TaxTMI 
TaxTMI 
2003 (7) TMI 266
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In the revised return filed on 11th September, 1997 the assessee claimed deduction of Rs. 98,61,884 which were credited in earlier year on account of price escalation from Madhya Pradesh Government for supply of country liquor during the Financial year 1985-86 to Financial year 1990-91. 2.3 The assessee company was one of the partners in the erstwhile firm M/s Associated Distilleries. The assessee company succeeded to the business of the said firm as a going concern w.e.f. 1st April, 1990. The erstwhile firm viz., Associated Distilleries as well as the assessee company supplied country liquor to M.P. Government during the period 23rd October, 1985 to 31st March, 1991 corresponding to the assessment years 1987-88 to 1991-92 and charged Rs. 5,02,82,790 by way of cost price bills. Subsequently, the assessee made claims for price escalation and raised supplementary bills in respect of Rs. 1,15,05,321 and demanded the said payment from the M.P. Government. There is no dispute that the claims for price escalation were credited by the assessee to the sale account in each of the relevant years and accordingly offered for taxation. Since the State Government of M.P. did not accept the afo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1)(vii) read with section 36(2) were not applicable since the sum of Rs. 98,61,884 was never acknowledged by the State Government of Madhya Pradesh at any time whatsoever. Relying on the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, the assessee contended that writing off a business loss in the books of account could not be a condition precedent for acceptance of a claim under section 28(i) read with section 2 of the Act. 2.6 The ld. CIT(A) accepted the submissions of the assessee and held that the excess credit of Rs. 98,61,884 could not be classified as debt as a bad debt presupposes the existence of a debt. The ld. CIT(A) has stated that the State Government of Madhya Pradesh at any point of time had acknowledged the amount of Rs. 1,15,05,321 raised by the assessee in its supplementary bill as debt due by it. Therefore, the demand or claim which was not acknowledged by the other side but disputed by it could never be regarded as 'debt' proper. The Ld. CIT(A) relying on the decision of the Madras High Court in the case of CIT v. Vanguard Insurance Co. Ltd. [1974] 97 ITR 546 held that a debt must be an admitted debt if it is to qualif....
X X X X Extracts X X X X
X X X X Extracts X X X X
....section 36(2) was not fulfilled. The Ld. D.R. submitted that it was not a business loss of the assessment year under appeal and as such the same could not be allowed in any other provision of sections 28 to 43D save and except under section 36(1)(vii) read with section 36(2) of the Act. On the other hand, the Ld. A.R. of the assessee justified the order of the ld. CIT (A). He contended strenuously that the State Government of Madhya Pradesh never acknowledged the claim of the assessee as a debt and it was a unilateral claim of the assessee for price escalation, the same did not become a contractual debt between the parties and accordingly, provision of section 36(1)(vii) is not applicable. The Ld. A.R. of the assessee submitted that the sales booked by raising the supplementary bills in the earlier years were tentative price and the final prices were determined later on resulting into a loss to the assessee of Rs. 98,61,884 which had been crystalised in April, 1995, when the assessee received the letter of the State Government of Madhya Pradesh on 19th April, 1995 and referred page 63 of the paper book to substantiate his submission. In support of his submission, the Ld. A.R. of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t one is bound to pay another a pecuniary due; a liquidated demand; a sum of money due by certain and express agreement. It includes any claim or demand upon which a judgment for a sum of money or directing the payment or money can be recovered in an action. Debt denotes not only the obligation of the debtor to but also the right of creditor to receive and enforce payment." 2.11 The Apex Court in the case of A.V. Thomas & Co. Ltd. v. CIT [ 1963] 48 ITR 67 has considered debt for the purpose of section 10(2)(xii) of the Income-tax Act, 1922. It was stated by Their Lordships that what is meant by debt in that connection was laid down by Rowlatt Justice in Curtis v. J &. G. Oldfield Ltd. [1925] 9 Tax Case 319 as follows:-- "Then the rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come into swelled the profits". Therefore, a debt in such case is an outstanding which if recovered would have swelled the profits. It means something which is related to business or results from it. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iew that the plea of the assessee that it was a unilateral claim of the assessee and there was no actionable claim of the assessee on the Madhya Pradesh Government we do not find any force in the said submissions of the assessee for the reasons that if there had been no valid claim, no direction could be issued by the Madhya Pradesh High Court to the Government of Madhya Pradesh to settle the claim of the assessee within a specified period of one month and admitting the claim of the assessee for a sum of Rs. 16,43,436.94 against the claim of the assessee of Rs. 1,15,05,321.10. Once the assessee had posted entries in the P&L Account, and also shown as credit sales, the outstanding at the close of the accounting year is to be carried forward in next accounting year only as trade debtor. Therefore, the balance amount of Rs. 98,61,884.16 is prima facie a trade debt which was rejected by the State Government in the assessment year under appeal. Since the assessee had not written off the amount in the assessment year under appeal as is required under section 36(2) of the Act, we are of the considered view that the Assessing Officer is justified not to allow the said claim as bad debt und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d No.1 of the appeal is allowed in favour of the Department. The ground No.2 of the appeal is as under:-- "That on the facts and in the circumstances of the case, the CIT(A) was not justified in deleting Rs. 7,18,512 being disallowance made in respect of foreign travel." 