1. The assessee is a Bank in liquidation and it went into liquidation on 21-4-1947. The Liquidator made a return of the income of the Bank for the assessment year 1948-49, and in this assessment he claimed bad debts amounting to Rs. 38,35,689/-. He also claimed as a business expense an amount of Rs. 10,15,000/- which represented a defalcation committed by the Bank's Secretary in respect of a particular transaction and a sum of Rs. 98,892/- which also represented a defalcation also committed by the Bank's Secretary in respect of another transaction. The Tribunal came to the conclusion that the Liquidator was not entitled to these deductions.
2. Now, turning to the question with regard to bad debts, an interesting question has been raised by Mr. Kolah. Admittedly these debts were not written off by the Liquidator in the books of the Bank. Mr. Kolah says that after liquidation, the Bank was not conducting its normal business as a Bank and all that the Liquidator was doing was collecting the debts and paying off the creditors, and, therefore, it was not possible for the Liquidator to write off these debts as they might have been written off by the Bank if it was carrying on its ordinary normal activities. But whatever the reason may be, the fact remains that these bad debts have not been written off, and the question that we have to consider is whether, looking to the provisions of Section 10(2)(xi), it is competent to the assessee to claim a bad debt which has not been actually written off in its books. Turning to the section it provides:
'when the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money
lending business, such sum in respect of loans made in the ordinary course of such business as the Income
tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee'.
Therefore, in order that the assessee should be entitled to claim this deduction, he must in the first instance maintain his accounts on the mercantile basis unless the assessee is carrying on a business of banking or money-lending, in which case, the bad debts must arise in respect of loans made by the assessee. Only such debts are allowed as bad debts as the Income-tax Officer may estimate to be irrecoverable. Therefore the Income-tax Officer must be satisfied that in the year of account in which bad debts are claimed, the debts could not be recovered. Then, there is a further limitation put upon the right of an assessee to claim amounts as bad debts and that limitation is that the bad debts which may be allowed must not exceed the amount actually written of as irrecoverable in the books of the assessee. Therefore, the Legislature seems to postulate not only the irrecoverability of the debt itself, but the actual writing off in the books of the assessee as a condition precedent to the right of the assessee to claim any amount as a bad debt. Now, what has been urged by Mr. Kolah is that the sub-section does not make it imperative and the language of a mandate is not used that the assessee should write off the debts in his books. What is urged is that if in fact the amount is written off, then there is a prohibition against the Income-tax Officer allowing any amount as bad debt which exceeds the amount actually written off. But if in fact no amount is written off, then the law does not cast any obligation upon the Income-tax Officer not to allow any bad debt in respect of debts which are in fact irrecoverable. The argument of Mr. Kolah may be put in another form. Mr. Kolah says that there is no principle underlying the suggestion made by the Department that even though the assessee may prove as a fact that a certain debt was irrecoverable in the year of account the mere absence of a book entry should prevent him from claiming that bad debt as a permissible deduction. What is forcefully put forward is that no sanctity attaches to a mere entry as such. What is of importance is the actual fact established and if the actual fact of irrecoverability is established, then it is of no consequence if the assessee for some reason or other has not written off the debt as a bad debt in his books. It is pointed out that in this very case looking to the facts and circumstances of the case, it was not possible for the Liquidator to write off these debts, and according to Mr. Kolah it would lead to an impossible and even absurd situation if the Liquidator of the Bank was prevented from claiming a large amount as bad debts, although he may be in a position to establish that they were irrecoverable, merely because he did not or could not write them off in his books. Forceful as the argument of the other side is, we must look to the language of the section and the scheme underlying it. The first part of the section makes it clear that it is only in the case of an assessee who maintains his account on the mercantile basis that he can claim any amount as a bad debt and as a permissible deduction. The reason for this is obvious. It is only in eh mercantile system of accounting that you credit an amount although you have not actually received it and your profits and/or losses are assessed not on the basis of receipts but on the basis of income which has accrued to you. Therefore, when an income, which you anticipated and which you have already included in your books of account does not come in, and there is no hope of its coming in, you must debit that amount in order to arrive at a correct result of your profits and losses, and what the Legislature required was that the return made by an assessee should correctly reflect the books of account of the assessee in order that a proper picture of the state of profits or losses of the assessee should appear in that return. Unless the bad debt was actually written off, the account would show a higher profit and it would also go to show that the assessee himself did not consider the debt as bad or doubtful because, if he did, in order to ascertain his own profits or loses he would have written it off. The same is the position with regard to the second part of the section because in the case of a Bank or a money-lender his profits or losses would only be ascertained by entries in the books of account with regard to the losses made by him. The loss of a loan would either go to reduce the profits or increase the losses, and therefore, what the Legislature intended was that when a Banker or a money-lender made his return, his return should correctly reflect his books of account and the proper state of profits or losses. But there is another aspect of the matter which seems to us almost conclusive. It cannot be disputed on any view of this section that if an assessee in his return claims a particular amount as bad debt, the Income-tax Officer cannot allow him bad debts exceeding that amount. Therefore, if an assessee were to show in his return bad debts as Rs. 5/- or Rs. 10/-, the power of the Income-tax Officer would be restricted to allowing bad debts only to the extend of that amount. But it is said that if the assessee instead of showing Rs. 5/- or Rs. 10/- were to show no bad debts at all, the power of the Income-tax Officer would be so large that he could permit as bad debts any amount even aggregating to lacs of rupees. Now, it seems to us that such construction is illogical. If the intention of the Legislature was to restrict the power of the Income-tax Officer not to allow bad debts exceeding the amount written off by the assessed himself in his books of account, logically the restriction must be applied to a case where the assessee had not written off any amount at all in his books as bad debts. A restriction only in a case where an amount is written off and no restriction in a case where no amount is written off seem to be both illogical and without any principle. Either there was good reason why the Legislature wanted to put this restriction upon the power of the Income-tax Officer or there was not. If there was good reason -- and there must be good reason because the section clearly says so -- then there is no reason why that good reason should not extend to a case where in fact no debt has been written off by the assessee.
