59. The assessee, was a registered firm carrying on extensive business in Bombay and Nagpur in various names, but from about 1955 the business activities came to be curtailed. The nature of the business activities and the names in which they were run are as follows : (1) Jethabhai Ramdas Co., Bombay : The main business of this shop seems to have been financing the business in the same name at Nagpu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (as the account of the party, which is annexed as annex. 'D', shows) on December 31, 1957. The ITO did not allow the claim of the assessee for several reasons: [a) Details regarding money-lending business were not produced. (b) That the transaction was not in the course of the assessee's business as sole selling agents to Empress Mills. In his order the ITO deals with various other aspects of the transaction, but the same need not be referred to as we are not concerned with these aspects for the purposes of answering the question referred to us. It may only be noted that the observations of the ITO in this connection appear to be somewhat confused and it is difficult to understand how they can be the basis of a reasoning process for disallowing the claim. When the matter was carried in appeal before the AAC it appears that the AAC required certain further details to be submitted by the assessee and two notes (part of annex. ' F ' collectively to the statement of case) were submitted by the assessee. The notes indicated that the goods were sold to New Era in 1953 and some payments were received from New Era in 1953, 1954 and 1955. As no payments were received thereafter, Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said decree. As far as the account of New Era is concerned, it has already been pointed out that the amount is written off as on December 31, 1957. It is pertinent to point out at this stage that the account mentions the last payment effected by New Era as on October 22, 1955, leaving a debit balance of Rs. 91,813-5-9 which has been carried forward for the whole of 1956 without any payment and this amount stood enhanced to Rs. 94,513.36 mentioned in the question with the addition of Rs. 2,700 which was debited to the account of New Era being legal expenses in respect of the suit, which expenses were paid to the assessee's solicitors on November 5, 1957. Before dealing with the decision of the AAC, a reference may be made to the contents of the statement of D. N. Shroff of New Era recorded by the ITO. This statement, as already stated, was recorded by the officer on November 28, 1962, i.e., much after the decree on admission passed against New Era on February 2, 1961. It is clear that the language is principally that of the ITO who has attempted to summarize what the said director must have told him in the following words : " Mr. Shroff denies the liability to pay as he h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. In the above position, we are unable to say that when recovery proceedings went on vigorously till 1962 at any rate, the assessee is entitled to claim the deduction in the material year on the footing that it had abandoned all hopes of recovery. No doubt the assessee will now not be able to claim the loss at any time, since the firm was dissolved after Diwali 1958. But that would not justify a premature allowance of the claim. The contention of the assessee on this point is rejected. " Mr. Dastur on behalf of the assessee contended that the decision of the Tribunal was not only erroneous but one which no reasonable Tribunal could arrive at. His initial complaint was that the Tribunal upheld the rejection of the assessee's claim on a footing totally different from the one which had been pressed into service by the ITO and the AAC. According to him, the full material on this aspect of the question was not called for by the Tribunal and, further, even some material on record which was relevant, was ignored by it while pressing into service some aspects and drawing therefrom inferences and conclusions which were impermissible and thoroughly unreasonable. On the other hand, counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. It was observed that the material date was not the date on which the embezzlement took place but the date on which the loss is caused. According to the Bench, it is only when it is clear that the money cannot be recovered that the loss is caused. It is in this context of irrecoverability of the amount embezzled that the Division Bench went on to observe as follows : " When a businessman writes off an amount, there is prima facie evidence that that amount is irrecoverable. Undoubtedly, the department can rebut the prima facie inference by drawing attention to circumstances or by leading some evidence to suggest that the position taken up by the assessee was not correct. In this case there is no evidence whatsoever on the record except the fact that the assessee wrote off this amount in the year of account. In the absence of any evidence we are entitled to presume that the amount became irrecoverable when the assessee wrote it off in its books of account. " Mr. Joshi submitted in connection with this authority that these observations pertain to a trading loss and not a bad debt and, therefore, could not afford any assistance to Mr. Dastur. It is true that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh and the share transfer stamps accounts by the employees, which had been going on for several years but had been discovered only in the accounting year. The ITO held initially that since the embezzlement was discovered in 1954, it could not be allowed in the assessment year 1954-55. When the assessee claimed the