3.1. The assessee debited an amount of Rs. 7,18,511.75 on account of foreign travel in its account. The Assessing Officer has stated that the assessee furnished some evidence for purchase of foreign currency but no documents/evidence were furnished for proving the purpose of such foreign tour. Therefore, the Assessing Officer disallowed the claim of foreign travel expenses and added the same to the total income of the assessee. The assessee filed appeal before the First Appellate Authority. 3.2 The assessee contended before the Ld. CIT(A) that the expenses were incurred by the two Directors of the assessee company for promoting assessee's products in the overseas market the Ld. CIT (A) considered the submission of the assessee and has stated that it is not in dispute that the assessee was engaged in export business. The ld. CIT(A) further observed that it is a common phenomenon that not all overseas trips culmin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 14,52,460 ------------- 98,91,000 ------------- 1996-97 &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; --------------- 3,06,023 --------------- 1997-98 Singapore 3,06,023 &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss can be allowed as a deduction only in the assessment year 1998-99 i.e., the assessment year relating to the previous year in which the loss was written off in the books of account. In case this loss can only be allowed as a bad debt under section 36(1)(vii), as is the revenue's case, the deduction will be admissible in the assessment year 1998-99, and, in case the loss is to be treated as business loss deductible under section 28 of the Act, as is the assessee's case, the deduction is admissible for the assessment year 1996-97. 3. There is admittedly no dispute, however, regarding deductibility per se of the aforesaid amount of Rs. 98,61,884 in the computation of business income of the assessee. 4. I may first of all reproduce certain extracts from the judgment dated 10-1-1995 passed by the Hon'ble Madhya Pradesh High Court (Indore Bench) in the case of The Associated Alcohols & Breweries Ltd. v. State of M.P. (WP No. 2283 of 1993), a copy of which is placed at pages 31-32 of the paper book. Hon'ble High Court has observed that: "The material facts are not in dispute. Prior to 1984, Government invited tenders for supply of country liquor. Rates used to be finalised on the ful....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rice fixed and ad hoc rates, the respondent shall also.....take steps to make the payment to the petitioners within a period of one month from the date of the price fixation. 5. In this regard, it is also relevant to reproduce certain extracts from the judgment of Hon'ble Supreme Court in the case of State of M.P. v. Nandlal Jaiswal 1987 AIR 251 SC, at page 286 wherein Their Lordships have taken note of, and approved, the method of deciding the price at which the Madhya Pradesh Government purchased country liquor from distilleries. Their Lordships of Hon'ble Supreme Court observed that: ".....The State Government also changed the mode of the rate fixation. Originally, the rates for supply of liquor to the retail vendors were fixed on the basis of tenders every five years with the result that the rates accepted by the excise authorities on the basis of tenders continued to prevail for a period of five years. Now it is as fallacy to assume that the lowest rates quoted by the tenderers would necessarily be the cheapest and the best. If the tenderers form a syndicate they can push up the rates for supply of liquor and in fact it is obvious from the rates which were accepted by the ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re specific terms, the issue before us is whether or not this repudiation of claim for enhancement amounts to a bad debt in the hands of the assessee. If it does constitute 'bad debt', as is the revenue's case approved by the learned brother, the amount in question is certainly not allowable in the present assessment year since the same has not been written off in the previous year relevant to this assessment year. Except for this objection regarding compliance with the provisions of section 36(1)(vii), revenue has no grievance against allow ability per se of the deduction of Rs. 98,61,884 which was duly accounted for as income of the earlier years and which, beyond dispute, was not an income at all. 8. Brother Judicial member, on these facts and after taking into account judgments of Hon'ble Punjab High Court in Basumal Jagat Narain's case and of Hon'ble Supreme Court in the case of A.V. Thomas & Co. Ltd. has observed that "therefore, a debt in such a case is an outstanding which, if recovered, would have swelled profits" and went on to add that "it means something which is related to business or results from it". It has also been observed that "it could not be said that there wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ake prompt steps to fix the price of country liquor for the period in question in conformity with the policy within a period of one month from today (the date of the judgment), and communicate the decision to the petitioners." Hon'ble High Court further added that "If (as a result of such price fixation by the State Government) the petitioners are found entitled to receive the amount as difference between the price fixed and ad hoc rates, the respondent shall also.....take steps to make the payment to the petitioners within a period of one month from the date of the price fixation.". These observations by the Hon'ble High Court do not leave any ambiguity over the position that, as at that point of time, the assessee did not have any existing right to receive any portion of the claim of the assessee, as reflected by the supplementary bills on account of claim of enhancement in rates. If at all the assessee had any right, the right was only to seek fixation of rates by the State Government and in the light of recommendations of the Experts Committee, and it was this right which he sought to enforce through the writ petition. 