1. This is a reference under Section 256(1) of the I.T. Act, 1961, (hereinafter 'the Act') and the Income-tax Appellate Tribunal, Allahabad Bench, has stated the case on the following question of law;
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 60,000 paid to Shri Mohan Lal Vyas represented a trading loss of the assessment year 1964-65 ?'
2. M/s. Glass Miniature Bulb Industries, Kanpur, hereafter referred to as 'the assessee', a partnership firm, carried on business in manufacture and sale of miniature bulbs. In its assessment to income-tax for the assessment year 1964-65, the previous year ended on April 30, 1963, the assessee claimed deduction of a sum of Rs. 60,000 as bad debt. The assessee claimed to have advanced this amount to Sri Mohan Lal Vyas between July, 1961, and April, 1962, and the debits were made as under in his account:
Paid byLuxmi Rattan Engg. Works Ltd.
Transferredfrom general ledger
3. The purpose for making these advances was stated to be to procure a manufacturing licence under the provisions of the Industries (Development and Regulation) Act, and a licence or permit for the release of foreign exchange necessary for import of machinery, plant and equipment, for starting manufacture of fluorescent tubes. The assessee wanted to start this venture in collaboration with some West German parties, with whom an agreement had been entered into to that effect. Mohan Lal Vyas procured a manufacturing licence which was issued to the assessee on December 5, 1961, but he could not procure a licence or permit for the release of foreign exchange for the import of necessary machinery, plant and equipment, with the result that the Government revoked the manufacturing licence as well. Thereafter, the assessee filed a suit against Mohan Lal Vyas for recovery of Rs. 60,000 in the court of the Civil Judge, Kanpur, being Suit No. 106 of 1964. That suit was decreed ex parte. However, the decree was not put into execution because Mohan Lal Vyas was not possessed of any assets. The claim was transferred as bad debt and debited to the profit and loss account on 30th of April, 1963, and the amount was claimed for deduction in the year under consideration.
4. The ITO did not allow the assessee's claim for the following reasons ;
5. Firstly, that the payment of the disputed amount to Mohan Lal Vyas itself was doubtful, secondly, that the civil suit had been filed to give a colour to the whole story and no proceedings were ever taken for execution of the decree and, lastly, that the purpose for which the payment had been made was not known and there was nothing in writing to substantiate the claim of the assessee that the money had been advanced for obtaining an import licence. He also held that, as required under Section 36(2) of the Act, the disputed amount had not been taken into account in computing the income of the assessee of any previous year. The assessee's claim for deduction of the alleged bad debt, therefore, was not allowed.
6. The assessee appealed and disputed the disallowance of this claim. It was contended before the AAC that its effort to start manufacture of fluorescent tubes was only by way of extension of the existing business and the disputed amount having been spent in respect thereof was allowable as an expenditure relating to business. The AAC did not accept that contention on the view that the expenditure had been incurred in the previous year relevant to the assessment year 1962-63 and could not be claimed for deduction in 1964-65. He was also of the view that manufacture of fluorescent tubes could not be strictly treated as extension of the assessee's business. Further, he agreed with the ITO that the amount could not be treated as bad debt because the execution of the decree was not taken out.
7. The assessee went up in further appeal before the. Appellate Tribunal when the claim of the deduction of this amount as bad debt was given up but was pressed as a business loss. The Appellate Tribunal agreed with the revenue and held that the claim was not allowable as an expenditure under Section 37(1) of the Act in the year under consideration because it related to the assessment year 1962-63. The Tribunal, however, agreed with the assessee and held that the claim could be allowed as a business loss under Section 28 of the Act. On the facts found it also held that the identity and genuineness of Mohan Lal Vyas had been established and that manufacture of fluorescent tubes was a business incidental to the assessee's business of manufacture of miniature bulbs. The Tribunal further held that the assessee had made the advance of the disputed amount to Mohan Lal Vyas to procure a manufacturing licence and a licence or permit for the release of foreign exchange to enable the assessee to import necessary machinery, plant and equipment. Mohan Lal Vyas did procure a manufacturing licence but he could not procure permit for release of foreign exchange and ultimately the manufacturing licence was revoked. On that view, it held that these amounts had been paid to Mohan Lal Vyas for the express purpose of starting an incidental business of manufacture of fluorescent tubes and since the whole enterprise ended in a fiasco, this amount ofRs. 60,000 became a dead loss to the assessee and it was bona fide written off in the previous year relevant to the assessment year 1964-65. The claim was thus allowed as a trade loss. Now, at the instance of the revenue, the question of law mentioned above has been referred to this court.