3. Now, this view that we have taken is in conformity with the view which this Court has consistently taken for all these years in interpreting this section. We are not aware of any single case where either the Department or the assessee ever contended in this Court that an assessee is entitled to a certain amount as a bad debt which amount has in fact not been written off in his books of account. But apart from the settled practice, there are decisions of this Court which have also proceeded on that view of the section. Mr. Kolah says that those decisions do not go to show that this question was ever argued. But the very reason why it was not argued was that both the department and the assessee assumed that the other view was not tenable and the position which was accepted was incontrovertible.
4. Now, turning to these decisions -- in Commr. of Income Tax and Excess Profits Tax Central, Bombay v. Jwalaprasad Tiwari : AIR1954Bom277 the Department took up the extreme attitude that because the debts which were claimed as bad debts were not actually credited to the account of the specific debtors, the debts could not be considered to have been written off. We rejected this contention holding that the debts had been actually written off in the assessee's books because they had been debited in one case to Shah's account and the other to another account which dealt with bad and doubtful debts. Now, this contention and this argument would have been unnecessary if the law was that it was necessary to write off the debts in the books of account before the assessee could claim amounts as permissible deductions. The whole of the judgment proceeds on the clear assumption that Section 10(2)(xi) required that the amount should be written off. What we were concerned to decide was what was the method of writing off and we said that no particular or specific entry was necessary in the books of account provided it appeared clear from the books of the assessee that he had written of these debts.
5. The second judgment is in Karamsey Govindji, Bombay v. Commr. of Income Tax, Bombay City : 31ITR953(Bom) . What held in this case was that the finding of the Income-tax Officer that a particular debt had not become bad in 1947 was justified on the evidence, and in this case we realised the difficulty that this interpretation of Section 10(2)(xi) would cause to an assessee in certain circumstances. What we pointed out was that if in a particular year a debt was written off and the debt was found to be not irrecoverable by the Income-tax Officer, the bad debt would not be allowed. In the next year, the debt might in fact become irrecoverable, but the assessee would not be entitled to the benefit because he did not write it off in that year, and we actually made a suggestion to the Department that in case like these, they should take a sympathetic attitude. Our recommendation to the Department was again based on the clear view that we took that in Section 10(2)(xi) the requirement was clear and that requirement was that the assessee must write off a bad debt in his books before he can claim it as a permissible deduction.
6. Mr. Kolah's argument is really based o a recent decision of the Calcutta High Court in Begg Dunlop and Co Ltd. v. Commr. of Excess Profits Tax, West Bengal : 25ITR276(Cal) . That was a case where not the Department but the assessee was contending that it was necessary that debt should be written off before it could be claimed as a bad debt, because there although the debt was claimed by the assessee in a particular year and written off in a particular year, the Excess Profits Tax Officer purported to distribute this bad debt over a certain number of years taking the view that the whole debt did not become irrecoverable i a particular year but portions of it became irrecoverable in different years, and the assessee contended that as he had written it off in one year it could only be permitted in that year and in no other year. This contention was rejected by the Calcutta High Court, and the learned Chief Justice in his judgment has construed Section 10(2)(xi). What the learned Chef Justice says at p.284 (of ITR): (at p.602 of AIR) is:
'I am entirely unable to hold that Section 10(2)(xi) of the Income-tax Act imperatively requires that in order that any amount may be allowed as irrecoverable in any particular year, such amount or a larger amount must be 'actually written off as irrecoverable i the books of the assessee'. The relevant language of the section, if I may 'its terms, is' such sum as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off'. What that language means, to my mind, clearly is that while the Income-tax Officer is given a discretion to allow such amount as he himself may estimate to be irrecoverable, a maximum limit or rather a ceiling is at the same time set, beyond or higher than which he may not go'.
But with great respect, what the learned Chief Justice overlooks is that if a ceiling is fixed in the case where a debt is written off by the assessee, it is impossible to understand why a ceiling is not fixed in a case where the assessee does,not write off a debt at all. If we were not confronted with our own settled practice and also our own decision, we would certainly have ut of deference to the Calcutta High Court and the view we have always taken that in the interpretation of All India Statutes there should be as far as possible uniformity of views between the different High Court, accepted the interpretation put by the Calcutta High Court on this section; but for reasons which we have just given, we regret that we are compelled to adhere to the view we have all along taken with regard to the interpretation of this sub-section. If we are right, this would dispose of the first question.
