TMI Blog1964 (10) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... a power of attorney dated August 14, 1943, he was entrusted with powers, amongst others, to supervise, manage and conduct the business, to lend and make at such rate or rates of interest as he thought fit with or without security to any person, and to receive and give good discharge for repayment of any moneys so lent or advanced and all interest thereon and to borrow money upon the security of any securities, assets or property of the bank and upon such terms as he thought fit for the benefit of the bank. On March 5, 1945, Javeri was appointed a director of the bank. On April 21, 1947, by order of the High Court of Bombay the bank was ordered to be compulsorily wound up and an official liquidator was appointed to liquidate the business of the a bank. On August 23, 1949, the liquidator submitted a return for the assessment year 1948-49 disclosing for the previous year ending June 30, 1947, business loss computed at Rs. 9,71,664 after debiting against the gross profits in the profit and loss account an amount exceeding Rs. 12,00,000 as, debts which became irrecoverable. On February 26, 1953, the liquidator informed the Income-tax Officer that in the course of investigations it was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powers entrusted to the secretary, and the year in which loss was suffered by the bank in consequence of embezzlements by the secrtry. The Tribunal reported that debts aggregating to " Rs. 15,00,000 at least " had become irrecoverable in the year of account, and that the secretary had misused powers entrusted to him under the power of attorney (a copy of which was annexed to the report) after posting fictitious entries in the books of account, but the defalcations of Rs. 18,00,000 and Rs. 98,892 by the secretary became known to the liquidator only after the year of account ending June 30, 1947. At the further hearing of the reference the High Court observed that they were bound by the finding recorded at the earlier hearing that bad debts were not admissible deductions because the debts were never written off in the books of account of the bank, and that the time when loss resulting from embezzlement or defalcation by a servant or agent of the assessee occurs must be decided on the facts and circumstances of each case, and no general rule could be laid down in that behalf. In the view of the High Court loss of Rs. 10,15,000 did not occur when fictitious entries had been posted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power is subject to the restriction that the allowance will not exceed the amount actually written off as irrecoverable in the books of the assessee. If the assessee in his books of account has written off a certain amount as irrecoverable, the Income-tax Officer may not, even if his estimate exceeds the amount written off, allow the amount exceeding the amount actually written off. Can it be said that when the assessee has not posted entries in the books of account writing off any amount representing bad or doubtful debts, there is no restriction upon the power of the Income-tax Officer to allow a permissible deduction under the head " bad debt " ? On this question there is conflict of opinion in the High Courts. Chagla C. J., in the judgment under appeal, held that the view that writing off in the books of account was a condition precedent to the admissibility of a bad or doubtful debt was in conformity with the view which the courts had consistently taken for many years in interpreting section 10(2)(xi). The learned Chief Justice observed : " We are not aware of any single case where either the department or the assessee ever contended in this court that an assessee is ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at year, because the loss had not been sustained in that year." The Judicial Committee however did not regard the entries writing off the debts as irrecoverable as a condition precedent to admissibility of the claim for allowances. It is true that in any recognised system of accounting, if the claim is made that a debt has become barred, where the accounts are maintained according to the commercial method of accounting, an entry or entries---if not in the account of the debtor---at some appropriate place or places in the books would be posted recording that in the view of the assessee the debt had become irrecoverable, and without such an entry or entries, it would, in normal cases, be difficult to make up a profit and loss account of the year. But the entries need not be in respect of each individual debt regarded by the assessee as bad or doubtful : a composite entry relating to the debts regarded as bad or doubtful may suffice. After the judgment of the Privy Council in Chitavis' case the legislature has inserted by section 11 of the Indian Income-tax. (Amendment) Act (7 of 1939) clause (xi) in sub-section (2) of section 10, which expressly deals with the admissibility of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that as the individual accounts of the debtors in the books of the assessee had not been credited with the amounts, the debts had not been written off as required by the section. The High Court held that the amount of the debts had in fact been written off in the assessee's books. The court held in that case that section 10(2)(xi) did not demand that individual ledger entries writing off debts claimed to be bad or doubtful should be posted. The court was