ANANTANARAYANA AYYAR J. - Under section 66(2) of the Indian Income-tax Appellate Tribunal, Hyderabad Bench, has referred the following question to this court :
'Whether the assessee was entitled to claim a sum of Rs. 8,324 as bad debt for the assessment year 1959-60 ?'
The relevant facts are as follows :
The concerned accounting year was the year ending December 31, 1958. The assessee-company, namely, the United Industrial Corporation (Agencies) Private Ltd., Hyderabad, was doing business in importing machinery, etc. It was maintaining accounts in mercantile system. Messrs. Chinoy Challani and Co., (hereinafter referred to as the debtor cleared certain goods and sent them to the Indian Steel and Wire-products Limited and to another party at the instance of the assessee. A sum of Rs. 11,299-6-8 became due from the debtor to the assessee as on February 10, 1948. Subsequently, the assessee assessee received Rs. 2,725-11-4 from the debtor on December 31, 1953. The assessee issued a lawyers notice dated January 19, 1954 (exhibit A), demanding payment of Rs. 15,887-1-10 with costs of notice. On April 10, 1956, the company wrote a letter (exhibit A-1) demanding a payment of Rs. 8,513-11-4 as due on threat of legal action. The debtor sent a reply (exhibit A-2) as follows :
'With reference to your letter dated April 10, 1956 (exhibit A-1), we have already explained to Mr. S. M. Hussain, director of the company, and also Mr. M. R. Patny regarding our inability to pay the money in view of our present financial circumstances. As such, we regret we are not in a position to pay the money. We request you not to institute any legal proceedings and it will prove to be infructuous, as we have not been left with any assets to proceed against us.'
Subsequently, on December 29, 1958, the debtor also wrote another letter as follows :
'As you are aware we have had serious reverses in business and our present financial position does not permit us to meet any further commitments. Due to the intervention of our mutual friends, viz., Sri M. R. Patny and Khan Bahadur Abdul Salam Sayed, it has been agreed that you will accept a cash payment of Rs. 249-4-4 in full and final settlement of all mutual claims between us in respect of this transaction as per details here under :
Rs. AS. Ps. Amount of rebate to be given by you by way of settlement 6,000-0-0 Cash to be paid by us 249-4-4
We hand you herewith cash amounting to Rs. 249-4-4 which please accept in full and final settlement of the mutual claims between yourself and ourselves in respect of this transaction'.
The assessee made an entry of this cash payment of Rs. 249-4-4 against the debtor in his (assessees) account and closed the debtors account by crediting a sum of Rs. 8,324-7-1 on December 31, 1958, as 'amount written off as bad debts'. He also debited this amount to the assessees profit and loss account for the year ending December 31, 1958, and claimed it as a deduction for the assessment year 1959-60.
The Income-tax Officer disallowed the assessees claim of bad debt on the ground that no action had been taken by the assessee by way of filing a suit and that the debt had already become time-barred even before December 31, 1958.
On appeal, the Appellate Assistant Commissioner held as follows :
'In any event, a substantial portion of the amount due to the appellant from Messrs. Chenoy Challani & Co. had become bad long before the previous year relevant to the assessment year 1959-60 ..... the appellant ought to have written off the debt long before the date on which it was actually written off. At any rate, considering the paltry amount received, the appellants could never reasonably have entertained any hope of recovering more than a thousand rupees. In the circumstances, a claim for bad debt to the extent of Rs. 751 (Rs. 1,000 estimated good portion of the debt several years ago less amount realised of Rs. 249-4-4) is allowed.'
The Tribunal dismissed the appeal on three main grounds :
(1) That the assessee did not choose to write off the debt in spite of the fact that in the annexure the debtor had clearly indicated that no sum could be realised from him.
(2) There was no evidence that, between 1956 and 1958, the assessee had any hope of recovery of the amount.
(3) At least from 1956 on wards, the assessee had shown the debt as doubtful in his balance-sheet and, as such, the assessee should have made a claim earlier as the Act provides for doubtful debts.
Shri I. V. Rangachary, the learned advocate for the assessee, contends that the order of the Appellate Assistant Commissioner itself shows that he had accepted in part the contention of the assessee that the debt had not become time-barred before the accounting year ending December 31, 1958, and that the Tribunal erred in acting on the three main grounds mentioned by us above.
The main questions concerned in this case are :
(1) Whether the debt concerned is a bad debt and (2) If so, at what point of time, it became a bad debt ?
In fact, the Appellate Assistant Commissioner and the Tribunal have held that the debt was a bad debt and that it became bad during the relevant accounting year ending December 31, 1958, only to the extent of Rs. 1,000 and that the rest of it had become bad even prior to that accounting year.
Shri C. Kondaiah contends that both these questions are questions of fact and, consequently, there is no question of law arising in this case.
The relevant portion of section 10(2) of the Act runs as follows :
'Such profits or gains shall be computed after making the following allowances, namely :- .....
(xi) When the assessees accounts ..... are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee .... as the Income-tax Officer may estimate to be irrecoverable in the books of the assessee'.