7. But Mr.Kolah says that in case the assessee wants to go higher, in order to obviate a remand at a very late stage, it would be desirable, as we are sending the matter back with regard to the second question, that certain other facts with regard to the first question should be elicited from the Tribunal. Assuming we are in the wrong on the interpretation which we have put on Section 10(2)(xi) and assuming that it is not necessary to write off the amount claimed by the assessee in the books of account of the assessee, even so there must be a finding that these debts were irrecoverable in the year of account, and this fact has not been found by the Judicial Member who says in his order that the question whether the debts actually became bad during the year account or whether they were debts arising in the ordinary course of the business of the company is not being decided. As against this the Account Member says:
'The fact that the assessee Bank had large bad debts cannot be denied. Some of these debts must have become irrecoverable in the year of account'. Now, this is not a clear finding. Therefore, when the Tribunal submits a supplementary statement of the case they should given an express finding whether the debts claimed by the Liquidator or any part thereof became irrecoverable in the year of account'.
8. Now, turning to the second question with regard to the defalcation by the Secretary, the Tribunal seems to have applied the test laid down in Curtis v. J. and G. Oldfield Ltd., (1935) 9 Tax Cas 319. Now, the test laid down by Mr. Justice Rowlatt in that case was, to put it briefly, that if moneys reached the till of the assessee and a defalcation took place subsequently, the assessee is not entitled to claim the loss caused by the defalcation as a business loss, because it could not be said that the defalcation was in the ordinary course of business. But if the moneys are intercepted before they reached the till by an officer of the assessee to whom authority is delegated, then the defalcation may be looked upon as a business loss. Now, this case was considered by us in Lord's Dairy Farm Ltd. v. Commr. of Income Tax Bombay North Kutch and Saurashtra Baroda : AIR1955Bom352 and we gave reasons in that case why we thought, with respect to Mr. Justice Rowlatt, that the test that he laid down would not be a proper test in certain type of cases, and the test we suggested was the one that finds place at p. 707 (of ITR): (at p.354 of AIR):
'If in any case it is found that it was necessary to deputise certain duties to an employee and it was also found that the loss sprang directly from the necessity of doing so, then the loss would be a trading loss and the assessee would be entitled to claim that amount as a proper deduction'.
Now, we do not find that the facts have been found by the Tribunal from this point of view, and we direct that the Tribunal should find the necessary facts bearing in mind the test that we have laid down and not the test laid down by Mr. Justice Rowlatt in (1935) 9 Tax Cas 319.
9. There is also another error into which the Tribunal has fallen, and that is that these losses could not be allowed because there is nothing on the record to show that these losses came to the knowledge of the Liquidator in the year of account. Therefore, the view that seems to have been taken by the Tribunal is that a defalcation may be allowed as a permissible deduction in the year in which the assessee comes to know of the defalcation. Here again, the Tribunal has gone contrary to the view that we have expressed in : AIR1955Bom352 we had said:
'If we are right in the view that we have taken that what is claimed as a trading loss is not a permissible deduction under Section 10(2)(xv) then the material date obviously is not the date when the embezzlement took place but the material date is when the loss is caused. So long as there is any possibility of the money being recovered from the employee who has embezzled the money, there is no loss to the assessee'.
Therefore, we want the Tribunal also the state the necessary facts from this point of view as to whether the loss was caused to the assessee in respect of these embezzlements in the year of account.
10. There seems to be also an error in framing question No. 2, because the claim made by the assessee may or may not fall under Section 10(2)(xv). Very likely it does not fall in view of our decision in Lord's Dairy Farm's case : AIR1955Bom352 . But even so, it will be open to the assessee to claim this deduction as a trading loss. We would, therefore, reframe the question so as to read:
'Whether on the facts and circumstances of the case, the assessee is entitled to claim two sums of Rs. 10,15,000/- and Rs. 98892/- as a business loss or as a deduction under Section 10(2)(xv) of the Indian Income-tax Act?'
11. With regard to Question No. 1 also some amendment is necessary because the amount of Rs. 48,50,689/- mentioned in question No. 1 also includes the sum of Rs. 10,15,000/- which is separately dealt with in question No.2. Therefore, the figure of Rs. 38,35,689/- will be substituted for Rs. 48,50,689/- in question No. 1. We will answer these questions after we receive the supplementary statement of the case.
12. When the supplementary statment of the case comes back, it would be open to Mr. Joshi to contend that the principle laid down in Lord's Dairy Farm Ltd's case : AIR1955Bom352 does not apply to the facts of this case, because Mr. Joshi says that this is a case where the Secretary had full authority to do the Bank's business and this is not a case where some special powers were delegated to an officer of the Bank. The Tribunal will also find what the powers of the Secretary were and submit the finding in the supplementary statement of the case.
13. No order on the Notice of Motion. No order as to costs on the Notice of Motion.
14. Order accordingly.