not called upon in that case to consider whether absence of an entry writing off the amount deprived the Income-tax Officer of his power to allow bad or doubtful debts to the extent estimated by the officer to be irrecoverable. This case does not lay down that to the admissibility of a bad debt as an allowance under section 10(2)(xi) writing off of the debt is a conditions precedent. The other case is Karamsey Govindji v.Commissioner of Income-tax. In that case the assessee had advanced in 1945 and 1946 without security certain loans to a flim producer and had written off the loans as bad debts in November, 1947. On the evidence in the case the income-tax authorities held that the loans had not become irrecoverable in 1947 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en off ; where the amount is not written off in the books of account, the Income-tax Officer's jurisdiction is at large and he may allow any amount as irrecoverable. But the provisions of the statute should not be construed in a narrow spirit of technicality. It may be noticed that clause (xi) does not restrict the power to estimate bad debts ; it limits the power to grant allowance under the head of bad and doubtful debts, any amount in excess of the amount actually written off by the assessee in his books of account. It would therefore be reasonable to hold that if after estimating the bad debts there is no express statutory restraint on the exercise of the power to grant allowance, no implication of a restraint on the exercise of the power may be evolved, unless such implication is on the scheme of the Act intended. And in the scheme of the Act we find no such restraint imperatively intended, for it cannot be assumed in all cases that absence of an entry writing off the amount of bad debts necessarily implies that no debts become irrecoverable in the year of account. In our view Chakravartti C. J. was right when he observed in Begg Dunlop and Co. Ltd.'s case at page 284 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is only restricted in one direction, namely, that where the assessee has posted an entry or entries in the books of account the amount to be estimated as irrecoverable is not to exceed the amount actually written off as irrecoverable by the assessee. Under the Income-tax Act, 1961 (43 of 1961), by section 36(1)(vi) the amount of any debt or part thereof which is established to have become a bad debt in the previous year has to be allowed in computing the income under section 28 ; but that allowance is subject to sub-section (2) which provides in so far as it is material that " in making any deduction for a bad debt or a part thereof the following provisions shall apply : (i) no such deduction shall be allowed unless such debt or part thereof--- (a) has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year......... " It is manifest that the material clause has been wholly redra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The Bank of Bhopal Ltd. filed a suit against the assessee bank in the Bombay High Court for an order for delivery of the Bhopal Government bonds and in the alternative for a decree for Rs. 3,00,000. A settlement was arrived at in the suit and the assessee bank agreed to pay to the Bank of Bhopal Ltd. Rs. 1,35,000 in full and final settlement. A consent decree was passed on September 20, 1951, and was satisfied by the liquadator some time thereafter. There is another amount of Rs. 98,892 which it was claimed by the liquidator was embezzled by the secretary. At the hearing counsel for the liquidator has given up this part of the claim and it is unnecessary for the purpose of this appeal to set out the details in respect of this amount. The claim under the second question must therefore be restricted to Rs. 10,15,000. The income-tax authorities disallowed this claim. In their view it was not suffered by the bank in the course of its business and therefore could not be treated as a loss by the bank, and in any event the loss was not suffered in the year of account because it was ascertained in the year 1949 or later and could be taken into account in the assessment relating to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or compelled by process of law or otherwise to restore wholly or partially his ill-gotten gains. Therefore, so long as a reasonable chance of obtaining restitution exists, loss may not in a commercial sense be said to have resulted. In M.P. Venkatachalapathy Iyer v. Commissioner of Income-tax it was held by the Madras High Court that profits and gains of a business must be ascertained by ordinary commercial principles of trading, and a working rule is that until the loss resulting from misappropriation," becomes actual and certain " there can be no accrual of loss. In Venkatachalapathy's case the assessee employed a clerk who wrote books of account of a business, acted as salesman, received and disbursed cash in the absence of the managing partner and collected bills. By manipulation of accounts the clerk misappropriated large amounts at diverse times. In May, 1941, it was discovered that the clerk had embezzled Rs. 36,298-3-6 during the period between October 17, 1939, and October 24, 1940. In June, 1941, a criminal prosecution was launched against the clerk and about the same time a civil suit for recovery of the amount was also instituted. The claim was compromised in Augus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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