10. At this stage, it is also necessary to appreciate that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mount of money to the assessee. The debt had an actual existence both in law and in fact." It is not in dispute, and as clearly emerging from the judgment of Hon'ble Madhya Pradesh High Court (referred to in paragraph 4 above) as well, that in the present case there was 'no legally enforceable obligation for payment of money'. The revenue's case fails on this elementary test. To put a question to ourselves could it be said that, on the facts of the present case, MP State Government's liability to pay the impugned sum to the assessee was "in actual existence" either "in law or in fact". The answer is emphatically in negative since, as I have discussed above, the assessee's right at best extended to the right of getting the prices fixed and the question of sum payable by the State Government was to arise only when the prices so fixed were over and above the ad hoc rates, and if yes, only to such an extent. Therefore, in my considered view, revenue derives no help from Besumal's case, particularly as, to apply the test applied by Their Lordships, it did not have any actual existence either in law or in fact. The existence in law could have been if the assessee had a right to sue for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any event, the amounts were spent in 1948 and not in the year ending December 31, 1951. They could not, therefore, be allowed as business expenditure...... (ii) That the assessee company was neither a banker or a money lender, the advances paid by the assessee company to the private company to purchase the shares could not be said to be incidental to the trading activities of the assessee. A debt, for the purpose of section 10(2)(xi), was something more than an advance which was related to business or resulted from it. It was an outstanding which, if recovered, could have swelled the profits and not merely money handed over to someone for purchasing a thing which that person failed to return even though no purchases were made. The amount due from the private company could not therefore be described as a debt for the purpose of section 10(2)(xi) and the assessee was not entitled to claim allowance of the balance of the advances as bad debt written off under section 10(2)(xi). 15. Justice Rowlatt's observations, which have been referred to by brother colleague in paragraph 2.11 of his draft, have been referred to in the above judgment of Hon'ble Supreme Court and elaborated by foll....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297, the same principle was set out in little more elaborate manner in the words of Justice Dr. A.S. Anand (as he then was): "It is neither desirable nor permissible to pick up a word or sentence from the context of question under consideration and treat it to be complete "law" declared by this Court. The judgment must be read as a whole and the observations from the judgment should be considered in the light of the questions which were before the Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision in a later case, the Court must carefully try to ascertain the true principle laid down by the decision of this Court and not pick out words or sentences from the judgment, divorced from the context of questions under consideration by this court, to support their reasoning." In the cases relied upon by the revenue, i.e. in the case of A.V. Thomas & Co. Ltd. or in the case of Basumal Jagat Narain, the question that came up for consideration was not the definition of a debt per se but the question was on the k....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions laid down in section 36(2) are satisfied. As there is specific provision in the statute for allowing this kind of loss, compliance with that provision is a must. Since the assessee has not fulfilled the conditions specified in section 36(2), I am not inclined to allow the sum of Rs. 98,61,884 as deduction from income of the assessee. On these facts, it is not necessary for me to comment upon merits of allowability of deduction but suffice to mention that, in my considered view and for the detailed reasons set out above, section 36(1)(vii) and section 36(2) have no application in the matter. Accordingly, revenue's objection, in my considered view, is devoid of any substance. 20. For the reasons as aforesaid, I am in respectful disagreement with the views expressed by learned brother and I am of the view that this ground of appeal should also be dismissed. 21. Let the matter be placed before the learned Judicial Member, who is the senior member on this bench, for initiation of further proceedings under section 255(4) of the Income-tax Act. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Since there is a difference of opinion between the members of the Bench, we s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessment years 1987-88 to 1991-92 and raised supplementary bills for Rs. 1,15,05,321 on the Government of MP. The demand made was subject to price fixation by the State Government. The M.P. Government, however, did not accept the claim for price escalation made by the assessee unilaterally through raising of supplementary bills. The assessee-company filed a Writ Petition before the Madhya Pradesh High Court at Indore and the High Court vide order dated 10-1-1995 directed the MP Government to fix the price of country liquor in conformity with the policy and on the basis of which the MP Government ultimately vide its letter dated 19-4-1995 determined the price. As a consequence of this, the assessee-company received a sum of Rs. 16,43,436.94 and the balance claim for price escalation to the extent of Rs. 98,61,884 was not accepted by the MP Government. In the mean time, the assessee had already taken extra credit aggregating to Rs. 98,61,884 in the books of account during the assessment years 1987-88, 1988-89, 1990-91 and 1991-92. The