1. This is an appeal filed by Hyderabad Roller Flour Mill Co. Ltd., against the order of the Commissioner (Appeals) for the assessment year 1978-79.
2. The assessee is a company which is running a flour mill. The assessee had debited a sum of Rs. 47,590, being the claim against the Food Corporation of India (FCI) towards reimbursement of some freight charges incurred during the year 1975-76 written off during the year.
This was added back by the ITO on the ground that there is no provision under the Income-tax Act for such allowance. The first appellate authority confirmed the addition primarily on the ground that the claim against the FCI was not brought to tax and that, therefore, the possibility of expenditure when such claim was not accepted cannot arise. In other words, he was not satisfied that the claims had entered the computation of income in earlier years, a point not taken up by the ITO himself.
3. The learned representative for the assessee took us over the past accounts to show that the claims were taken into account in the computation of the assessee's income. He pointed out that the FCI recognised the assessee's claim partly and that it was only the balance that was written off. Since the settlement was only during the year, it was his argument that it is allowable either as expenditure, bad debt or loss incidental to business. The learned departmental representative desired that the assessee's submission on facts would need verification by the ITO. On a question of law, he claimed that it was a case where facts converse to those provided under Section 41 of the Income-tax Act, 1961 ('the Act'), for taxing remission of liability arose. If remission of liability in the assessee's favour could be taxed only by a special provision, he saw no way by which a similar remission by the assessee in favour of third party could be allowed as an expenditure without a corresponding provision for such allowance.
4. We have carefully considered the facts as well as the arguments. The assessee has debited Rs. 57,305 and Rs. 60,160 as freight, wheat transport charges and carriage outward in its final accounts (printed) for C.Y. 1975 and 1976, respectively. Details of this account for both the years are reproduced side by side below:6.
Freight, cartage and coolie 482.50 466.05 57,305.55 62,881.197.
Less credit balance of handling charges--wheat andwheat products -- 2,722.24Net carried to P & L A/c 57,305.00 60,160.00 It may be seen therefrom that the wheat transport charges alone, with which we are concerned, were Rs. 27,467.02 and Rs. 33,401.64 for the two years. The manner in which they were reckoned for the two years are as below: *Wheat transport charges:Actual expenditure 86,905.30 1,21,898.96during the yearVijayawada 12,676.60 40,900.60 41,017.30 59,438.28 88,497.32Net carried to profit and The assessee took credit for Rs. 40,900.60 for C.Y. 1975 and Rs. 41,017.30 for C.Y. 1976 as amounts outstanding against FCI. In other words, the assessee had not charged the full extent of actual expenses to profit and loss account but reduced the charge by these amounts as it expected to recover the same from FCI as per bills made by it. It had prepared bills to this extent against Food Corporation and it was for this reason that the amount due, as per the assessee's accounts, from FCI appeared in the balance sheet as current assets as outstanding bills to be recovered. As and when bills were made, FCI was debited and wheat transport charges accounts credited. The outstanding amount due from Food Corporation, therefore, had to appear in the balance sheet as current assets just as another amount due from debtors. It is, therefore, clear that the first appellate authority was wrong in his conclusion that these amounts had not entered into the computation of the assessee's income. We have further verified that the relevant assessments for the two years have proceeded with reference to the income as per profit and loss account and, hence, the credit for the same was certainly taken by the assessee without any 'adjustment' by the ITO. It is clear that the assessee would have been entitled to larger deductions of Rs. 40,900 and Rs. 41,017 for C.Y. 1975 and 1976, respectively, but for its refraining to claim the same as on the assumption that it would be reimbursed by the FCI to this extent. The aggregate of the two sums (supra) Rs. 40,900.60 and 41,017.30 being Rs. 81,918 was the subject-matter of 'representations' according to the FCI and 'dispute' according to the assessee as between the FCI and all Roller Flour Mills represented by. Regional Associations and Federation. It was only on 18-7-1977 that the assessee received communication from FCI that the. matter was considered by the Ministry (Government of India) and a decision was taken against reimbursement of transport charges, for supplies (to make up shortfalls) between July 1974 to August 1975. Only part of the claim was, therefore, found reimbursable. It was only on 8-7-1977 which falls during the C.Y. 1977 accounting year relevant to assessment under consideration that the assessee had reason to conclude that the reimbursement will not be forthcoming for the entire amount. The balance of Rs. 47,590 could not have been, therefore, written off in an earlier year. It could not also be stated that the assessee should have claimed the entire wheat transport charges as incurred by it during the relevant years, as it was under the impression that this would be reimbursed. The expectation for reimbursement at the relevant period is evidenced by the fact that regular bills were made out. The assessee was not alone in this expectation as other sister mills also had similar expectation till receipt of circular dated 18-7-1977, communicating Government of India's decision to turn down the demand of the assessee and other mills. In fact the assessee recovered Rs. 34,328 out of the total amount of Rs. 81,918 and it is for this reason that the assessee wrote off the balance of this amount of Rs. 47,590. These facts are clear from the records and there is no reason why the matter should be set back to the ITO for 'verification' merely because the first appellate authority misdirected himself on facts. We should, therefore, proceed to consider the 'legal' argument of the ITO reiterated by the learned departmental representative that there is no provision in law for allowance of deduction of such amounts.
