1. In compliance with the requisition of this court under section 66(2) of the Indian Income-tax Act, the Tribunal has drawn up a statement of the case and referred the following two questions to us :
'1. Whether on the facts and in the circumstances of the case the Tribunal was justified in disallowing the sum of Rs. 2,23,162 (rupees two lakhs twenty-three thousand one hundred and sixty-two) which was claimed as a bad and irrecoverable debt
2. Whether on the facts of the case the debt of Rs. 2,23,162 (rupees two lakhs twenty-three thousand one hundred and sixty-two) became in law a bad debt in S. Y. 2004 ?'
3. We are here concerned with the assessment year 1949-50, relevant account year being S. Y. 2004, i.e., the period November 13, 1947, to November 1, 1948. The assessee is a partnership firm, carrying on extensive forward business in several commodities including bullion. The forward business in gold and silver is carried under the name and style of Messrs. Jaswantlal Jadavji (Chamber Department). That business is conducted in conformity with the rules and regulations of the Marwari Chamber of Commerce Ltd. (now known as the Western India Chamber of Commerce). One Vasanji Ladhabhai, a sub-broker, introduced one Joitram Kedarnath to the assessee and Joitram carried on forward business in several commodities and mainly in bullion through the assessee firm. Joitram (who would hereafter be referred to as the debtor) suffered a loss in the Posh and Magh settlement in silver to the extent of Rs. 5,83,555. This settlement was of February 10, 1948. On February 20, 1948, the debtor's indebtedness to the assessee from another department to the extent of Rupees one lakh was transferred to the Chamber Department. The debtor suffered a loss to the extent of Rs. 301 on April 29, 1948, in the silver settlement of Chaitra and Vaishakh. As against this loss the debtor in his other dealings earned profits also. In the silver settlement of January 27, 1948, he earned a profit to the extent of Rs. 1,13,918. On March 24, 1948, in the forward settlement he earned a profit of Rs. 13,563. On April 8, 1948, he earned a profit of Rs. 2,537; on May 8, 1948, he earned a profit of Rs. 21,000 and on May 26, 1948, the debtor paid cash to the event of Rs. 9,675. It appears that after suffering the loss of Rs. 5,83,555 the debtor gave six hundies of Rs. 50,000 each to the assessee firm. These hundies were payable on different dates. It is sufficient to say that four of the six hundies were due after 81 days and the other two were due after 360 days, that is, the money of the two hundies became payable after the close of S. Y. 2004. The assessee gave credit for the entire amount of Rs. 3,00,000 and ascertained the balance due from the debtor at the end of the year at Rs. 2,23,162-8-0 in the computation of his income under section 10(2) (xi) of the Act. The Income-tax Officer did not accept this claim of the assessee. In his opinion the debt had not become bad in the year of account. He based his conclusion on the facts that tough the debtor had debit balances in the other department of the assessee, those debit balances were carried forward and were not written off as was done in respect of the debtor's loss in the bullion transaction (Chamber Department); the debtor had neither become a defaulter not an insolvent and was doing business on a large scale in all forward markets. Event though the debtor had suffered a loss to the extent of Rs. 5,83,555 on April 8, 1948, the assessee continued to do business with the debtor even after that date. After the close of the account year, on September 29, 1948, the assessee had filed a suit in the High Court for recovery of the said amount of Rs. 2,23,162 together with interest at 6 per cent. The debtor had contested the suit and filed a counter-claim on 8th October, 1952. Both the suits filed by the assessee and the counter-claim were dismissed by this court. On appeal the Appellate Assistant Commissioner agreed with the findings of the Income-tax Officer and further referred to other circumstances, namely, that the debtor had barred a sum of Rs. 12 lakhs from the assessee on the security of 367 silver bars. Those silver bars were sold by the assessee for realisation of the debt. The sale of the silver bars resulted in realisation of an amount more than the debt due. As a result of the sale, the assessee became liable to pay to the debtor a sum of Rs. 8,322, which the assessee adjusted against the said debt of Rs. 2,23,162 in S. Y. 2008. The Appellate Assistant Commissioner also took into consideration another fact that in the next year, i.e., S. Y. 2005, the assessee had made further recoveries to the extent of Rs. 42,000 from the sub-broker, Vasanji Ladhabhai, through whom the transaction of the debtor had been effected. The assessee took a second appeal to the Tribunal and the Tribunal has, agreeing with the views of the income-tax authorities, dismissed the assessee's appeal. The application made by the assessee under sub-section (1) of section 66 also was dismissed by the Tribunal. As already stated, on a requisition by this court, the aforesaid two questions have been referred to us.