In the commentary by Kanga and Palkhivala on the Law and Practice of Income-tax (1958, fourth edition) at page 358, six conditions are mentioned as governing the grant of an allowance.
Of them Nos. IV and V are as follows :
'IV. The debt or loan must have become irrecoverable in the relevant accounting year and not prior or subsequent to that year.
V. The allowance is confined to only such sum in respect of bad and doubtful debts .... as the Income-tax Officer may estimate to be irrecoverable'.
These conditions follow from the wording of the section.
In Commissioner of Income-tax v. Chitnavis it was observed by their Lordships of the Privy Council as follows :
'Whether a debt is a bad debt, and if so at what point of time it became a bad debt, are questions which in their Lordships view are questions of fact, to be decided in the event of dispute by the appropriate Tribunal, and not by the ipse dixit of anyone else. The mere fact that a debt was incurred at a date beyond the period of limitation will not of itself make the debt a bad debt; still less will it fix the date at which it became a bad debt. A statute-barred debt is not necessarily bad; neither is a debt which is not statute-barred necessarily good. The age of the debt is no doubt a relevant matter to take into consideration. In every case it is a question of fact to be determined after consideration of all relevant circumstances.'
This passage is extracted with approval by their Lordships of the Supreme Court in Bank of Bihar Ltd. v. Commissioner of Income-tax with the following observation :
'It is true that at the material time when this case was decided, the Act contained no provision such as section 10(2)(xi) authorising deductions of bad debts of business, but it was held that such a deduction was necessarily allowable .....
In this case before the Tribunal, there was evidence on which it could hold that tbe debt had become bad in the year 1947 .....'
In that case also, the question referred was under section 66(2) and was substantially similar to the question concerned in the present case in material particulars and ran as follows :
'Whether, in the circumstances of the case, the income-tax department was legally justified in rejecting the claim of the assessee under section 10(2)(xi) of the Income-tax Act with regard to the amount of Rs. 2,11,493 as bad debt for the assessment year 1950-1951 ?'
The High Court and the Supreme Court held that the question was one of fact and was not liable to be reopened in a reference under section 66(2) of the Act as there was evidence on which the conclusions of the Appellate Assistant Commissioner and the Tribunal could be founded. Shri Rangachary contends that the mention in exhibit A-3 that there had been intervention of mutual friends, which resulted in an agreement, had not been taken into account. He has also referred to the recital in exhibit A-2. But his contention in this matter only amounts to the contention that the finding of the Appellate Assistant Commissioner and the Tribunal on a question of fact is not correct.
In Tejpal Jamunadas v. Commissioner of Income-tax the learned judges held, in dealing with a reference under section 66(2) of the Act, as follows :
'On a consideration of all the facts and circumstances the Tribunal came to the conclusion that the debt had become irrecoverable in Samvat 1990. It is not for us to consider whether, on the same facts, we would have come to the same or to a different conclusion. All that we are entitled to see is whether there was material on which the Tribunal could come to the conclusion arrived at by it. We fail to see how it can be said, in view of the facts and circumstances detailed in the appellate order of the Tribunal, that there was no material for the finding arrived at by it.'
In the present case also, the Tribunal has considered all the relevant documents including exhibit A-2 and exhibit A-3 and arrived at its conclusion and given its finding on the relevant questions of fact. We do not find sufficient reason to hold that the Tribunal did not act without there being evidence before it or without considering the evidence which was before it.
Shri Rangachary relies on the decision in Devi Films Ltd. v. Commissioner of Income-tax wherein it was decided that, though what was required was an honest judgment on the part of the assessee at the time when he makes a write-off in the light of events up to that stage and not in the light of later happenings, yet in order to determine the question whether the assessee could have believed that the debt as solvent and sound could be relevant and admissible. In that case, the assessee had treated a certain debt by a debtor, Tehrani, as having become bad in the year ending April 12, 1957 (accounting year). The Income-tax Officer rejected that claim. The assessee reiterated the claim in the subsequent assessment year 1958-59. The Income-tax Officer rejected that claim also. The Appellate Assistant Commissioner and the Tribunal also rejected the claim. In its order, the Tribunal pointed out among other things that within six months after the date of writing off, which was April 12, 1957, the assessee made a further advance of Rs. 25,000 to Tehrani for the production of another picture. The amount written off was Rs. 55,950-13-10. The learned judges pointed out in the decision that the question whether a debt has become bad and doubtful and, if so, when, was really one of fact depending upon congeries of facts and diverse circumstances but they proceeded to consider the arguments on this question and finally held that the Tribunal had reached the correct conclusion after consideration of the facts. The question as to whether, on the finding of fact, the court would interfere on a reference under section 66(2) was not raised and considered in that case. This decision dose not affect the principle already mentioned by us above regarding interference by this court on questions of fact in a reference under section 66(2) of the Act.
We, therefore, answer the question in the negative and in favour of the department with costs. Advocates fee Rs. 150 (rupees one hundred and fifty).
Question answered in the negative.