1. The question referred by the Income-tax Appellate Tribunal is as follows :
'Whether, on the facts and in the circumstances of the case, the amount advanced by the assessee firm to Shri V. Nagayya can be allowed as a deduction in the computation of its business income either as a bad debt or as a business loss for the assessment year 1962-63 ?'
2. The statement of the case leading to this reference is as follows :
The assessee-firm has been carrying on business as a commission agent for the sale of the products of M/s. Kirloskar Bros. Ltd., M/s. American Spring and Pressing Works (Private) Ltd., and M/s. Tata Fizon Ltd., for the Vidarbha region, besides selling hardware goods, agricultural implements and accessories. In an earlier year the assessee-firm had advanced a sum of Rs. 12,000 to one Nagayya, film producer and an artist to Madras, under an agreement of joint venture to purchase dismantled building material consisting of canvas, iron angles, wooden structures, ceiling sheets, etc., used in the industrial exhibition held in Madras in January, 1960. Shri V. Nagayya was stated to be a member of the exhibition committee. The assessee lent the said amount to Shri V. Nagayya and the latter executed a hundi for the same in favour of the assessee. It was found by the Appellate Assistant Commissioner that the advance made by the assessee-firm was of a capital nature. Shri V. Nagayya neither purchased the dismantled building materials nor returned the said amount. The assessee claimed deduction of the said sum of Rs. 12,000 against its business income, on the ground that it was a debt and had become bad and irrecoverable in the relevant accounting year. The Income-tax Officer disallowed the assessee's claim on the following grounds :
'(1) The correspondence that exchanged between the assessee and Shri V. Nagayya showed that even after writing off the amount, the assessee was pursuing the recovery of the said amount by reminding the debtor and the debtor promised to pay, vide letters dated 1-4-1961 and 17-7-1961, copies of which form part of the statement of the case as annexures 'A' and 'B'
(2) No legal steps were taken against him for the recovery of the same.
(3) The debt in question was neither taken into consideration for computing the assessee's income for the year in which the loan was advanced or for any other year, nor was the amount lent by the assessee-firm to Shri. V. Nagayya in the ordinary course of money-lending business.'
3. The Income-tax Officer accordingly rejected the assessee's claim of a deduction as a bad debt under section 36(2) of the Income-tax Act, 1961. A copy of the assessment order forms part of the statement of the case as annexure 'C'.
(4) On appeal the Appellate Assistant Commissioner upheld the disallowance of the claim holding that the said advance was in the nature of a loan on a friendly basis and nothing beyond, that at best it was an advance of a capital nature, with the intention of entering into a business adventure and the inability of the assessee to recover the amount could never be termed as a bad debt. Since the assessee was not carrying on money-lending business, the loan in question was neither a bad debt nor a loss of stock-in-trade. A copy of the order passed by the Appellate Assistant Commissioner forms part of the statement of the case as annexure 'D'.
4. The assessee then filed a second appeal to Appellate Tribunal. The Tribunal held that the letters of Shri. V. Nagayya addressed to the assessee and that there was no evidence to prove that Shri V. Nagayya was either insolvent or was unable to pay the amount. The Tribunal, therefore, held that the loss did not accrue to the assessee-firm in the relevant accounting year. The Tribunal also agreed with the view of the Appellate Assistant Commissioner that it was a loss of capital nature. The Tribunal accordingly upheld the disallowance of the assessee's claim. A copy of the Appellate Tribunal's order forms part of the statement of the case as annexure 'E'.
[After setting out the statement of case as above, ABHYANKAR J. continued.]
5. The assessee is a firm doing business, and among other articles, it is alleged that they sell hardware goods, agricultural implements and accessories. The assessee claimed a deduction of Rs. 12,000 paid to Nagayya for purchase of dismantled goods on the ground that the payment was made for purchase of good which were to be resold and therefore was in the nature of revenue expenditure. As the goods were not purchased for the amount which represented the purchase money given to Nagayya on behalf of the assessee and was not returned, in any case it was a bad debt which became irrecoverable in the accounting year. Admittedly, the amount was paid some time August, 1960. On the same date, it appears a hundi was taken from Nagayya. The statement of the case has attached two letters from Nagayya, one dated 1st April, 1961, and other dated 17th July, 1961, addressed to the assessee recounting the circumstances in which he was unable to pay the sum of Rs. 12,000 and promising to pay the same. There is also a reference to a letter sent by the assessee in February, 1962, in which the demand for refund of the amount seems to have been reiterated.
6. The departmental authorities came to the conclusion that the payment of Rs. 12.000 was in the nature of a capital advanced or capital investment and not a revenue expenditure. The learned counsel for the assessee has relied on a recent decision of the Supreme Court in Commissioner of Income-tax v. Mysore Sugar Co. in support of their contention that the amount spent with a view to acquiring goods which were to be sold by them should properly be treated as an expenditure on revenue account and not a capital expenditure. According to the test at page 653, the question to consider in such cases is what was the amount laid out for. If the money was laid out for purchase of goods in which the assessee dealt and which were ultimately to be sold at profit, then the expenditure would be revenue expenditure. On the other hand, it is urged on behalf of the department that the Tribunal has found that there was an agreement between the assessee and Nagayya for a joint venture to purchase dismantled building material consisting of canvas, iron angles, wooden structures, etc., and in this joint venture, which appears to be in the nature of partnership, the capital was provided by the assessee-firm and the said Nagayya was perhaps to use his influence and position as a member of the exhibition committee to acquire the goods at 'throw-away prices' as mentioned in the order of the Income-tax Officer. If the amount was thus invested by way of capital contribution, then the fact that a part of it would be used by partners which was a joint venture for purchase of goods which in their turn may be sold would not covert, so far as the assessee was concerned, what was paid as capital into a revenue expenditure on their own account.