deduction in the next assessment year 1955-56, the ITO rejected the claim taking the view that the loss did not occur in the course of the business, and that, further, as the assessee had taken promissory notes from the employees responsible for the embezzlement, but had taken no action to recover the moneys on the promissory notes, no allowance could be granted. The Division Bench observed that the fact that the employees had executed promissory notes or that the employer had not pursued further remedies against these employees on the negotiable instruments would not by themselves disentitle the employer from claiming the deductions. According to the Bench, it was not incumbent upon the employer to pursue a useless remedy and waste money in such proceedings. According to Mr. Dastur's submission, the assessee before us who had filed a suit much prior to the write-off (tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as being irrecoverable. The decision cited was Devi Films Ltd. v. CIT [1963] 49 ITR 874 (Mad). Parsuant to an agreement dated July 6, 1955, and a further agreement dated January 31, 1956, the assessee had advanced to one Tehrani a sum of Rs. 5,57,022-10-1. The assessee was able to realise a sum of about Rs. 4,91,000 leaving a balance of about Rs. 65,950 due and payable by Tehrani to the assessee. It was observed that this Tehrani was not a person of large means. On April 1, 1957, the assessee entered into an arrangement with Tehrani by which certain shares were pledged as security for a sum of Rs. 10,000 on condition of the assessee waiving the balance of Rs. 55,950. In the year of assessment 1957-58, in respect of the previous year which ended on April 12, 1957, the assessee wrote off the sum of Rs. 55,950-13-10 (the amount to be waived under the arrangement of April 1, 1957). It was found amongst other things by the Tribunal that within six months after the date of write-off, which was April 12, 1957, the assessee had made a further advance of Rs. 25,000 to Tehrani. The Tribunal also found that the debtor owned houses at Madras and in Ootacamund and that though the house in Mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous period cannot be reopened for the purpose of bringing in the debt as a trading receipt merely because in a subsequent accounting period it is found to be a good debt. It is true that what all is required is an honest judgment on the part of the assessee at the time when he makes write-off in the light of events up to that stage and not in the light of later happenings. But it cannot be said that in order to determine the question whether the assessee could have believed that the debt was made on a particular date his subsequent conduct, treating the debtor as solvent and sound, would be irrelevant and inadmissible. " It would appear to us that the principles enunciated in this case are of considerable assistance in determining the proper approach to the claim of the assessee which is involved in question No. 1 referred to us. As observed, the question is one really of fact depending upon the congeries of facts and diverse circumstances and there can be no acid test to ascertain whether a debt has become bad and doubtful, and if so, when. It has been rightly stated that the department cannot insist on demonstrative proof of the fact which proof must satisfy the test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o consideration any material evidence and we have allowed Mr. Kola to argue this matter because the fact of the application to the High Court for leave to appeal to the Privy Council was not taken into consideration by the Tribunal. But, even when we take that into consideration we still feel that the judgment of the Tribunal was right and that the debt became a bad debt on the 29th of September, 1941. Mr. Kola says that the assessee did not make the necessary entries in his books of account till long after the 29th of September, 1941, and that fact should be taken into consideration in determining when the debt became a bad debt. In my opinion it cannot be left to the volition of the assessee to decide by his own conduct as to when the debt becomes a bad debt. His making entries in his books of account is an exercise of his own volition. It is not left to his option to fix the date as to when the debt becomes a bad debt. Whether a debt becomes a bad debt is an objective fact to be determined objectively and the determination must be left to the Income-tax Officer. If the finding of that question of fact is vitiated by any factor then undoubtedly this court would consider whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off the debt prior to the accounting year. In connection with this aspect of the matter, it was observed on page 187 : " From the manner in which the Tribunal has dealt with the matter, we should point out that there is no presumption one way or the other that the debt became a bad debt on a certain date or later and that a decision on the question will depend upon facts proved on evidence. It cannot be said that, merely because the assessee has not furnished evidence to show why he waited till the assessment year 1956-57 to write off and what reasonable hope of recovery he had after he had brought the property to sale on the first occasion, the debt became bad or doubtful prior to the accounting year. That the debt became bad prior to the accounting year will have to be found on proved facts relevant to the question. We have not been invited to any evidence or material on which the Income-tax Officer could say that the assessee had knowledge that the debtors had no properties from a particular point of time and they had no other means to