1. This is a reference at the instance of the assessee under S. 66(2) of the Indian I.T. Act, 1922. The following three questions are referred to us :
'1. Whether, on the facts and in the circumstances of the case, and in particular that the assessee has not been able to recover a single pie out of the bad debt of Rs. 94,513 of New Era Textile Mills Private Ltd. up to date, the Tribunal was justified in law in disallowing the said bad debt of Rs. 94,513 in the account of the said party in the assessment year 1958-59 on the ground that the write-off of the said debt was premature
2. Whether there is any material on the record of the case to justify the Tribunal's conclusion that the property known as Pagalkhana property at Nagpur belonging to the firm was not used for the firm's business during the accounting year relevant to the assessment year 1958-59
3. Whether in any event, on the facts and in the circumstances of the case, the Tribunal having found that the said property was used for the assessee's business in the past and also having found that the business was in existence during the accounting year relevant to the assessment year 1958-59 was justified in rejecting the assessee's claim for allowing the loss of Rs. 30,988 on sale of the said property under section 10(2)(vii)?'
2. For the purpose of our judgment we will have to deal with question No. 1 separately from questions Nos. 2 and 3, and it is desirable that the facts pertaining to these two sets should be separately stated. However, there are certain preliminary stages which may be indicated. We are concerned in this reference with the assessment year 1958-59. The assessee was a registered firm carrying on extensive business in Bombay and Nagpur in various names, but from about 1955 the business activities came to be curtailed. The nature of the business activities and the names in which they were run are as follows :
(1) Jethabhai Ramdas & Co., Bombay : The main business of this shop seems to have been financing the business in the same name at Nagpur.
(2) Jethabhai Ramdas & Co., Nagpur : This business consisted of selling agency of the Empress Mills, Nagpur.
(3) Krishnakumar Jethabhai & Co., Bombay : This business was in woollen piece goods and art silk.
(4) M/s. Jethabhai Hirji & Co., Bombay (Cotton piece goods), Bombay.
(5) Jethabhai Hirji & Co. : It is observed by the Tribunal that the exact nature of this company was not clear from the records made available to it.
In the statement of case, the Tribunal mentions that the Nagpur business had two branches and further that some of the above businesses embraced money-lending. For the business of M/s. Jethabhai Hirji and Co. the accounting year is S.Y. 2013 (November 3, 1956, to October 23, 1957), whereas for Jethabhai Ramdas & Co., Nagpur and Bombay, the accounting year is the calendar year 1957. In the past separate sets of accounts were being maintained and there were separate balance-sheets and profit and loss accounts for the various businesses. In June, 1955, the assessee ceased to be the selling agent of Empress Mills, Nagpur. Gradually, other businesses also began to be curtailed. For the assessment year 1956-57, accounts were maintained in various sets, but for 1957-58 and 1958-59 there was only one year account. Up to the assessment year 1957-58, there were separate balance-sheets for Bombay and Nagpur. For the material assessment, however, there was only one balance-sheet. At the end of the previous year for 1959-60 assessment, no balance-sheet was drawn since all the accounts were closed. The last assessment of the firm was for 1959-60.
3. We are concerned in this reference with the following two amounts :
(1) Amount written off in the account of New Era Textile Mills Ltd., and (2) Loss on sale of a property at Chhindwara Road, Nagpur. The first item is concerned in question No. 1 referred to us and questions Nos. 2 and 3 pertain to the loss on the Nagpur property.
The write-off in the account of New Era Textile Mills was claimed by the assessee before the ITO on the footing that during the course of business (which included money-lending business) the assessee-firm had financed the purchase of goods from Empress Mills to New Era Textiles Mills Ltd., Bombay (hereinafter referred to as 'New Era'). Considerable difficulties had been experienced in recovering the amount from New Era and ultimately the amount was written off (as the account of the party, which is annexed as annex. 'D', shows) on December 31, 1957. The ITO did not allow the claim of the assessee for several reasons :
(a) Details regarding money-lending business were not produced.
(b) That the transaction was not in the course of the assessee's business as sole selling agents to Empress Mills.
4. In his order the ITO deals with various other aspects of the transaction, but the same need not be referred to as we are not concerned with these aspects for the purposes of answering the question referred to us. It may only be noted that the observations of the ITO in this connection appear to be somewhat confused and it is difficult to understand how they can be the basis of a reasoning process for disallowing the claim. When the matter was carried in appeal before the AAC it appears that the AAC required certain further details to be submitted by the assessee and two notes (part of annex.'F' collectively to the statement of case) were submitted by the assessee. The notes indicated that the goods were sold to New Era in 1953 and some payments were received from New Era in 1953, 1954 and 1955. As no payments were received thereafter Suit No. 2 of 1957 was filed in which suit ultimately a decree was obtained on February 2, 1961. It may be mentioned that the suit was filed, as the number would indicate, in January, 1957, and the decree obtained was a decree on admission. It provided for instalments and it further provided that if a certain amount was paid by instalments (less than the full decretal amount) the decree would be marked fully satisfied. According to the note, much prior to the decree and in the course of the proceedings of the suit itself, it was noticed that New Era's financial position was hopeless. Search in the office of the Registrar of Companies disclosed that New Era had not filed any balance-sheet at all; that various proceedings were pending against New Era and its directors, and it had no ostensible assets. The note refers to efforts made to serve notices for winding up and difficulties felt in order to effect service. The note also refers to a statement of one D.N. Shroff, the managing director of New Era, which was recorded by the ITO. This is the statement dated November 28, 1962 (annex. 'G'). It is an admitted position that this statement was recorded by the ITO ex parte, i.e., without the assessee or its representative being present, and in the note submitted by the assessee to the AAC a grievance is made of the fact that even a copy of this statement was not supplied despite requests and reminders sent by the assessee in that behalf. The note mentions that copies of the accounts of New Era maintained by the assessee are being enclosed along with the note. In the further note details are given of the supplies made and the total price payable. According to this note, the total bales delivered to New Era were 221, the total price payable being Rs. 2,87,176-1-0. The note mentions that the Empress Mills had supplied the goods to various constituents under instructions from the selling agents (namely, the assessee) who had to pay the full price as soon as the goods left the premises of the mills. The note mentions that these purchases were financed by the assessee. New Era were very slow in making payments for the price of the goods and also raised certain objections about the quality. Periodical amounts were received up to the end of 1955 after which the suit was filed as already mentioned. The further note clarifies that no payment whatsoever was received against the said decree.