7. The further question that has been canvassed is that, even assuming that this is revenue expenditure, the amount had become irrecoverable inasmuch as Nagayya did not either purchase the materials or refund the amount which he promised to do, time and again, but had not paid and which in the estimate of the assessee had become irrecoverable and was, therefore, written off in the year of account. In other words, this expenditure had become a bad debt within the meaning of section 36 and as a bad debt was bound to be allowed as a permissible deduction in computing the income.
8. The Income-tax Appellate Tribunal has found in paragraph 5 of the statement of the case that there was no evidence to prove that Nagayya was either insolvent or unable to pay the amount, and, therefore, it could not be held that that was a loss which had occurred to the assessee in the relevant accounting year. In other words, the finding of the Tribunal is that the assessee had failed to prove that it was a bad debt at least during the accounting year. With regard to this finding, it is contended that it is primarily within the powers of the assessee as a businessman to determine whether an outstanding liability is or is not reasonably recoverable within a particular period. Unless it is proved that this conclusion reached by the assessee was unsupportable, the income-tax authorities would have very limited jurisdiction to interfere with the conclusion of the assessee as to a debt being a bad debt or an irrecoverable debt.
9. In our opinion, it is not necessary in this case to decide finally whether the expenditure of Rs. 12,000 incurred by the assessee was in the nature of revenue expenditure. Even if it is assumed that this was an expenditure in the nature of revenue expenditure, the question that still remain would be whether the expenditure so incurred had acquired the character of a bad debt. Actually the amount was paid to Nagayya, and whether it was a partnership venture as suggested in the observations of the Tribunal or not, Nagayya was undoubtedly selected by the assessee to purchase the dismantled goods. Nagayya, it is admitted, did not purchase any such goods and failed to return the amount which he promised to pay against the hundi given by him. In order words, what was laid out as expenditure for purchase of goods ultimately became a liability undertaken by Nagayya so far as the return of the amount was concerned. To the extent of Rs. 12,000, therefore, Nagayya was indebted to the assessee-firm.
10. The next question is whether this liability owed by Nagayya had become irrecoverable in the accounting year to be treated as a bad debt. In our opinion, the finding of the income-tax authorities and ultimately by the Tribunal that the assessee had failed to prove that the amount due had become a bad is essentially a question of fact. It cannot also be said in this case that the finding reached about the debt not being a bad debt in the Accounting year us without evidence or has been arrived at after undue interference with a certain amount of discretion that vests in a businessman to decide which debt is recoverable and which debt is a bad debt. The Tribunal has pointed our and it is evident from the record and the material before us that this amount was paid some time in August, 1960. At the same time, the assessee had secured a hundi. When demand was made, the debtor, Nagayya, had agreed to pay the amount and in the two letters which are reproduced, far from repudiating his liability, he was only asking for time to pay as he was handicapped by had health or due to adverse circumstances. It is suggested that the assessee must have found that it was not possible to recover the amount from Nagayya and, therefore, chose to write it off. Before such an inference could be drawn, it was expected that the assessee should have brought on record material to show that there were reasonable circumstances to come to the conclusion that the debt had really become irrecoverable. For one thing, there was enough time limit to recover the debt by action at law. It also does not appear that any complaint was made by the assessee to any authorities against non-payment of the amount. It is also evident that the assessee did not bring any material on record to show that Nagayya was in insolvent circumstances and, therefore, in fact unable to discharge his liability. Thus, in view of the fact the debt was not very old and that there was a repeated assurance on behalf of Nagayya that he was going to pay the amount, and in the absence of any evidence to show that Nagayya was unable, due to his circumstances as to property or otherwise, to pay the debt at the relevant time, if the authorities came to the conclusion that treating this amount due as a bad debt was not justified and could not be allowed as a permissible deduction, we do not think that there is any error of law committed by the authorities in these circumstances. As already stated, even after writing off this amount as a bad debt in its account, it does appear that the assessee continued correspondence with Nagayya and even in February, 1962, a demand seems to have been made. It is unlikely that the demand would continue to be made if there was hardly any chance or probability of having the amount recovered from Nagayya. Thus, the finding reached by the authorities that the assessee had failed to prove that this was a bad debt cannot be said to be a finding which, in the circumstances of the case, was not possible to be reached.
11. Thus, the result is that our answer to the question is that, on the facts and circumstances of the case, the a amount advanced by the assessee-firm to Nagayya could not be allowed as a bad debt or as a business loss for the assessment year 1962-63. As the reference is answered against the assessee, we direct that
12. assessee shall pay the costs of the respondent. Hearing fee, Rs. 250.