repay the debts thereafter so that the debts could be treated as having become bad at that point of time. When the assessee claimed that the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount on December 31, 1957 and had in fact obtained a decree in 1961, and had attempted further to wind up New Era and had made similar attempts to induce the Registrar of Companies to prosecute the directors of New Era, would clearly indicate that the debt was in the process of realisation and farther that it could be demonstrated that the assessee had still hopes to recover its debt. It was in these circumstances submitted that the debt could not be considered as being irrecoverable. In support of his contention that so long as the suit was pending the write-off could not be allowed, Mr. Joshi finally referred to an authority of the Bombay High Court in Jadavji Narsidas Co. v. CIT [1963] 47 ITR 411 where it was observed at page 417 : " 'Bad debt' is claimed as an allowance by the assessee and, therefore, the burden is on him to show that he had no reasonable expectations of recovering it at the time he wrote off or that there was no ray of hope at all on which he could rely for recovering the amount from his debtor at the time he wrote off the debt. In the instant case, the facts on which reliance is placed by the income-tax authorities and the Tribunal go to show that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icative and demonstrative of the fact that he had not given up hope about recovering the amount from the debtor. There is no material on record to show that by proceeding with the suit after December 31,1957, and obtaining the decree on admission the assessee had incurred substantial or considerable expenditure after that date which would put the facts before us on a line with the facts being considered by the Division Bench in Jadavji's case [1963] 47 ITR 411 (Bom). Substantial costs are incurred by litigants who commence an action when the action is initiated, and in this case the suit was filed in January, 1957, when the court-fees on the amount of the claim must have been paid by the assessee. The suit was filed on the original side of the High Court and with the drawing up of the pleading and the filings the assessee would incur substantially the costs which the attorneys in law would be entitled to claim from him though the actual payment may be made much later. It has also to be realised that since the action culminated in a decree on admission what was done subsequently, i.e., after January 1, 1958, was also in a sort of way to salvage a portion of the court-fees paid since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off of the debt, continues with legal proceedings against the debtor need not necessarily lead to the conclusion that the write-off was improper or lacked bona fides but would be a factor to be taken into account in order to arrive at a proper determination of the question. It is, however, clear to us that mere notices served for taking up a debtor-company into winding up or launching criminal prosecution or inducing other authorities to launch criminal prosecution against the debtor-company or its directors cannot be regarded as equivalent to taking steps for recovery of the amount. It is in the light of the principles already indicated in the discussion whilst dealing with the several authorities cited at the Bar and in the light of the aforesaid principles that we will now be required to summarize the facts to be gleaned from the materials on record and to consider whether the Tribunal has ignored any relevant circumstance or misdirected itself. From the materials on record we find : (1) that according to the accounts maintained by the assessee the liability of New Era arose by reason of supplies made to it in 1953 against which the last of the payment made by it was in Octo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a request to the assessee to write off the arrears as New Era was not in a position to pay. The second sentence refers to goods being sold by the assessee which resulted in the loss. This clearly must refer to a point of time prior to the filing of the suit and it is clear from this statement that even at that time, i.e., prior to the crystallisation of the loss the position of New Era according to Mr. D. H. Shroff, its managing director, was becoming weaker financially ; that what is stated in this sentence refers to an earlier period and not to the position in 1962 is made clear from the last sentence in the first paragraph of the statement which commences with the word "now". This indicates that at the time when the loss was crystallised, New Era was becoming weaker financially and that in 1962 it had no assets and was likely to be wound up in the near future. We have now to consider whether the conclusion of the Tribunal that the claim was premature and could not be allowed in the accounting year, was not merely an erroneous conclusion but a perverse one in the sense that the Tribunal had ignored any relevant circumstance or material and has misdirected itself as to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madras High Court where the subsequent conduct of the asssessee would clearly establish that its decision to write off the amount was not proper, justified and bona fide. Is there any such conduct of the assessee in this case to suggest that the decision to write off the amount on December 31,1957, was not proper or which would satisfactorily establish the inference that on that date or subsequently it had a hope of recovering the debt or any part thereof ? In our opinion, there is no such material on the record before us. In our opinion, the