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1964 Supreme(SC) 265
SUPREME COURT OF INDIA
22nd October 1964.
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
The Associated Banking Corporation of India Ltd., Appellant
Versus
The Commissioner of Income-tax, Bombay, Respondent.
Civil Appeal No. 956 of 1963.
Advocates appeared
Mr. A. V. Viswanatha Sastri, Senior Advocate, (M/s. J. B. Dadachanji, O.C. Mathur and Ravinder Narain, Advocates of M/s. J. B. Dadachanji and Co., with him), for Appellant.
Mr. C. K. Daphtary, Attorney General for India and Mr. K.N. Rajagopala Sasrri, Senior Advocate (M/s. R. H. Debar and R.N. Sachthey, with them), for Respondent.
A.V.VISHWANATHA SASTRI, C.K.DAFTARY, CO., J.B.DADACHAN, K.N.RAJAGOPAL SASTRI, O.C.MATHUR, R.H.Dhebar
Writing off in the books of account is not a condition precedent to the admissibility of allowance for bad debts under S. 10(2) (xi) of the Income-tax Act, 1922.
Headnote:
INCOME TAX - Bad debts - Allowance - Condition precedent - Writing off in books of account - S. 10(2)(xi) of the Income-tax Act, 1922 - Whether writing off in the books of account is a condition precedent to the admissibility of allowance for bad debts.
Fact of the Case:
The assessee, a Banking Corporation, claimed bad debts amounting to Rs. 38,35,654 in the assessment year 1948-49. The Income-tax Officer and the Tribunal rejected the claim on the ground that the bad debts were not written off in the books of account of the Bank as required by S. 10(2) (xi) of the Income-tax Act, 1922. The High Court agreed with the Tribunal that the claim for allowance of bad debts could not be sustained under S. 10(2) (xi) as the debts had not been written off in the books of account of the Bank.
Finding of the Court:
The Court held that writing off in the books of account is not a condition precedent to the admissibility of allowance for bad debts under S. 10(2) (xi) of the Income-tax Act, 1922. The Income-tax Officer has the power to estimate the debts as irrecoverable, but this 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.
Issues: Whether writing off in the books of account is a condition precedent to the admissibility of allowance for bad debts under S. 10(2) (xi) of the Income-tax Act, 1922.
Ratio Decidendi: The Court interpreted S. 10(2) (xi) of the Income-tax Act, 1922 and held that the provision does not require that a debt which the Income-tax Officer may treat as irrecoverable must be written off at all. The section merely provides that if a debt has actually been written off by the assessee in his books as irrecoverable in a particular year, then the Income-tax Officer, in making an allowance in respect of bad debts for that year, must not allow anything in excess of the amount which the assessee has himself written off.
Final Decision: The Court allowed the appeal in part and held that the assessee was entitled to claim Rs. 15,00,000 as bad debts in the year of account ending June 30, 1947 under S. 10(2) (xi) of the Income-tax Act, 1922.
Judgment
SHAH, J.:
One M. C. Javeri was appointed Secretary of the Associated Banking Corporation of India Ltd., and under 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 moneyupon the security or any securities, assets of 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 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 found that the bad debts of the Bank including the amounts embezzled by the Secretary amounted to Rs. 48,50,952.
2. It is common ground that entries adjusting the books of amount and writing off the amounts claimed to be irrecoverable were not posted in the books of account either before he return was filed, or even till the proceeding reached the Tribunal. The departmental authorities and the Tribunal rejected the claim for allowance of bad debts on the ground that the bad debts were not written off in the books of account of the Bank as required by S. 10(2) (xi) of the Income-tax Act. The claim for allowance of Rs. 10,15,000 and Rs. 98892 being the loss resulting from embezzlements by the Secretary was rejected by the departmental authorities on the grounds, that the embezzlements did not relate to the business of the Bank and could not be treated as loss suffered by the Bank in the course of the business, and in any event the loss was not suffered in the year of account because it was not ascertained in that year. The Income-tax Appellate Tribunal agreed with the departmental authorities for the second of the two reasons.
3. The Tribunal referred under S. 66(1) of the Act, two questions which were later modified by the High Court to read as follows :
(1) Whether on the facts and in the circumstances of the case the assessee is entitled to claim bad debts amounting to Rs. 38,35,654 or any lesser sum?
(2) Whether on the facts and in the circumstances of the case the assessee is entitled to claim two sums of Rupees 10,15,000 and Rs. 98,892 as a business loss or as a deduction under S,10(2) (xv) of the Income-tax Act?
The High Court agreed with the Tribunal that the claim for allowance of bad debts could not be sustained under S. 10(2) (xi) as the debts had not been written off in the books of account of the Bank. But at the request of counsel for the liquidator they called upon the Tribunal to submit a supplementary statement on the question whether the debts had actually become irrecoverable during the year of account, and whether they were debts arising in the course of the business of the Bank. The High Court being of the opinion that the facts set out in the statement of case were not sufficient to enable them to record an answer on the second question, called upon the Tribunal to submit a supplementary statement about the powers entrusted to the Secretary, and the year in which loss was suffered by the Bank in consequence of embezzlements by the Secretary. The Tribunal reported that debts aggregating to "Rupees 15,00,000 at least" had become irrecoverable in the year of account, and that the Secretary had misused powers entrusted to him unde