4. In our opinion the first question does not arise out of the order of the Tribunal. It has not been held that at no point of time the debt became bad or irrecoverable. The ground on which the claim of the assessee had been rejected is that the debt did not become bad in the relevant S. Y. 2004. The only question that arises on the order of the Tribunal, therefore, in our opinion, is the second question. Counsel for the parties also agree that the first question does not arise on the order of the Tribunal but only the second question arises.
5. On the second question it is the contention of Mr. Kolah that the income-tax authorities and the Tribunal were not justified in holding that the debt due from the debtor to the extent of Rs. 2,23,162 had not become a bad debt in S. Y. 2004. According to him the facts that the assessee firm continued to transact business with the debtor after he had suffered loss to the extent of Rs. 5,83,555 or that he had filed a suit for the recovery of the amount in the subsequent year or that he had subsequently adjusted a payment of Rs. 8,322 and an amount of Rs. 42,000 to this account do not raise the inference that the debt had not become bad in that account year. According to him, if the assessee feels that he had no reasonable expectation of recovering the debt from the debtor, the assessee would be justified in writing off the debt. The assessee in the instant case felt that he had no reasonable expectation of recovering the debt from the debtor and, therefore, there debts had been written off. He referred to a decision in Hongkong and Shanghai Banking Corporation v. Commissioner of Income-tax
6. We find it difficult to accept the contentions of Mr. Kolah in view of the facts of the present case. This court in Raja Bahadur Mukundlal Bansilal v. Commissioner of Income-tax, has held that a debt becomes a bad debt when the creditor has no reasonable expectations of recovering it from the debtor or when there is no ray of hope at all on which the creditor can rely for recovering the amount from his debtor. In the decision, to which our attention has been drawn by Mr. Kolah, the position is stated thus :
'The expression 'bad and doubtful debts' in section 10(2) (xi) does not contemplate two kinds of debts, but refers to the same class of debt, namely, a debt which is bad and doubtful, i.e., a debt, of which the chance of recovery is nil or slender. A doubtful debt does not mean a debt which cannot be held to be irrecoverable. Such a debt may also be held to be irrecoverable wholly or in part.'
7. The principle of law stated by the Calcutta High Court and stated by this court is not in any way different. 'Bad debt' is claimed as an allowance by the assessee and, therefore, the burden is one 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 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 hundies 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 hundies were not received by the assessee, the assessee had given credit in the year of account for the entire amount of the hundies. 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 the Tribunal as not justified in holding that the debt had not become a bad debt in S. Y. 2004. In this view of this matter, the answer to the second question will have to be returned in the negative.
8. Before parting with the case, we would refer to another decision of this court in Karamsey Govindji v. Commissioner of Income-tax referred to us by Mr. Kolah. The decision itself had hardly any application to the facts of the present case. However, we would like to reiterate the following observations therein made by the learned Chief Justice :
'As we had occasion to point out before, the present income-tax law with regard to bad debts makes the position of the assessee extremely difficult. He may write off a debt in a particular year and may claim it and the claim lay be disallowed. In the next year he cannot make treat claim because it would be urged against him that he did not write off the debt in that year. Therefore, the assessee always finds himself on the horns of a dilemma and it is the duty of the department to take a sympathetic view of the matter if in fact that debt was never recovered. Therefore, if the debt was not allowed to the assessee in the year of account, there is not reason why the department should not consider allowing him this debt in the next year.'
9. The material on the record shows that out of the sum of Rs. 2,23,162 the assessee had been able to recover only two sums, namely, Rs. 8,322 and Rs. 42,000. The assessee had not been able to recover anything beyond that up to now. There cannot be any doubt that the balance of the amount that had remained to be recovered had subsequently become a bad in some year or other.
10. Our answer to the second question is in the negative. The assessee shall pay the costs of the department.
11. Questions answered in the negative.