irrecoverable sum of Rs. 98,61,884 was written off by the appellant in its P&L Account drawn for the year ended 31-3-1998 corresponding to the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... made by the appellant did not result in any contractual debt between the State Government and the appellant. No obligation could be cast on the State Government by reason of such unilateral act. The State Government never acknowledged the value of escalation bills raised by the appellant as debt. Therefore, by no stretch of argument can the amount in question be regarded as debt. And if there is no debt the question of its deductibility under section 36(1)(vii) does not arise. The loss arose out of the carrying on of the business of the appellant and resulted in connection with transactions between the supplier (the appellant) and the buyer (the State Government). The fixation of liquor prices in respect of liquor supplied by the appellant to the State Government during the period October 23rd, 1985 to March 31st, 1991 took place in April, 1995 when the Government's order dated April 19, 1995 was issued. In view of the new rates intimated by the State Government through its said order, the appellant was able to realize only an aggregate sum of Rs. 16,43,437 as against its claim of Rs. 1,15,05,321. Thus the amount of Rs. 98,61,884 became irrecoverable during the previous year under....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry liquor to the Government of M.P. and charged Rs. 5,02,82,790. Subsequently, the assessee made claim of price escalation and for that purpose it raised a supplementary bill on the Government of M.P. The supplementary claim was made subject to the price fixation by the State Government. The State Government never accepted the claim of the assessee. Ultimately the assessee filed a Writ Application before the Hon'ble High Court and the Court directed the Government to fix the price of country liquor without any further delay. Pursuant to the said direction, the Stage Government repudiated the claim of the assessee in April, 1995. The assessee at the time of assessment made an alternative claim that the amount of loss if not allowable under section 36(1)(vii) of the Act may be allowed as a business loss. The Assessing Officer in his order held that it is a bad debt which may be allowed under section 36(1)(vii) provided conditions laid down in section 36(2) are satisfied. The Ld. Judicial Member accepted this finding of the Assessing Officer. On the other hand, the Ld. CIT(A) held that section 36(1)(vii) will be applicable only if it is a debt. In this case, the State Government had n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the balance amount to the extent of Rs. 98,61,884. Therefore, it could not be said that there was no valid claim of the assessee on the State Government. Thus the loss had occurred to the assessee in the assessment year under appeal in respect of its business by not recovering the trade debt due to it from the State Government. The plea of the assessee that it was a unilateral. claim and not actionable claim was not accepted by the Ld. Judicial Meinber on the ground that if there had been no valid claim, no direction could be issued by the M.P. High Court to the Government of M.P. to settle the claim of the assessee within a specified period. Therefore, the claim of the assessee was a trade debt which was rejected by the State Government and it is to be allowed as bad debt under section 36(1)(vii) of the Act. 9. On the contrary, the Ld. Accountant Member has observed in his order as to why the assessee moved before the Hon'ble M.P. High Court. He reproduced extracts from the judgment passed by the Hon'ble M.P. High Court. From the portion of the judgment I find that the system for price fixation of liquor was changed from April, 1986. Now process was formulated after constituti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r that the Hon'ble Supreme Court has held something more than what was quoted by the Ld. Judicial member. The Ld. Judicial Member did not quote the entire paragraph where it has been further held by the Supreme Court as follows: "A debt in such cases is an outstanding which, if recovered, would have swelled profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the section, debt means something more than a mere advance. It means something related to business or results from it. To be claimable as bad or doubtful debt, it must be shown as a proper debt." 11. In the case of Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767, reliance was placed on the decision of Privy Council in the case of Wallace Bros. & Co. Ltd. v. CIT [1948] 16 ITR 240 where it has been held as follows: "To summarize: A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro:debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened." It was held by the Pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt of supplementary bill was at best a contingent liability which was not acknowledged by the M.P. Government. Therefore, I find that the tests laid down by the Apex Court ad other Hon'ble Courts are not satisfied for treating the amount of Rs. 98,61,844 as debt. The supplementary bill raised by the assessee was a unilateral claim made by the assessee. According to the Ld. Judicial Member, since the Hon'ble High Court has given direction to the M.P. Government to settle the claim of the assessee within a period of one month, therefore, it was a valid and actionable claim of the assessee. This reasoning of the Ld. Judicial member, in my view, is not correct because the assessee moved before the High Court, as already mentioned above, for fixation of price and until and unless the price is fixed how the liability of the State Government can be ascertained. Therefore, it was only a contingent liability, as held by the Ld. Accountant Member in his order which, in my opinion, is correct. Since the amount in question cannot be treated as debt, therefore, the same cannot be allowed as bad debt under section 36(1)(vii) of the Act. The Assessing Officer in his order as observed as under: "....