5. We have found that the amount of Rs. 47,590 was taken on credit as realisable reimbursement of business expenditure in computation of the assessee's income for the assessment years 1976-77 and 1977-78. The amount was found to be not realisable for the first time during the accounting year relevant to the assessment year under consideration. It was clearly a trade debt which was found to be unrealisable. The learned departmental representative's argument that it is a case of remission of debt by the assessee is not factually correct because the assessee has not given up his right out of his own volition. Hence, there is no scope for further argument that in absence of provision similar to Section 41(1) to cover converse cases of release from liability, there cannot be an allowance. It is clear that the assessee had no reason to expect that the amount would be partly not realisable when credit was taken for it in earlier years. From the words 'it has been decided finally', while referring to the Government's decision communicated in circular dated 18-7-1977, it is clear that the hopes of the assessee were lost only on this communication which clearly falls during the accounting year. It is for this reason that we are holding that this amount was rightly taken on credit in 1976-77 and 1977-78 and rightly charged to the profits of the year. It is a trade debt due from FCI. It had been taken into account in reckoning the assessee's total income and had gone bad during the year and written off during the year. Hence, it can be allowed under Section 36(1)(vii) as a bad debt.
A debt is treated as bad, if the chances of recovery has become 'nil or slander'. It is not necessary that the debtor should, in every case, be insolvent or otherwise incapable of paying the amount. It is in this view, it can be allowed as bad debt. The ITO says that 'reimbursement anticipated', if it does not come, cannot be a loss. If credit was taken for such anticipation, non-realisation of such credit certainly amounts to a loss. Hence, it can also be treated as a loss incidental to business inasmuch as the claim itself arose in the course of business. As long as loss is connected with the business and is of non-capital nature, it has to be allowed as a business deduction, though it may not be possible to treat it strictly as business expenditure. It has been so held by the Supreme Court in Badridas Daga v. CIT  34 ITR 10 and CIT v. Nainital Bank Ltd.  55 ITR 707. Even if the assessee had not accepted the decision communicated to it and had not written off this amount in its accounts, it would appear that the assessee would be entitled to claim this amount even as a disputed liability, where mercantile system of accounting has been adopted. The Allahabad High Court in CIT v. Sugar Dealers  100 ITR 424, following the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363, pointed out that even a disputed liability can be claimed as a deduction if the taxable event had occurred during the year. The assessee is in much stronger position since the matter was settled during the year. The amount, is, as contended by the assessee clearly admissible as a deduction also 'on ordinary principles of commercial accounting', a principle widely recognised by tax courts in United Kingdom and India. Even if it is taken to be voluntary remission, which it is not, in the assessee's case, the learned departmental representative is not justified in believing that the amount foregone can never be allowed as a deduction in absence of a provision in the nature of Section 41(1) to apply to 'converse' case because the courts have laid down that such amount foregone could be allowed as a deduction on grounds of 'commercial expediency' if it is on revenue account in contradistinction to capital account and if it is bona fide done for business purposes. It has been so held by the Supreme Court in the cases of CIT v. Chandulal Keshavlal & Co.  38 ITR 601 and the Bombay High Court in Tata Sons Ltd. v.CIT  18 ITR 460. Hence, in any view of the matter, we do not find any justification for the disallowance.
6. In the result, the appeal is allowed. The addition of Rs. 47,590 stands deleted.