The assessee is entitled to claim a bad debt deduction if it has been established that the debt has become bad in the previous year. A cess collected from customers on sale of oil is a trading receipt. A loss incurred on settlement of contracts is a business loss if it is incurred due to non-performance of the contract for reasons beyond the control of the assessee.

Headnote:
INCOME TAX - Bad debt - Whether the assessee was justified in claiming a bad debt of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan of Nadbai? - Cess collected from customers on sale of oil - Whether it could be assessed as a trading receipt? - Loss incurred on settlement of contracts - Whether it should be treated as a business loss or speculation loss?
Fact of the Case:

The assessee claimed a bad debt of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan, Nadbai, which was a proprietary concern doing commission agency in food grains, etc. The assessee purchased oil seeds through this party and wrote off the debt as irrecoverable in the previous year. The Income-tax Officer rejected the claim on the ground that the debt did not become bad in the previous year and that the assessee did not take sufficient steps to recover the debt. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The Tribunal held that the debt had become bad in the accounting period relevant to the assessment year under appeal. The assessee also collected Rs. 6,157 from its customers as cess on sale of oil, which was not paid to the Government and was credited to the Amanath account. The assessee claimed that the said amount is not a trading receipt and represented the liability of the assessee which it would have to fulfil in case the dispute was decided against the assessee. The Income-tax Officer and the Appellate Assistant Commissioner held that the said amount is liable to be included as a trading receipt. The Tribunal held that the amount was held in trust either for the customer or for the Government, and, therefore, it could not be considered as a trading receipt. The assessee also incurred a loss of Rs. 17,316 on settlement of contracts for supply of goods through a dalal. The Income-tax Officer treated the same as speculation loss as no delivery of goods were effected. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The Tribunal held that the payment in question represents damages for breach of contract which did not fall within the purview of section 43(5) of the Income-tax Act and that the said section is applicable only in case of settlement of the contract where the payment is made without delivery of the goods.
Finding of the Court:

The Tribunal was justified in allowing the claim of bad debt of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan of Nadbai. The Tribunal was not justified in holding that the amount of Rs.6,257 collected by the assessee as cess from its customers on sale of oil could not be assessed as a trading receipt. The Tribunal was justified in holding that the amount of Rs. 17,316 should be treated as a business loss and not speculation loss.
Issues: Whether the assessee was justified in claiming a bad debt of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan of Nadbai? Whether the amount of Rs.6,257 collected by the assessee as cess from its customers on sale of oil could be assessed as a trading receipt? Whether the amount of Rs. 17,316 should be treated as a business loss or speculation loss?
Ratio Decidendi: The assessee has discharged the burden of proof by producing the certificate of the chairman of the municipality and the conduct of the debtor in not responding to the notice and not making the payment of the balance amount. The amount collected as cess from customers is a trading receipt, as it was received in the course of the assessee's business. The loss incurred on settlement of contracts is a business loss and not speculation loss, as it was incurred due to non-performance of the contract for reasons beyond the control of the assessee.
Final Decision: The reference is answered in favour of the Revenue on point No. 2 and on points Nos. 1 and 3 in favour of the assessee and against the Revenue.

JUDGMENT

1. - The Income-tax Appellate Tribunal has referred the following three questions of law arising out of its order dated July 5, 1980, in respect of the assessment year 1974-75 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the claim of bad debt of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan of Nadbai ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs.6,257 collected by the assessee as cess from its customers on sale of oil could not be assessed as a trading receipt ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 17,316 should be treated as a business loss and not speculation loss ?"

2. The brief facts of the case are that the assessee claimed bad debts of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan, Nadbai, which was the proprietary concern of Shri Radheyshyam. This concern was doing commission agency in food grains, etc. The assessee was purchasing oil seeds through this party. In the assessment year 1972-73, the assessee has paid advances of Rs. 9,84,431 against which goods of Rs. 9,29,102 were purchased and there was a debit balance of Rs. 55,310. In the next year also the advances were made and the debit balance was at a figure of Rs. 2,48,192 against which the goods of Rs. 1,40,356 were received and a sum of Rs. 1,07,836 was still in the debit balance. No further advances were made and the assessee started doubting the creditworthiness of this party. A sum of Rs. 55,731 was recovered and the balance amount of Rs. 52,105 was written off on the last date of the previous year. It is alleged that the assessee made the enquiries with regard to the financial position and the certificate was also obtained from the chairman of the municipality of Nadbai regarding the financial position of the debtor. A registered notice dated November 5, 1973, asking for the payment of the amount was duly served on the debtor but no payment was made. The assessee came to the conclusion that there was no possibility of recovery of the amount in question and it was written off. The Income-tax Officer was of the view that the debt in question did not become bad in the previous year and he rejected the claim of the assessee on the ground that a debtor who could pay a sum of Rs. 55,731 in one year could not be said to be unable to meet out his liabilities. The amount involved was huge and no businessman of prudence would leave the matter by issuing a legal notice only and since no suit was filed in the court, it could not be considered that the debt has become bad. The certificate of the chairman of the municipality was not relied upon. It was also observed that since no insolvency proceedings were taken by the parties, the debt could not be considered to be bad. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. In the second appeal, the Tribunal held that the debt had become bad in the accounting period relevant to the assessment year under appeal.

3. So far as the first question is concerned, it has been provided under section 36(1)(vii) that subject to the provisions of sub-section (2) the amount of any bad debt or part thereof which is established to have become a bad debt in the previous year is to be allowed as a deduction. It is not disputed that the debt was in respect of the business which was carried on by the assessee in the relevant accounting year and the amount has been written off as irrecoverable in the accounts of the assessee in the accounting year for which the deduction is claimed. The dispute is only with regard to the fact as to whether it has become bad or not. The finding which has been recorded by the Tribunal is that the amount was not recoverable. It is for the assessee to have a reasonable belief that the debt has become bad and there could not be any

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1993 Supreme(Raj) 737

RAJASTHAN HIGH COURT AT JAIPUR BENCHK.C.Agarwal, V.K.Singhal, JJ.Commissioner of Wealth - AppellantVersusShree Bhagpatia Food Industries - RespondentD.B. Wealth-Tax Reference No 130 of 1982.Decided On : 08-10-1993

Cases Referred (1)

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RAJASTHAN HIGH COURT AT JAIPUR BENCH
K.C.Agarwal, V.K.Singhal, JJ.
Commissioner of Wealth - Appellant
Versus
Shree Bhagpatia Food Industries - Respondent
D.B. Wealth-Tax Reference No 130 of 1982.
Decided On : 08-10-1993