8. It was urged before us by Sri Ashok Gupta, counsel for the department, that the question referred embraces two aspects. Firstly, assuming that it was a trade loss, it has to be seen in which year this loss occurred and could be claimed by the assessee, and, secondly, what is the nature of the loss. Is it a capital loss or a trade loss While elaborating his submissions, Sri Gupta contended that, admittedly, the assessee follows the mercantile system of accounting and if it was an expenditure incurred by the assessee for starting an incidental business, it would be a liability of the year in which the expenditure was incurred, i.e., of the assessment year 1962-63. If it was a trade loss, even then it would be allowable in that very year and the filing of the suit for recovery of this amount from Mohan Lal Vyas was not very relevant for this purpose. Apart from this, according to Sri Gupta, it was a loss on investment made for starting a new or allied venture and so it would be a capital loss and not a trade loss. According to Sri R. K. Gulati, counsel for the respondent-assessce, three years are involved in respect of the disputed claim. The first year is the year in which advances were made, i.e., the previous year relevant to the assessment year 1963-64, the second year is the year in which the balance-sheet was debited, i.e., the previous year relevant to the assessment year 1964-65, and, lastly, the year in which the suit was filed. According to Sri Gulati, it would be a trade loss relating to the assessment year 1964-65. It would not be a loss relating to the year in which the suit was filed because the assessee could not postpone accrual of the liability till the filing of the suits. As for the nature of the loss, it was submitted by Sri Gulati, that this aspect is not embraced in the question referred and hence it cannot be gone into. The question referred proceeds on the basis that it is a trading loss. If, in the alternative, it arises, since it was in the nature of a trading expenditure and the venture could not go through, it would be a trade loss and not a capital loss.
9. The first question which falls for our consideration is as to whether the revenue can be allowed to challenge the nature of the loss. Whether the question referred embraces within its scope both the aspects, viz., the nature of the loss and the year in which it can be allowed. In our opinion, it does not do so. The question assumes that the disputed loss represented trading loss and it is only in respect of the year in which it is allowable that the opinion of this court has been solicited. The legal position in this respect is well settled and it is that the High Court can answer thosequestions which are actually referred to it; it cannot raise and answer new questions which have not been so referred. If the Tribunal refuses to refer under Section 256(1), a question of law which arises out of its order then the proper course for the court is to require the Tribunal under Section 256(2) to refer the same. What is open to the court is only this much that without raising new and different questions it can resettle or reframe the questions formulated by the Tribunal before answering them so as to bring out the real issues between the parties. Reference may be made to Karnani Properties Ltd. v. CIT : 82ITR547(SC) , where it was laid down (p. 554):
'The question as to the correctness of the facts found by the Tribunal was not before the High Court nor is it before us. When the question referred to the High Court speaks of 'on the facts and in the circumstances of the case', it means on the facts and circumstances found by the Tribunal and not about the facts and circumstances that may be found by the High Court. We have earlier referred to the facts found and the circumstances relied on by the Tribunal, the final fact-finding authority. It is for the Tribunal to find facts and it is for the High Court and this court to lay down the law applicable to the facts found. Neither the High Court nor this court has jurisdiction to go behind or to question the statements of fact made by the Tribunal. The statement of the case is binding on the parties and they are not entitled to go behind the facts found by the Tribunal in the statement: See Kshetm-Mohan Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax : 24ITR488(SC) .'
10. This being the position, the question of the nature of loss cannot be gone into so as to enlarge the scope of the question referred and on that view we need not refer to the various cases cited at the bar in support of the rival contentions.
