1. At the instance of the assessee the question that has been referred to this court by the Tribunal under section 66 (2) of the Indian Income-tax Act, 1922, runs as follows :
'Whether the applicant's income from contracts with the Government has been properly estimated at Rs. 24,604 (rupees twenty-four thousand six hundred and four) as against a loss of Rs. 94,206 (rupees ninety-four thousand two hundred and six) claimed by the applicant ?'
2. The question arises in these circumstances : The assessee, Messrs. D. P. Wadia & Sons, is a registered-firm consisting of 3 partners carrying on business as a contractor. The relevant assessment year in respect of which the question arises is 1956-57, for which the accounting year is the financial year ended March 31, 1956. During the accounting year the assesee carried out certain works directly and certain other works through three sub-contractors and in this reference we are concerned with 16 items of work which were carried out by the assesse through one of such sub-contractors, namely, H. R. Gopalswamy, and these works related to the Government of India Printing Press at Nasik. As per its usual terms with such sub-contractors the assessee was to retain only 5% of the gross receipts from the Government in respect of the contract as its profits. Since the sub-contractor, Shri Gopalswamy, was in need of monies, the assessee, it is claimed, went on making advances to accommodate him on his request. Out of 16 items of jobs which were sublet to the sub-contractor with the permission of Government, about 14 items of jobs were completed by him but the Sub-contractor left two major works incomplete, which ultimately led to cancellation of the contract of the assessee by the Government of India. The assessee was to recover the advances which he used to make to the sub-contractor from the bills recovered from the Government of India in respect of such sub-contracts to be executed by that sub-contractor. According to the assessee, during the accounting year the total amount advanced to Gopalswamy was to the tune of Rs. 4,36,215 and the amount recovered by the assessee from the bills which it received from the Government amounted to Rs. 3,42,009 and as such a sum of Rs. 94,206 could not be recovered by it from the sub-contractor during the year of account and it was this sum which the assessee claimed as loss in the accounting year which has been disallowed by the taxing authorities.
3. In its assessment the assessee claimed that no profit had been made by it at all in respect of the above sub-contract given to Gopalswamy but on the contrary it has actually sufered a loss to the tune of Rs. 94,206 as being irrecoverable advances given to him. It was pointed out to the taxing authorities that a suit for recovery of the balance out of the advances that was due from Gopalswamy had been filed in the court of the civil judge, senior division, Nasik, being Special Suit No. 41 of 1957. It may be stated that although the assessee has been established contractors of several years standing it has year to year refused to maintain regular books of account for its business and, therefore, every time it has been a case of estimated income to be disclosed by the assessee and the estimated income to be ascertained by the Income-tax Officer. The profit in respect of the sub-contract in regard to Nasik work was, therefore, estimated by the Income-tax Officer on the basis of the total bills received by the assessee from the Government. As against the total bills of Rs. 4,92,081 which figure was put forward by the assessee as being its gross receipt the Income-tax Officer estimated the receipts at Rs. 4,95,000 and on the these receipts he took the rate of profit at 5%. In other words, he estimated the net profit at Rs. 24,750 as against the loss of Rs. 94,205 claimed by the assessee. The claim with regard to the alleged loss was rejected by the Income-tax Officer by observing that monies had been advanced to Gopalswamy by the assessee without keeping proper accounts and if the result of such activity was any loss to the assessee then it was not at all a businessman's prudent transaction and, furthermore, there were no regular books of accounts maintained by the assessee and as such the assessee could not claim the loss of Rs. 94,206 as a revenue loss. When the assessee went in appeal to the Appellate Assistant Commissioner, the latter officer modified the Income-tax Officer's estimate of the profit by accepting the total amount of the bills at Rs. 4,92,061 as shown by the assessee and, calculating the net profit rate of 5% on this, he arrived at the net profit of Rs. 24,604. As regards the claim for loss of Rs. 94,206 the Appellate Assistant Commissioner observed that the figure of the loss claimed was in fact the result of overdraw made by Gopalswamy; that is to say, the loss claimed was merely part of the debts advanced by the assessee to Gopalswamy and that it had nothing to do with the accrual of the profits from the contract in which the assessee had at least a 5% share as per arrangement. He, therefore, upheld the rate of 5% at which the net profit was to be calculated and adopted by the Income-tax Officer and rejected the claim for loss.
4. Before the Tribunal the decision of the Appellate Assistant Commissioner in so far as it related to the estimate of net profit was upheld. The claim for the allowance of the loss was pressed on behalf of the assessee on two alternative grounds, on under section 10 (1) of the Act and the other under section 10 (2) (XV) of the Act, and the Tribunal expressed the opinion as follows :
'The assessee has received the contract takings from the Government direct and it is out of such takings the assessee becomes entitled to its profit of 5%. The income from the contracts has, therefore, not only accrued to the assessee, but also received by it in the first instance.'
5. It is on this basis that the claim falling under section 10 (1) was rejected and the estimated profit as done by the Appellate Assistant Commissioner was upheld by the Tribunal. In regard to the alternative claim, the Tribunal observed as follows :
'We are unable to understand the business necessity for making such advances recklessly forgetting ordinary business prudence. Such foolish advances are by no means incidential to the business and the loss therefrom cannot constitute a deduction either under section 10 (1) or section 10 (2) (XV). The irrecoverable amount now claimed has not also been identifiably made during the previous year; it is the balance in an account running into other years as well.'