5. As far as the account of New Era is concerned, it has already been pointed out that the amount is written off as on December 31, 1957. It is pertinent to point out at this stage that the account mentions the last payment effected by New Era as on October 22, 1955, leaving a debit balance of Rs. 91,813-5-9 which has been carried forward for the whole of 1956 without any payment and this amount stood enhanced to Rs. 94,513.36 mentioned in the question with the addition of Rs. 2,700 which was debited to the account of New Era being legal expenses in respect of the suit, which expenses were paid to the assessee's solicitors on November 5, 1957.
6. Before dealing with the decision of the AAC, a reference may be made to the contents of the statement of D.N. Shroff of New Era recorded by the ITO. This statement, as already stated, was recorded by the officer on November 28, 1962, i.e., much after the decree on admission passed against New Era on February 2, 1961. It is clear that the language is principally that of the ITO who has attempted to summarize what the said director must have told him in the following words :
'Mr. Shroff denies the liability to pay as he had requested to write off the arrears as New Era was not in a position to pay. With the consent of New Era which went on becoming weaker financially as time passed, goods were sold by M/s. Jethabhai Ramdas at market rates which involved a loss. Now New Era has no assets - it is being wound up in the near future.'
The rest of the statement has not been reproduced as it appeared to us to be irrelevant for our purposes.
7. The AAC agreed with the ITO that the assessee's claim for deduction of the amounts could not be allowed and this was on the ground that it pertained to a business which had ceased to exist before the commencement of the relevant accounting period. Being aggrieved by this confirmation of the ITO's decision the assessee carried the matter in second appeal to the Tribunal any by its order dated February 16, 1966, the Tribunal expressed its opinion that the claim by the assessee to write off the debt in the accounting year could not be allowed, that the debt had not become bad in the accounting year, and that the allowance claimed was premature. In para. 6 of its order the Tribunal dealt with the notes of the assessee and the assessee's grievance that the statement of Shroff recorded by the ITO was not supplied to it, but goes on to observe that in the view that it took, it was not necessary to consider this evidence. It then proceeded in para. 7 of its order to give the full process of reasoning which induced it to regard the claim by the assessee as premature. It would be appropriate in our opinion to set out fully the contents of the said para :
'7. Having considered the facts of the case, we have come to the conclusion that the debt did not become bad in the accounting year. The accounting year now under consideration is Diwali year ending 1957. The assessee filed the suit in 1957. A decree on admission was obtained on 24-4-1961. Thereafter, letters were written by the assessee's solicitors to the solicitors of the debtor on 27-4-1961, 15-7-1961 and 13-9-1962. On 29-9-1962, the assessee's solicitors sent a reminder to the Registrar of Companies, Bombay, enquiring what action had been taken against New Era Textile Mills Ltd. and its officers (for their offence under the company law). On 1-10-1962, the assessee's solicitors informed the chartered accountants representing the assessee what action had so far been taken against the defendants. In the above position, we are unable to say that when recovery proceedings went on vigorously till 1962 at any rate, the assessee is entitled to claim the deduction in the material year on the footing that it had abandoned all hopes of recovery. No doubt the assessee will now not be able to claim the loss at any time, since the firm was dissolved after Diwali 1958. But that would not justify a premature allowance of the claim. The contention of the assessee on this point is rejected.'
8. Mr. Dastur on behalf of the assessee contended that the decision of the Tribunal was not only erroneous but one which no reasonable Tribunal could arrive at. His initial complaint was that the Tribunal upheld the rejection of the assessee's claim on a footing totally different from the one which had been pressed into service by the ITO and the AAC. According to him, the full material on this aspect of the question was not called for by the Tribunal and, further, even some material on record which was relevant, was ignored by it while pressing into service some aspects and drawing therefrom inferences and conclusions which were impermissible and thoroughly unreasonable. On the other hand, counsel for the revenue submitted with his usual vehemence in order to preserve and protect the finances of his client that the conclusion of the Tribunal was a clear conclusion of fact which could be supported by some of the material on record and if that was so, it would not be proper for the High Court in its reference jurisdiction to differ from appraisal of this material by the Tribunal merely on the footing that the appraisal was erroneous and that another conclusion was the better or proper conclusion. It was submitted by him in the first place that the Tribunal was correct in the conclusion that it arrived at, that the debt had not become irrecoverable in the year in question, and further that in any event it was a possible view which did not call for interference in the limited jurisdiction of the High Court under S. 66 of the Indian I.T. Act, 1922. Both counsel attempted to support their respective contentions by reference to several authorities to which it will now be necessary to refer.
9. The first of these authorities on the observation of which great reliance was placed by Mr. Dastur is the decision of a Division Bench of this court in Lord's Dairy Farm Ltd. v. CIT : 27ITR700(Bom) . The Division Bench in that case was considering the loss caused to the assessee by defalcations of an employee. The amount was claimed under the provisions of Ss. 10(2)(xi) and 10(2)(xv). As regards the first heard of claim, it was observed that it is difficult to understand how any amount was due by the employee to the assessee-company which amount became irrecoverable and, therefore, the subject-matter of a deduction under S. 10(2)(xi). Even as regards S. 10(2)(xv), the Division Bench was not inclined to agree with the view taken by the Tribunal, but it observed that it did not follow that the assessee which suffered a loss in its business could not get relief because the specific cases of deduction dealt with under S. 10 did not cover its case. According to the Division Bench, this was a trading loss which had to be deducted before arriving at the true profits of a business from a commercial point of view and the assessee would be entitled to deduct that loss although such a loss may not fall within the ambit of any of the deductions mentioned in sub-s. (2) of S. 10. The Bench was then required to consider the question as to when the amount of loss could be allowed to the assessee. It was observed that the material date was not the date on which the embezzlement took place but the date on which the loss is caused. According to the Bench, it is only when it is clear that the money cannot be recovered that the loss is caused. It is in this context of irrecoverable of the amount embezzled that the Division Bench went on to observe as follows (p. 708) :
'When a businessman writes off an amount, there is prima facie evidence that, that amount is irrecoverable. Undoubtedly, the department can rebut the prima facie inference by drawing attention to circumstances or by leading some evidence to suggest that the position taken up by the assessee was not correct. In this case there is no evidence whatsoever on the record except the fact that the assessee wrote off this amount in the year of account. In the absence of any evidence we are entitled to presume that the amount became irrecoverable when the assessee wrote it off in its books of account.'