11. We then proceed to consider the question as to in which year the disputed claim was allowable. The assessee claimed to have advanced the disputed amounts to Mohan Lal Vyas between July, 1961, and April, 1962, i.e., the period which will be relevant for the assessment year 1963-64. The details have already been given in the earlier part of this judgment. By 6th of November, 1961, a sum of Rs. 7,500 was purported to have been advanced while the remaining amount was claimed to have been paid on 30th April, 1962, the last date of the previous year. Rs. 7,500 was paid by Luxmi Rattan Engineering Works Ltd. and Rs. 45,000 was transferred from the general ledger. It is rather curious to note that a stamped receipt was obtained by the assessee from Mohan Lal Vyas on December 31, 1961, for Rs. 45,000. It is not understandable as to how the receipt was given by Mohan Lal Vyas for this amount on December 31, 1961, when actually this amount was paid to him on 30th April, 1962. However, before the Appellate Tribunal, the assessee based its claim on this receiptfor the undertaking given by Mohan Lal Vyas to obtain a permit or licence for release of foreign exchange so as to enable the assessee to import machinery, plant, etc., and that was to be done by 15th of January, 1962, and in the event of delay or non-issue, he further undertook to return the amount. It may not be possible for this court to doubt the advance of Rs. 60,000 by the assessee to Mohan Lal Vyas between July, 1961, and April, 1962, since it was accepted by the Appellate Tribunal. From the above, it, however, comes out that Mohan Lal Vyas was to perform his part of contract by 15th of January, 1962, and in the event of his failing to do so, he was to return the amount to the assessee. In other words, on the facts found by the Appellate Tribunal, the advance of the disputed amount took place in the previous year relevant to the assessment year 1963-64, and further the contract itself was to be performed within that very year. It has been further found that the manufacturing licence which had been issued to the assessee on December 5, 1961, was revoked by the Government and we were informed that it was revoked on November 2, 1962. That will be relevant for the assessment year 1964-65. A suit for recovery of this amount was filed some time in 1964, since the number of that suit was No. 106 of 1964. The suit was decreed ex parte but the decree was not put into execution because, according to the assessee, Mohan Lal Vyas was not possessed of any assets. This will be relevant for the assessment year 1965-66. Prior to the filing of the suit the assessee had written off this amount in its books on 30th April, 1963, relevant for the assessment year 1964-65. It, would be seen, therefore, that three assessment years are involved : 1963-64, in the previous year of which the amount was advanced and the contract was to be performed but was not performed; 1964-65, in the previous year of which the manufacturing licence was cancelled and the amount was written off as bad debt; and 1965-66, in the previous year of which suit for recovery was filed but the execution of the decree was not considered feasible. Assessment year 1965-66 can be ruled out because the assessee could not have postponed the accrual of the liability till the filing of a suit and, therefore, the filing of the suit has no bearing on the accrual of the liability or its allowability. Thus, there remain only the assessment years 1963-64 and 1964-65 for consideration of the allowability of this claim.
12. There is one more aspect of which we would like to lay some stress and it is that admittedly the assessee maintains its accounts on the mercantile system. It hardly needs mention that under this system the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and whether such expenditure has been actually paid or not, that is to say, that the profit computed under this system is the profit actually earned though not necessarily realized in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. To put it more simply, this system brings into credit what is due immediately it becomes legally due and before it is actually received and it brings into debit expenditure, the amount for which a legal liability has been incurred before it is actually disbursed. The accrual of an income or of liability, therefore, does not depend on its actual receipt or disbursement but when it becomes due or when it is legally incurred. Thus, we have to see as to in which year the loss was actually sustained or the expenditure was actually incurred.
13. If we proceed on the premises indicated above, we do not think that there would be much difficulty in answering the question. The disputed amount had been paid to Mohan Lal Vyas for obtaining a manufacturing licence and a licence or permit for release of foreign exchange. He did succeed in procuring a manufacturing licence which was issued on December 5, 1961, but he could not succeed in obtaining a licence or permit for release of foreign exchange. As noted above, it was the assessee's case before the Appellate Tribunal itself and that was on the basis of the stamped receipt dated December 31, 1961, given by Mohan Lal Vyas that the permit or licence for release of foreign exchange would be obtained by 15th January, 1962, and, in the event of delay or non-issue, he would return back the amount. He could not succeed in obtaining such permit or licence and, therefore, the default occurred in this very year. On either view of the matter, it was an expenditure or a loss of this year only because the money was paid for obtaining the licence. Since it had been paid in this very year it became an expenditure of this year. If the liability was to arise on the occurrence of default, then also it became a legal liability of this year because the default occurred in this year.