6. In other words, the Tribunal gave two reasons why it rejected the claim for the allowance of the alleged loss. In the first place, it took the view that advances had been so recklessly made by the assessee that they could not by any means be called incidental to business and, secondly, it rejected the claim on the ground that the irrecoverable amount claimed by the assessee had not been identifiably made during the previous year and that it represented the balance in an account running into other years as well.
7. Mr. Munim, counsel for the assessee, has contended before us that out of the two grounds given by the Tribunal for rejecting the claim for allowance of the loss, the first ground was not sustainable in law, for, according to Mr. Munim, in the first place, the question whether advances had been recklessly made or whether advances had been prudently made could not be a valid consideration for deciding the question as to whether advances could be regarded as expenditure incurred as being incidental to business and, secondly, he urged that even the finding that the advances were recklessly made could not be sustained because if regard was had to the total value of the sub-contract which had been sub-let to Gopalswamy, it could not be said that the advances were reckless. In that behalf he pointed out that the total value of the sub-contract which had been sub-let to Gopalswamy was to the tune of Rs. 12 lakhs and as such advances to the tune of Rs. 5 lakhs right from the commencement of the contract up to the termination thereof by the Government could not be regarded as reckless. In our view, it is really unnecessary for us to go into this question, for it is the second ground mentioned by the Tribunal which really presents strong hurdle in the way of the assessee in claiming the allowance for the loss and if the second ground which has been mentioned by the Tribunal cannot be overcome by the assessee, the question whether the Tribunal was right in putting forward this first ground or not will not survive. The Tribunal has observed as a finding of fact that the irrecoverable amount, viz., Rs. 94,206, in respect of which relief by way of allowance for the loss was claimed, could not be said to be identifiably made during the previous year and that it really represented the balance in an account running into other years as well. What was sought to be urged by Mr. Munim before us was that if the orders of the Income-tax Officer and the Appellate Assistant Commissioner were carefully scrutinised it would appear clear that the statement containing advances made by the assessee to the sub-contractor during the year of account and the recoveries made out of such advances during the accounting year could be said to have been accepted by them and as such it would be correct to say that there was material on record to show that the irrecoverable amount had been identifiably made during the previous year. It is not possible to accept this submission of Mr. Munim for the simple reason that all that the Income-tax Officer and the Appellate Assistant Commissioner have done while disposing of this question is that they have merely set out as and by way of recitation of fact that the statement had been prepared by the assessee showing the total advances made to Gopalswamy, the sub-contractor, during the year of account and the total amount of recoveries said to have been made out of such advances during the relevant accounting year but there is no statement or averment to be found in the orders passed either by the Income-tax Officer or the Appellate Assistant Commissioner to the effect that such statement was accepted by either of them. In fact the Income-tax Officer, after referring to this statement that was prepared by the assessee and put forward before him, has gone on to observe as follows : assessee to 'From the copy of the plaint furnished, as well as from discussion, it appears that moneys were advanced to Shri Gopalswamy by the assessee without keeping proper accounts and if the result of such was any loss to the assessee then it was not at all a businessman's prudent transaction and besides there are no regular books of accounts maintained by the assessee and the assessee, therefore, cannot claim the loss of Rs. 94,206 as a revenue loss.'
8. In other words, in the absence of proper books of accounts having been maintained and produced before the taxing authorities, the said authorities were unable to accept the statement that was prepared by the assessee and produced before them showing appropriation of certain figures towards the accounting year from out of the total advances made to the sub-contractor and the total recoveries made out of such advances during the entire period. It cannot be disputed that such appropriation for a particular accounting year could be accepted only if proper books of accounts regularly kept in the ordinary course of business are maintained by a businessman. In this context it would not be out of place to mention that in para. 6 of the plaint in the suit filed by the assessee against the sub-contractor (copy of which has been annexed as annexure 'D') certain figures have been given by the assessee as the plaintiff in that suit and according to relevant averments which are to be found in para. 6 of the plaint it will appear that according to the assessee the firm had advanced to the sub-contractor from January 10, 1955, to June 18, 1956, several amounts to the extent of Rs. 5,90,528-4-0 and that the assessee have been able to recover Rs. 4,47,054-12-0 from out of the bills of the Government till the construction of work was stopped by the sub-contractor. In other words, the total figure of advances said to have been made by the assessee to the sub-contractor from January 10, 1955, to June 18, 1956 has been given and the total recoveries out of such advances during this whole period again have been given. The relevant accounting year has ended on 31st March, 1956, and it is , therefore, clear that not only the advances have been made even before the accounting year commenced but recoveries were made by the assessee even after the accounting year was over. Moreover, as was fairly stated by Mr. Munim, it was a case of making recoveries from the Government by submitting running bills to the Government and, as such, till the contract was terminated by the Government and damages were actually claimed by the Government, it would not be possible for the assessee as the contractor to say whether in the contract as a whole he has made any loss and if so to what extent and the loss would really arise in the year in which that eventuality occurs. In the circumstances, it would be really difficult for any taxing authority to come to definite conclusion as to whether the irrecoverable amount which was being claimed by the assessee could be said to be a loss referable to the accounting year. Placed in that situation, the Tribunal, in our view, correctly observed that the irrecoverable amount had also not been identifiably made during the previous year and that it represented the balance in an account running into other years as well.
9. Having regard to the above discussion, we feel that the allowance was rightly rejected by the taxing authorities and by the Tribunal by recording a finding of fact which was based on an appreciation of evidence. The question referred to us, therefore, is answered in the affirmative against the assessee.
10. The assessee will pay the costs of this reference to the department.