10. Mr. Joshi submitted in connection with this authority that these observations pertain to a trading loss and not a bad debt and, therefore, could not afford any assistance to Mr. Dastur. It is true that there is a well-settled distinction between a trading debt and a trading loss. Similarly, an amount due from a debtor with whom the assessee has traded and which liability has arisen in the course of commercial dealings is certainly not of the same character as amount lost by the assessee by reason of fraud or embezzlement by an employee. The Division Bench was, however, considering the point of time at which the amount is to be allowable as a deduction to the assessee and applying its mind, in that context, to the question of recoverability or irrecoverable of the amount. Thus, although a trading loss is different from the trading debt, what has been observed with regard to recoverability of amounts and the general principles to be applied to the question, will seem to apply irrespective of the nature of the claim of the assessee. It may be mentioned in this connection that is Income-tax Reference No. 94 of 1965 Bombay Samachar (P.) Ltd. v. CIT - unreported, decided on December 6, 1974 (since reported in : 120ITR819(Bom) ) a Division Bench of this court was considering the question of recoverability of an amount lent by the assessee-company to another (obviously not a case of a trading loss). Counsel for the assessee in the aforesaid reference had relied on the decision of the Lord's Dairy Farm Ltd. : 27ITR700(Bom) , which was considered by the court and held as not being really helpful to the assessee, because it laid down (according to the latter Bench) that in the absence of any evidence the court was entitled to presume that the amount become irrecoverable when the assessee wrote it off in its books of account and according to the court there was some evidence which would mean that the presumption indicated in Lord's Dairy's case : 27ITR700(Bom) was not available to the assessee. What is important, however, is not the principle of application deduced by the latter from the decision in Lord's Dairy's case : 27ITR700(Bom) , but the fact that it was applied to the case of an ordinary trading debt occasioned by lending by one concern to another, and not restricted to the case of a trading loss suffered by reason of embezzlement.
11. The next authority relied upon by Mr. Dastur was a decision of the Madras High Court in Kothari and Sons v. CIT : 61ITR23(Mad) . This was also a case of embezzlement. There were certain manipulations in the cash and the share transfer stamps accounts by the employees, which had being going on for several years but had been discovered only in the accounting year. The ITO held initially that since the embezzlement was discovered in 1954, it could not be allowed in the assessment year 1954-55. When the assessee claimed the deduction in the next assessment year 1955-56, the ITO rejected the claim taking the view that the loss did not occur in the course of the business, and that, further, as the assessee had taken promissory notes from the employees responsible for the embezzlement, but had taken no action to recover the moneys on the promissory notes, no allowance could be granted. The Division Bench observed that the fact that the employees had executed promissory notes or that the employer had not pursued further remedies against these employees on the negotiable instruments would not by themselves disentitle the employer from claiming the deductions. According to the Bench, it was not incumbent upon the employer to pursue a useless remedy and waste money in such proceedings. According to Mr. Dastur's submission, the assessee before us who had filed a suit much prior to the writ-off (though in the very calendar year) could not be put in a position worse than he would be put if he had not taken any remedy against New Era. According to him, if the suit had not been filed then on the material on record the assessee would have been entitled to the deduction and the position could not be made worse for the assessee merely by reason of the fact that the suit was proceeded with, decree obtained, and notices for winding up given or sought to be given, but which ultimately yielded not a single paisa to the assessee in respect of the amount of his claim.
12. Mr. Dastur also referred to U.P. Vanaspati Agency v. CIT : 68ITR120(All) , where the Allahabad High Court came to the conclusion that a loss which had occurred in the assessment year 1960-61 could be claimed and allowed in the assessment year 1961-62, provided all other requirements were satisfied. This was, it may be noted, also a case of embezzlement by an employee. One of the grounds on which the Tribunal had decided against the assessee was that the loss had occurred in the year 1960-61 and not 1961-62, in which the claim for deduction was made. The Division Bench observed that it was on January 4, 1960, that a sum of Rs. 13,100 was stolen, but on the very same day Rs. 1,100 were recovered. The assessee allowed some time to expire and made the claim only in the assessment year 1961-62, which commenced on April 1, 1960, that is to say, about three months after it was dispossessed of the amount of Rs. 1,200. It was observed that this was not an unreasonably long period for any person to entertain a hope of recovery of the amount of which he was dispossessed. This may also be regarded as a reasonable period within which efforts could be made by a person to have his money back. According to Mr. Dastur, the account of New Era would show that the last of the payments made by the party was, as already stated earlier, on October 22, 1955. The assessee thereafter has waited for two years and written off the amount on the last date of the calendar year 1957. According to him, on these dates, to regard the write-off premature, would be something improper and unreasonable.