14. Our attention was invited by Sri Ashok Gupta to certain decisions in this behalf. In Laxmi Ginning and Oil Mills v. C1T , the assessee had sold a certain quantity of oil to a company for a total value of Rs. 26,642, The purchaser-company did not take delivery of the oil contracted to be purchased by it and thus committed a breach of the contract. The assessee then sold that quantity of oil in the open market at the risk of the purchaser and realized only a sum of Rs. 20,572 incurring a loss of Rs. 9,160 which was debited by him to the 'groundnut account' and credited to the 'claim in dispute account'. Later on, the assessee filed a suit against the company for recovery of the said loss and obtained a decree in 1962. It, however, claimed the above loss in its return for the assessment year 1953-54. The ITO disallowed the loss on the ground that as the loss debited to the trading account had not been finally settled, the debit created in the groundnutaccount could not be allowed and added back the same. That view was upheld by the appellate authority. On a reference, it was, however, held that the loss was suffered by the assessee in the accounting year relevant to the assessment year 1953-54 and was allowable in that year. If as a result of the litigation it was found that the assessee was entitled to less amount than the amount claimed, the difference could be included in the assessable income of the assessee for the year during which the final decision of the same was made. Similarly, if the assessee had been successful in obtaining the entire amount of the loss from the company, the amount could be included in the income of the assessee for the year during which the amount was actually recovered. It would be seen, therefore, that the ratio of this decision is that the loss is allowed in the year in which it is actually suffered. The accrual is not postponed to the year in which it is actually realised.
15. In CIT v. Burhwal Sugar Mills Ltd. : 82ITR784(All) , relying on Calcutta Co. Ltd. v. CIT : 37ITR1(SC) , it was laid down that it is settled law that when an assessee maintains his account books on the mercantile system of accounting, the date on which the liability accrues is the date to be considered for the purpose of entering that liability in the accounts. That is so even though the liability is capable of estimate only and its actual quantification has to be postponed.
16. According to Sri Gulati, the disputed loss would be the loss of the year in which the contract came to an end or became incapable of performance. Since the manufacturing licence was revoked on November 2, 1962, it would be taken that the contract came to an end and became incapable of performance and, therefore, it became a loss of the year under consideration. We find no merit in this submission because it was never the basis of the assessee's claim that the contract became impossible of performance when the licence was revoked. On the contrary, as we have noted above, the assessee's case before the Appellate Tribunal on the basis of the receipt dated December 31, 1961, was that Mohan Lal Vyas had undertaken to obtain foreign exchange (barter licence) which was expected to be finalised by 15th January, 1962, and in the event of delay or non-issue he further undertook to return the amount. The Appellate Tribunal, accepting this contention, observed :
'It is true that Shri Mohan Lal Vyas was able to procure the manufacturing licence for the assessee. The fact, however, remains that he could not obtain the licence or permit for release of foreign exchange. As a consequence of non-availability of foreign exchange the assessee could not import the plant and machinery necessary for manufacturing fluorescent tubes. The failure of the assessee to import the said plant and machinery in its turn led to the revocation of the manufacturing licence granted to it by the Government earlier. It is established on the record that Shri Mohan Lal Vyas undertook to obtain foreign exchange (barter) licence for fluorescent tubes as per his undertaking dated 31-12-1961. '
17. The Appellate Tribunal, therefore, found that the receipt dated December 31, 1961, was in the nature of a contract between the parties. As noted above, according to the assessee's own case, this contract was to be performed by January 15, 1962, and in the event of Mohan Lal Vyas failing to do so, he was to return the amount. The failure of the contract, therefore, occurred in that previous year itself. The date on which the manufacturing licence was revoked was given to us during the course of arguments by the learned counsel for the assessee. It was not the assessee's case that the contract became incapable of performance when the manufacturing licence was revoked. The assessee based its claim of allowability of the claim in 1964-65 on the basis that it was written off in the books as a bad debt in this year. The Appellate Tribunal, of course, accepted this claim but we find that that is not correct because the accrual of the allowability does not depend on the assessee's debiting the same in his books. When the assessee maintains his accounts on the mercantile basis, a liability accrues when it is actually incurred. There is no material in support of this contention of Sri Gulati that the assessee could not claim this loss in 1963-64 because Mohan Lal Vyas continued assuring the assessee that he would fulfil his part of the contract but when the manufacturing licence was revoked the loss actually occurred. In our opinion, therefore, the disputed claim being a trading loss can be allowed in the year in which it occurred. Thus, if it is treated as a business expenditure it could be claimed in the year in which it was incurred and if it was a trading loss it could be claimed in the year in which it was actually caused. On the facts found by the Appellate Tribunal, the money was advanced to Sri Mohan Lal Vyas and he failed to perform his part of the contract in the previous year relevant to the assessment year 1963-64 and, therefore, it was a loss which was allowable in that year and simply because the bad debt was written off in the books on 30th April, 1963, it would not become a loss allowable in the year under consideration.
18. We, therefore, answer the question in the negative, in favour of the department and against the assessee. The department is entitled to costs, which are assessed at Rs. 200.