aforesaid discussion is sufficient to rebut both the alternate submissions of Mr. Joshi. We are clearly of opinion that the conclusion of the Tribunal is not only erroneous, but taken ignoring the relevent material on record as well as drawing impermissible inference from such material which is referred to by it in para. 7 of its order. Further, bearing in mind the circumstances in which it decided the question against the assessee on a point specifically taken at the second appeal stage for the first time, it is clear that the decision was taken without full material on record. This will permit us then to give a different finding and arrive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,700. Mr. Dastur has submitted that even if this amount may not be allowable as and by way of bad debt written off, the assessee would be entitled to claim it on some other footing. We express no opinion upon the merits of such claim or about the assessee being entitled to raise such alternative claim of deduction at the stage of second appeal before the Tribunal. The matter will be entirely in the discretion of the Tribunal as and when the occasion arises. This brings us to a consideration of questions Nos. 2 and 3. These two questions pertain to a claim made by the assessee regarding loss of certain property at Chhindwara Road, Nagpur, hereinafter referred to as the " Pagalkhana Property ". The amount was originally claimed in the return as a capital loss. However, a note was put by the assessee before the ITO for being allowed the amount as ordinary loss under s. 10. According to this note the property was purchased in 1944 for Rs. 31,000. It was purchased by the firm for its own use and the vacant portion was already occupied by the firm. There were some tenants who paid rents and for three assessment years 1945-46, 1946-47 and 1947-48 the rents were accounted for. The tena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with this aspect of the matter are to be found in para. 12 of its order. It has referred to the expenditure side of the accounts pertaining to this property where there are minor items of expenses pertaining to electricity bills, account books, corporation tax, trunk calls and salary of about Rs. 500. In connection with the claim of loss in respect of Pagalkhana property it was submitted by Mr. Dastur that the Tribunal was not correct when it observed that there was no evidence of business activity carried on at Nagpur in the accounting year and he drew our attention to what it has stated earlier in para. 4 of its order. In para. 4 of its order when it was dealing with the claim of bad debt in respect of an amount due from one Mishrilal Shaligram, the Tribunal seems to have observed that no doubt the business had seen better days in the past, but there were still some business activities even during the accounting year as also in the following year. Reading both these paras together, it would seem to us that it could not be denied that there was some activity and it would be more correct to say that with the closure of the selling agency the main business activities had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee about actual user, the Tribunal considered the evidence which was available and held that the account merely showed some expenses, but it was not satisfied that there was any actual user. Bearing in mind the frame of questions Nos. 2 and 3 and the language to be found in para. 12 of the order of the Tribunal it would appear to us that the further alternative submission of passive user, possible user as contra-distinguished from actual user, would not seem to arise from the order of the Tribunal and is not within the ambit of the questions referred to us. This latter aspect of what questions are referred, assumes importance when one bears in mind that this is not a reference by the Tribunal simpliciter under s. 66(1) but at the instance of the High Court under s. 66(2) of the Indian I.T. Act, 1922. In order to satisfy our conscience we went through the income-tax application made by the assessee for the purpose of the reference, being Income-tax Application No. 5 of 1967, and we have satisfied ourselves that even in that application the assessee proceeded on the basis of actual user and not possible user. Mr. Dastur submitted that even if the contention was not argued be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding has been given in his favour by the Tribunal. In our opinion, on the actual user, the decision of the Tribunal appears to be correct. In any case it is not such a conclusion which will entitle us to sit in appeal, reappraise the evidence and differ on such reappraisal. On question No. 3, it is clear that there is no presumption from past use either as regards actual or effective use and such claim of actual use would have to be decided upon the material placed before the revenue authorities by the assessee in the accounting year. In this view of the matter, as far as the claim of the assessee regarding loss from the Pagalkhana property is concerned, we feel that the Tribunal could not be said to be in error in rejecting the assessee's claim for such allowance. In the result, the questions referred to us are answered as follows : Question No. 1:-In the negative and in favour of the assessee but subject to what has been stated about the quantum of claim, i.e., Rs. 94,513, and, in particular, about the payment of legal expenses of Rs. 2,700. Question No. 2:-In the affirmative and against the assessee. Question No. 3:-In the affirmative and against the assessee. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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