13. The next authority to which our attention was drawn by counsel for the assessee was of the Madras High Court which was expressly considering the case of a bad and doubtful debt and the point of time when such debt could be regarded as being irrecoverable. The decision cited was Devi Films Ltd. v. CIT : 49ITR874(Mad) . Pursuant to an agreement dated July 6, 1955, and a further agreement dated January 31, 1956, the assessee had advanced to one Tehrani a sum of Rs. 5,57,022-10-1. The assessee was able to realise a sum of about Rs. 4,91,000 leaving a balance of about Rs. 65,950 due and payable by Tehrani to the assessee. It was observed that this Tehrani was not a person of large means. On April 1, 1957, the assessee entered into an arrangement with Tehrani by which certain shares were pledged as security for a sum of Rs. 10,000 on condition of the assessee waiving the balance of Rs. 55,950, In the year of assessment 1957-58, in respect of the previous year which ended on April 12, 1957, the assessee wrote off the sum of Rs. 55,950-13-10 (the amount to be waived under the arrangement of April 1, 1957). It was found amongst other things by the Tribunal that within six months after the date of writ-off, which was April 12, 1957, the assessee had made a further advance of Rs. 25,000 to Tehrani. The Tribunal also found that the debtor owned houses at Madras and in Ootacamund and that though the house in Madras stood in the name of the debtor's wife, the debtor himself had treated the income from this house as his own income in submitting his income-tax returns. It was because of these facts that the claim to write off the amount as a bad debt was disallowed, but the observations made in connection with the proper approach to the question and the principles enunciated were very strongly relied on by Mr. Dastur and they may be usefully reproduced. It is observed at page 877 of the report as follows :
'The expression 'bad and doubtful debt' is descriptive of a debt which cannot reasonably be expected to be realised. It would not do for the assessee to say that he became pessimistic about the prospects of recovery of the debt in question. He must feel honestly convinced that the financial position of the debtor was so precarious and shaky that it would be impossible to collect any money from him. There is no acid test to ascertain whether a debt has become bad and doubtful, and if so, when. A time-barred debt can be assumed to be bad, but is not necessarily bad because of the bar of time. The insolvency of the debtor is not conclusive proof that the debt has become bad. Nor does the fact that the debtor has managed to keep outside bankruptcy proceedings constitute evidence of the debt being good. The question is really one of fact depending upon the congeries of facts and diverse circumstances bearing on the debtor's pecuniary position, his commitments and obligations, and the natural apprehensions that would be caused in the minds of the creditors regarding recovery of their dues. While the onus of establishing that the write-off of the alleged bad debt is proper and permissible in the circumstances of the case is undoubtedly upon the assessee, the department cannot insist on demonstrative profit which is quite infallible.'
It was submitted to the Division Bench of the Madras High Court that subsequent happenings could not be relied on. In connection with this submission reliance was placed on the observations of Rowlatt J. in Anderson and Halstead Ltd. v. Birrell  TC 16 . In connection with the aforesaid submissions made and the decision cited in support thereof, the Division Bench went on to observe at page 880 :
'The principle of this decision is that if a debt is written off as bad and is treated as such for tax purposes, the account for the previous period cannot be reopened for the purpose of bringing in the debt as a trading receipt merely because in a subsequent accounting period it is found to be a good debt. It is true that what all is required is an honest judgment on the part of the assessee at the time when he makes the write-off in the light of events up to that stage and not in the light of later happenings. But it cannot be said that in order to determine the question whether the assessee could have believed that the debt was made on a particular date his subsequent conduct, treating the debtor as solvent and sound, would be irrelevant and inadmissible.'
14. It would appear to us that the principles enunciated in this case are of considerable assistance in determining the proper approach to the claim of the assessee which is involved in question No. 1 referred to us. As observed, the question is one really of fact depending upon the congeries of facts and diverse circumstances and there can be no acid test to ascertain whether a debt has become bad and doubtful, and if so, when. It has been rightly stated that the department cannot insist on demonstrative proof of the fact which proof must satisfy the test of infallibility. We also agree with the observations which suggest that all that is required is an honest judgment on the part of the assessee at the time when he makes the write-off and we also agree that the question has to be scrutinised in the light of all relevant circumstances then existing, as also the subsequent conduct of the assessee which cannot be ignored if it is relevant and pertinent. As stated earlier, counsel for the revenue laid considerable stress on the clear observations to be found at the commencement of para. 7 of the order of the Tribunal which records the conclusion of the Tribunal that the debt did not become bad in the accounting year. It was submitted by him that whether a debt is a bad debt and in what year it became bad, are questions of fact and the findings of the Tribunal on these questions can be disturbed by the High Court only if there is no evidence to support them or when the Tribunal has misdirected itself in law. It was submitted by him that it was not possible for the High Court to say that there was no evidence before the Tribunal on this question or that it had misdirected itself in law on the question and accordingly the High Court could not sit as a court of appeal from the conclusions of the Tribunal and adjudicate on them on the footing whether on that evidence the High Court would have arrived at a similar finding. It was submitted by him further that the time when the assessee writes off a debt was totally irrelevant and in support of this head of argument he referred us to certain authorities to which reference may now be made. The first was a decision of the Division Bench of the Bombay High Court in Sidhramappa Andannappa Manvi v. CIT : 21ITR333(Bom) . In the above decision, the following passage is to be found at page 343 :
'Now the question as to whether a debt is bad debt or not is a question of fact and that question should be determined from the point of view of the possibility of the realisation of the debt. If there is any possibility that the debt can be realised, then the debt does not become a bad debt but when there is no possibility at all and when it is ascertained as a fact that on a particular date the debt became finally irrecoverable that is the date when the debt becomes a bad debt. A decision of fact may be challenged before us if it is vitiated by any error or by refusal to take into consideration any material evidence and we have allowed Mr. Kola to argue this matter because the fact of the application to the High Court for leave to appeal to the Privy Council was not taken into consideration by the Tribunal. But, even when we take that into consideration we still feel that the judgment of the Tribunal was right and that the debt became a bad debt on the 29th of September, 1941. Mr. Kola says that the assessee did not make the necessary entries in his books of account till long after the 29th of September, 1941, and that fact should be taken into consideration in determining when the debt became a bad debt. In my opinion it cannot be left to the volition of the assessee to decide by his own conduct as to when the debt becomes a bad debt. His making entries in his books of account is an exercise of his own volition. It is not left to his option to fix the date as to when the debt becomes a bad debt. Whether a debt becomes a bad debt is an objective fact to be determined objectively and the determination must be left to the Income-tax Officer. If the finding of that question of fact is vitiated by any factor then undoubtedly this court would consider whether the Income-tax Officer was right in coming to the conclusion that a particular debt was bad debt.'
15. Relying upon the aforesaid passage Mr. Joshi submitted that it was not left to the assessee to fix the date as to when the debt became a bad debt and the time when he wrote off was totally irrelevant. We are unable to agree with this reading of the said passage. All that is indicated in the passage is that the time when an assessee writes off a debt is not conclusive and the passage does not say that this aspect of the matter is totally immaterial or irrelevant to the question under consideration. The passage extracted is important inasmuch as it clearly indicates that the decision of the Tribunal which is described as factual, could be challenged before a High Court if it is vitiated by any error or by refusal to take into consideration all material evidence. Following the approach indicated in the passage, it would appear to us that the question as to when the debt became a bad debt would have to be objectively determined on the materials on record and if the assessee is able to satisfy this court that the conclusion of the Tribunal is vitiated by any gross error or refusal to take into consideration any material evidence, we would be entitled to answer the question in favour of the assessee, although there may be a clear conclusion of the Tribunal against him.
16. Mr. Joshi also relied on Kantilal Chimanlal Shah v. CIT : 26ITR303(Bom) , where the principles and tests enunciated in Sidhramappa's case : 21ITR333(Bom) were applied also by a Bench of the Bombay High Court. It was observed that the approach must be from the point of view of the possibility of the realisation of the debt and that it was not open to the creditor merely by making an entry to convert a debt which might be a good debt into a bad debt. In our opinion, this authority does not lay down any new principle, but merely reaffirms the principles earlier laid down in Sidhramappa's case : 21ITR333(Bom) .
17. Mr. Joshi also strongly relied upon the decision of the Madras High Court in T.S.PL.P. Chidambaram Chettiar v. CIT : 64ITR181(Mad) . In the above decision the High Court was considering the disallowance by the Tribunal of two sums claimed by the assessee as bad debts in the assessment year 1956-57. The finding of the Tribunal was that the assessee should have written off the debt prior to the accounting year. In connection with this aspect of the matter, it was observed on page 187 :
'From the manner in which the Tribunal has dealt with the matter, we should point out that there is no presumption one way or the other that the debt became a bad debt on a certain date or later and that a decision on the question will depend upon facts proved on evidence. It cannot be said that, merely because the assessee has not furnished evidence to show why he waited till the assessment year 1956-57 to write off and what reasonable hope of recovery he had after he had brought the property to sale on the first occasion, the debt became bad or doubtful prior to the accounting year. That the debt became bad prior to the accounting year will have to be found on proved facts relevant to the question. We have not been invited to any evidence or material on which the Income-tax Officer could say that the assessee had knowledge that the debtors had no properties from a particular point of time and they had no other means to repay the debts thereafter so that the debts could be treated as having become bad at that point of time. When the assessee claimed that the debts become bad in the accounting year, he was not called upon to show that it was not so and that the debts became bad prior to the accounting year. But the assessee should certainly satisfy the departmental authorities and the Tribunal on proper material or evidence that the debts became bad in the accounting year.'
The observations made have to be read in the context of the question which was being considered by the Division Bench and appreciation of the passage and the true effect thereof will be conditioned by the fact that the question was ultimately answered in favour of the assessee, the Division Bench holding that the finding of the Tribunal was not based on any material or evidence and also vitiated by an erroneous approach. The question was answered in favour of the assessee, which answer implied that the Division Bench found that the amounts had to be allowed as claimed by the assessee and that its disallowance was not right in law. Understood in the proper background, we feel that the observations do not really help Mr. Joshi.
18. Mr. Joshi next referred to the decision given by the Full Bench of the Lahore High Court in B.C.G.A. (Punjab) Ltd. v. CIT . The relevant observations of the Full Bench are in connection with questions No. 4 and 5 dealt with at pages 304 to 307 of the report. It was observed, and rightly so, that in every case it was a question of fact to be determined for consideration of all relevant circumstances. The Full Bench referred to certain observations of an earlier Bombay case which were to the effect that to constitute moneys due by a company a bad debt or business loss to the creditor, it is necessary that the company should have ceased to be a going concern and referred to the observations of the Privy Council in which it was stated that there was no justification for the view under which a debt due from a limited company which is still a going concern was incapable of being treated as a bad debt. Mr. Joshi, however, relied very strongly on the observations to be found a page 307 which were to the effect that so long as there is any ray of hope left to recover a debt, however dim it may be, and so long as a debt is in the process of realisation, it cannot be said that it has become irrecoverable. According to him inasmuch as the assessee before us had continued with the suit after writing off the amount on December 31, 1957 and had in fact obtained a decree in 1961, and had attempted further to wind up New Era and had made similar attempts to induce the Registrar of Companies to prosecute the directors of New Era, would clearly indicate that the debt was in the process of realisation and further that it could be demonstrated that the assessee had still hopes to recover its debt. It was in these circumstances submitted that the debt could not be considered as being irrecoverable. In support of his contention that so long as the suit was pending the writ-off could not be allowed, Mr. Joshi finally referred to an authority of the Bombay High Court in Jadavji Narsidas & Co. v. CIT : 47ITR411(Bom) where it was observed at page 417 :
''Bad debt' is claimed as an allowance by the assessee and, therefore, the burden is on him to show that he had no reasonable expectations of recovering it at the time he wrote off or that there was no ray of hope at all on which he could rely for recovering the amount from his debtor at the time he wrote off the debt. In the instant case, the facts on which reliance is placed by the income-tax authorities and the Tribunal go to show that the assessee has not been able to establish these circumstances. It is difficult to assume that a person having no reasonable expectation of recovering the debts from his debtor or a person having no ray of hope at all of recovering the debt from his debtor would go to the extent of filing a suit against the debtor and incur the expenses involved in such a litigation. Further, two hundis given by the debtor were to mature not in the year of account but in the following year and, even though the amount of the hundis were not received by the assessee, the assessee had given credit in the year of account for the entire amount of the hundis. This again is indicative of the fact that the assessee had not given up hope about recovering the amount due from the debtor and had not then come to the conclusion that his debtor would not be paying him his dues in future. This being, inter alia, the material on the record before the Tribunal, it cannot be said that Tribunal was not justified in holding that the debt had not become a bad debt in S.Y. 2004. In this view of the matter, the answer to the second question will have to be returned in the negative.'
19. Mr. Joshi submitted that the observations in Jadavji's case : 47ITR411(Bom) were directly on all fours with the facts being considered by us and the fact that the assessee proceeded with the suit would clearly establish that he had not given up hopes about recovering the amounts due from the debtors and had not really come to the conclusion that the debtors would not be paying him his dues. It was further submitted that if this could be held as having been established, the write-off on December 31, 1957, would have to be held as unjustified and improper, and that in any case there was material on record for the Tribunal to come to the conclusion which it did, which conclusion ought not to be disturbed. It has to be pointed out in the first place that in Jadavji's case : 47ITR411(Bom) it is clear from the recital of the facts that the suit was filed by the assessee subsequent to the write-off and that the observations made in the context of such conduct cannot be regarded as having full applicability to the facts as are before us. Mr. Joshi submitted that in proceeding with the suit and obtaining the decree the assessee incurred expenses or must have incurred expenses and that this conduct is clearly indicative and demonstrative of the fact that he had not given up hope about recovering the amount from the debtor. There is no material on record to show that by proceeding with the suit after December 31, 1957, and obtaining the decree on admission the assessee had incurred substantial or considerable expenditure after that date which would put the facts before us on a line with the facts being considered by the Division Bench in Jadavji's case : 47ITR411(Bom) . Substantial costs are incurred by litigants who commence an action when the action is initiated, and in this case the suit was filed in January, 1957, when the court-fees on the amount of the claim must have been paid by the assessee. The suit was filed on the original side of the High Court and with the drawing up of the leading and the filings the assessee would incur substantially the costs which the attorneys in law would be entitled to claim from him though the actual payment may be made much later. It has also to be realised that since the action culminated in a decree on admission what was done subsequently, i.e., after January 1, 1958, was also in a sort of way to salvage a portion of the court-fees paid since the assessee would be entitled to a refund of two-thirds of the court-fees paid at the time of institution of the suit by reason of the decree on admission. We have, therefore, a case of there being no material to show that the assessee incurred further costs between December 31, 1957, and February, 1961, by proceeding with the suit and obtaining a decree on admission; on the other hand, the material available would indicate that the passing of the decree on admission resulted in the assessee recovering some of the good money which he had thrown after litigation which did not result in any recovery despite a decree in the assessee's favour.
20. Before summarizing and dealing with facts as are on record and considering whether the Tribunal has ignored any relevant circumstances or misdirected itself in order to reach its conclusion, it will be appropriate to consider and set down the principles which there authorities establish. Any such exposition, however, is subject to the general caveat that principally the conclusion to be arrived at is a conclusion of fact depending upon the circumstances and the materials brought on record and there is no general rule or universal test which will apply to all cases and all circumstances. It is clear that the debt cannot be written off as bad and irrecoverable if on the material available it could be shown that there was a possibility of recovering the same or which is not yet taken into liquidation, will not by itself establish such a possibility. That the assessee wrote off the debt at a particular point of time or in a particular year is not conclusive of the matter, but is not wholly or totally irrelevant. This will be a material circumstance unless it can be shown or established from the materials on record that the writ-off was not proper or bona fide. That this was so can be established even by reference to the subsequent conduct of the assessee from which it is possible to infer definitely that the assessee still considered the debt or at least a part thereof as recoverable or regarded the debtor as financially solvent. It is now well settled that the fact that the assessee has not taken steps by way of legal proceedings against the debtor would not automatically justify the finding that he was not entitled to writ off the amount as a bad debt. In our opinion, the fact that an assessee, subsequent to the writ-off of the debt, continues with legal proceedings against the debtor need not necessarily lead to the conclusion that the write-off was improper or lacked bona fides but would be a factor to be taken into account in order to arrive at a proper determination of the question. It is, however, clear to us that mere notices served for taking up a debtor-company into winding up or launching criminal prosecution or inducing other authorities to launch criminal prosecution against the debtor-company or its directors cannot be regarded as equivalent to taking steps for recovery of the amount.
21. It is in the light of the principles already indicated in the discussion whilst dealing with the several authorities cited at the Bar and in the light of the aforesaid principles that we will now be required to summarize the facts to be gleaned from the materials on record and to consider whether the Tribunal has ignored any relevant circumstance or misdirected itself.
22. From the materials on record we find : (1) that according to the accounts maintained by the assessee the liability of New Era arose by reason of supplies made to it in 1953 against which the last of the payment made by it was in October, 1955, and that too of a very small amount. After this for full two years there was no payment by the debtor. This is borne out by the account of New Era at annex.'D'; (2) on account of the non-payment in January, 1957, the assessee filed a suit against New Era for the amount due by New Era for which purpose the assessee has already borne heavy expenditure as is indicated by the debit entry which records the payment of Rs. 2,700 in November, 1957; (3) the assessee's contention in the note submitted to the AAC that in the course of proceedings in the suit it was noticed that New Era's financial position was hopeless. It is true that in this note (part of annex.'F') the precise point of time at which this was noticed is not indicated and all that is said is that this was much prior to the decree and in the course of proceedings in the suit. As the suit was filed in January, 1957, this could have been noticed even during that year and subsequently also. It is pertinent to note in this context that no attempts have been made by the Tribunal before reaching the conclusion which is attacked to ascertain from the assessee the point of time at which the 'hopeless' financial position of the debtor was noticed as mentioned in the note; (4) the decree on admission that is without any contest passed in February, 1961, the particulars whereof are indicated in the first note annex.'F'. This resulted in refund of court-fees paid by the assessee, but according to the note no payment whatsoever was received from the debtor against the decree; (5) the letters dated July 15, 1961, September 13, 1962, and September 20, 1962, from the solicitors of the assessee to the debtor, and a similar letter dated September 25, 1962, from the solicitors of the assessee to the Registrar of Companies. These are letters for winding up of New Era and for commencement of penal action by the Registrar of Companies against the directors of New Era. It is clear from the subsequent letter to the auditors dated October 1, 1962, that the penal action proposed was by reason of the fact that no balance-sheets had been filed by New Era with the Registrar of Companies ever since its incorporation, i.e., for about 24 years; (6) the least pertinent fact would be the statement made by D.N. Shroff, the relevant portion whereof has already been extracted, which mentions his denial of liability and a request to the assessee to write off the arrears as New Era was not in a position to pay. The second sentence refers to goods being sold by the assessee which resulted in the loss. This clearly must refer to a point of time prior to the filing of the suit and it is clear from this statement that even at that time, i.e., prior to the crystallisation of the loss the position of New Era according to Mr. D.H. Shroff, its managing director, was becoming weaker financially; that what is stated in this sentence refers to an earlier period and not to the position in 1962 is made clear from the last sentence in the first paragraph of the statement which commences with the word 'new'. This indicates that at the time when the loss was crystallised. New Era was becoming weaker financially and that in 1962 it had no assets and was likely to be wound upon the near future.
23. We have now to consider whether the conclusion of the Tribunal that the claim was premature and could not be allowed in the accounting year, was not merely an erroneous conclusion but a perverse one in the sense that the Tribunal had ignored any relevant circumstance or material and has misdirected itself as to the fact of other material. In our opinion, reading paras. 6 and 7 of the order of the Tribunal, the Tribunal misdirected itself in ignoring from consideration the very relevant statement of the managing director of the debtor-company which indicated that even at the time when the loss was crystallised which the assessee could claim from the debtor the position of the debtor was weak and becoming weaker. It has to be noted in this context that the statement of the debtor's managing director was recorded by the ITO behind the back of the assessee and that the assessee was denied a copy of this statement despite demands. What has been recorded would seem to indicate that the debtor whose position was described by its managing director as weak would hardly by in a position in 1957 to meet any claim, let alone a claim of the extent made by the assessee. In any case, it would appear to us that when the ITO recorded the statement and failed to examine and elicit a clear answer from the debtor about the financial position of the debtor in the year 1957 or early 1958, it would not lie in the mouth of the revenue to complain that the assessee had not discharged the onus of showing that the debt was bad and irrecoverable in the year of account when the opportunity was available to the I.T. department and not availed of by it and when all this was done behind the back of the assessee. When considered in the light of the fact that the point first assumed importance at the stage of the second appeal, i.e., before the Tribunal itself, the failure of the Tribunal to consider the inferences flowing from this statement of the debtor becomes reprehensible. It was a very material circumstance to be considered and ignorance thereof must be regarded as an error of the nature which would vitiate the conclusion and which would permit us to substitute a proper conclusion for the conclusion somewhat cavalierly arrived at by the Tribunal.
24. We are also in disagreement with the conclusion of the Tribunal that proceeding with the suit, obtaining the decree, giving notices for winding up and asking the Registrar to prosecute the directors of New Era would have to be regarded as vigorous recovery proceedings in respect of the amount due to the assessee or that all this material would indicate that it had not abandoned all hopes of recovery. We would refer to the type of case which was before the Madras High Court where the subsequent conduct of the assessee would clearly establish that its decision to write off the amount was not proper, justified and bona fide. Is there any such conduct of the assessee in this case to suggest that the decision to write off the amount on December 31, 1957, was not proper or which would satisfactorily establish the inference that on that date or subsequently it had a hope of recovering the debt or any part thereof In our opinion, there is no such material on the record before us. In our opinion, the aforesaid discussion is sufficient to rebut both the alternate submissions of Mr. Joshi. We are clearly of opinion that the conclusion of the Tribunal is not only erroneous, but taken ignoring the relevant material on record as well as drawing impermissible inference from such material which is referred to by it in para. 7 of its order. Further, bearing in mind the circumstances in which it decided the question against the assessee on a point specifically taken at the second appeal stage for the first time, it is clear that the decision was taken without full material on record. This will permit us then to give a different finding and arrive at a different conclusion from that reached by the Tribunal if we are satisfied that the opposite conclusion is the proper conclusion on the material on record. The test which the Tribunal failed to elicit and apply was whether there was sufficient material on record to show that on December 31, 1957, the decision taken by the assessee to write off the claim against New Era was or could be demonstrated to be improper or otherwise not bona fide. The only fact relied on by the Tribunal was that after the write-off the assessee continued to proceed with the suit, obtained a decree on admission and addressed letters giving notices under S. 434 of the Companies Act and to the Registrar of Companies. From the prosecution of the suit and obtaining the decree it will not follow that the assessee was realising the claim. The assessee was bound either to withdraw the suit unconditionally or to obtain a decree on admission to get a refund of court-fees. The suit having already been filed, it had to be disposed of and it could not be allowed to remain pending. A decree on admission does not indicate the possibility of recovery of the assessee's hopes of such recovery. It does not establish that the assessee being apprised of such a possibility or having such hopes and, despite such hopes, wrote off the amount on December 31, 1957, which alone justified the conclusion that the write-off in the year or at the time was premature. In this view of the matter, we are entitled to disregard the conclusion of fact and substitute it by the proper one which must be in favour of the assessee.
25. Before we turn to questions Nos. 2 and 3, we must make it clear that although question No. 1 mentions the amount of Rs. 94,513 which is the amount claimed by the assessee as bad debt, the account of New Era annexed to the statement of the case shows that the shortfall in payment by New Era was to the extent of Rs. 91,813-5-9 only, the difference of Rs. 2,700 being the amount of legal expenses paid by the assessee to its solicitors, being the expenses incurred in connection with the suit against New Era. Although we are not inclined to uphold the rejection of the claim on the footing of appeal to the Tribunal, it does not follow that we are of the opinion that the entire amount of Rs. 94,513.36 is allowable as a bad debt. We have certainly reservations in this connection about the claim of Rs. 2,700. Mr. Dastur has submitted that even if this amount may not be allowable as and by way of bad debt written off, the assessee would be entitled to claim it on some other footing. We express no opinion upon the merits of such claim or about the assessee being entitled to raise such alternative claim of deduction at the stage of second appeal before the Tribunal. The matter will be entirely in the discretion of the Tribunal as and when the occasion arises.
26. This brings us to a consideration of questions Nos. 2 and 3. These two questions pertain to a claim made by the assessee regarding loss of certain property at Chhindwara Road, Nagpur, hereinafter referred to as the 'Pagalkhana Property'. The amount was originally claimed in the return as a capital loss. However, a note was put by the assessee before the ITO for being allowed the amount as ordinary loss under S. 10. According to this note the property was purchased in 1944 for Rs. 31,000. It was purchased by the firm for its own use and the vacant portion was already occupied by the firm. There were some tenants who paid rents and for three assessment years 1945-46, 1946-47 and 1947-48 the rents were accounted for. The tenants vacated the portions in their occupation and thereafter the whole property was occupied by the firm. In the subsequent year the municipal taxes were debited to the firm's profit and loss account and were allowed as business outgoing. No depreciation was claimed on the property in any of the years. According to the assessee after the initial amounts spent for acquisition of the property, large amounts have been spent from year to year, particularly in 1951 and 1952 bringing the aggregate amount expended on the property to Rs. 80,988 (as per figures in annex. 'C'). The property was sold in the assessment year in question for Rs. 50,000 resulting in a deficit of Rs. 30,988.
27. In his order dealing with the claim, the ITO doubts the claims made as regards the amount of Rs. 21,933 purported to have been spent in 1951 and Rs. 13,212 spent in 1952 and observed that no evidence was produced to substantiate that these were spent properly and entirely used for the property. It is again difficult to follow exactly what the ITO holds on the various contentions of the assessee, but the purport of the order was that the claim could not be allowed. In appeal to the AAC, it was observed that during the relevant accounting period there was no cloth business and that the loss claimed under S. 10(2)(vii) arising from the sale of the Nagpur property was rightly rejected by the ITO. According to the AAC except for a mere verbal claim no evidence could be produced by the assessee in support of its claim that the property had in fact been utilised in the previous years for business purposes. The assessee carried the matter in further appeal to the Tribunal. After hearing submissions and going through the material on record the Tribunal disagreed with some of the views expressed by the ITO and the AAC and observed that the Pagalkhana property purchased in 1944 was actually used for the Nagpur business. It further observed that the fact that the assessee omitted to claim depreciation would not some in the way of claiming the loss on sale under S. 10(2)(vii). It then considered whether any kind of business activity was carried on in the accounting year at Nagpur itself and after going through the entries in the Nagpur shop, its conclusion was that there was no evidence of any activity or of the user of the shop in any such activity at Nagpur. The conclusions of the Tribunal in connection with this aspect of the matter are to be found in para. 12 of its order. It has referred to the expenditure side of the accounts pertaining to this property where there are minor items of expenses pertaining to electricity bills, account books, corporation tax, trunk calls and salary of about Rs. 500.
28. In connection with the claim of loss in respect of Pagalkhana property it was submitted by Mr. Dastur that the Tribunal was not correct when it observed that there was no evidence of business activity carried on at Nagpur in the accounting year and he drew our attention to what it has stated earlier in para. 4 of its order. In para. 4 of its order when it was dealing with the claim of bad debt in respect of an amount due from one Mishrilal Shaligram, the Tribunal seems to have observed that no doubt the business had seen better days in the past, but there were still some business activities even during the accounting year as also in the following year. Reading both these paras together, it would seem to us that it could not be denied that there was some activity and it would be more correct to say that with the closure of the selling agency the main business activities had come to an end, but that some little business activity was still continuing mainly in the nature of winding up of the affairs, realization of the amounts, etc.
29. Mr. Dastur then submitted that the assessee was entitled to claim the loss on the footing that the amounts considered by the Tribunal would suggest that the Pagalkhana property was put to some use for business purposes. In the alternative, he submitted that the Tribunal having found that the said property was used for the assessee's business in the past and also having found that the business was in existence during the accounting year, it was not justified in rejecting the assessee's claim and it should be presumed that the assets which were in the past used for business purposes continued to be used for business purposes in the year under consideration. In the further alternative, he submitted that the word 'use' in the section should be understood in a wide sense so as to embrace passive as well as active user. According to him if any assets used in the business of the assessee in the past were kept ready or available for use at any moment in the year in question, the asset or item can be said to be 'used' for the purpose of the business, although not actually utilised or employed. In connection with this head of the argument he referred to a decision of a Division Bench of the Bombay High Court in Whittle Anderson Ltd. v. CIT : 79ITR613(Bom) . In connection with this branch of the argument he drew our attention also to the observations to be found in Niranjan Lal Ram Chandra v. CIT : 49ITR177(All) (All), where it is observed that the word 'used' in S. 10(2)(viii) has to be understood in a wider sense of 'as capable of being used' and not in the narrower sense of 'actual use'.
30. However, we find one difficulty in the last alternative submission of Mr. Dastur in connection with the claim as to Pagalkhana property. It is clear that before the Tribunal the assessee had made a claim in respect of such loss on the question of actual user in connection with the business during the accounting year. The observations of the Tribunal do not deal with the so-called passive user or any contention based on Whittle Anderson's case : 79ITR613(Bom) or the Allahabad case : 49ITR177(All) since no such argument appears to have been advanced before the Tribunal. Dealing with the case of the assessee about actual user, the Tribunal considered the evidence which was available and held that the account merely showed some expenses, but it was not satisfied that there was any actual user. Bearing in mind the frame of questions Nos. 2 and 3 and the language to be found in para. 12 of the order of the Tribunal it would appear to us that the further alternative submission of passive user, possible user as contra-distinguished from actual user, would not seem to arise from the order of the Tribunal and is not within the ambit of the questions referred to us. This latter aspect of what questions are referred, assumes importance when one bears in mind that this is not a reference by the Tribunal simpliciter under S. 66(1) but at the instance of the High Court under S. 66(2) of the Indian I.T. Act, 1922. In order to satisfy our conscience we went through the income-tax application made by the assessee for the purpose of the reference, being Income-tax Application No. 5 of 1967, and we have satisfied ourselves that even in that application the assessee proceeded on the basis of actual user and not possible user.
31. Mr. Dastur submitted that even if the contention was not argued before the Tribunal and even if it is the view of the court that such contention would not directly arise from the frame of questions No. 2 and 3, the High Court was entitled to go into this aspect of the matter since the assessee was claiming an allowance and the High Court could direct the allowance to be given on any ground relevant to the question. He relied on certain observations to be found in CIT v. Ogale Glass Works Ltd. : 25ITR259(SC) . The frame of the question which was considered by the High Court and which was before the Supreme Court for consideration in the above decision is found at page 532 and the frame is much wider than the frame of the questions before us which are restricted to the specific aspects indicated in the question. Further, the Supreme Court in its decision had emphasised the fact that it was a reference under S. 66(1) which the High Court was considering and not under S. 66(2). Finally, the Supreme Court principally relied upon the discretion exercised by the High Court in permitting the argument to be advanced before it and since the High Court had so permitted the parties, the Supreme Court observed that it was not prepared to shut out the argument which had been canvassed before the High Court and allowed to be canvassed by the High Court. These observations, in our opinion, do not assist the assessee at all. If interests of justice require, questions can be reframed to bring out the proper aspect of the controversy between the parties, but the controversy, in our opinion, must arise from the order of the Tribunal. If this aspect has not been agitated before the Tribunal and the Tribunal has not applied its mind to the question about the availability or readiness of the assets for use in the accounting year, would it be right for us to allow the question to be agitated for the first time before us in our advisory jurisdiction When the question is so put, the answer is obvious, and it must be that this aspect cannot be allowed to be agitated in the manner sought by the assessee. In this view of the mat