D.K. Kapur J.
1. For the assessment year 1960-61, the following question has been referred to us at the instance of the assessed :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the claim of bad debt of a sum of Rs. 37,440 in respect of the assessment year 1960-61 ?'
2. The relevant facts as set out in the statement of the case may conveniently be summarised first. The assessed was a partner in a firm known as M/s. Mahadeo Ganga Prasad in which he had a 55 per cent. share. The said firm advanced a sum of Rs. 37,500 to M/s. Jai Hind Foundry Works Ltd. The debit balance owed by the company at the end of the year relevant to assessment year 1952-53 was Rs. 84,190-14-0. This balance was carried forward till the financial year 1956-57. There was a further debit of Rs. 2,250 in the assessment year 1958-59. In the next year, a sum of Rs. 49,000 was credited on account of sale of the foundry and machinery to M/s. National Engineering Works, Gwalior. The amount of Rs. 37,440.87 remaining in the account was written off as a bad debt on March 31, 1960. This is the bad debt claimed by the assessed.
3. According to the statement of the case, there were some other transactions relating to the advance. There was a mortgage to the extent of Rs. 1,00,000 on July 5, 1952, by the company though the advance at that time stood at Rs 84,190-14-0. The mortgagees were given a first charge over the unpaid share capital and debts due to the mortgagors according to the mortgage deed. On December 29, 1952, the firm issued a notice to the company calling upon it to pay the advance amount together with interest. In furtherance of this notice, the company handed over the absolute charge and possession of the mortgaged assets. The firm took over these assets and then proceeded to realise the amount by sale of the assets in 1960.
4. When the Income-tax Officer disallowed the bad debt, he did so because he found that M/s. National Engineering Works which had purchased the assets was a firm in which the assessed was himself a partner having a 50 per cent. share. This was based on the statement of one Shri R. S. Ganeriwal. According to the assessed, he was not partner, but there was only a proposal for a partnership. There was also an account opened with the United Commercial Bank in the name of M/s. National Engineering Works on September 16, 1959, in which the assessed and Shri R. S. Ganeriwal had been shown as partners.
5. The reason for the disallowance of the claim for bad debt was on account of the fact that the debt, if any, had become bad on December 25, 1954, relevant to the assessment year 1955-56, or earlier. Furthermore, the assessed had become an owner of the machinery and, hence, there was no loss in the assets. And lastly, as he had himself purchased the assets in partnership, there was no real sale.
6. On appeal to the Appellate Assistant Commissioner, it was held that the bad debt had not become time-barred because it was a secured debt. According to him, the sale was to a different firm and it did not make any difference that the assessed was a partner. Thus, the claim was allowed.
7. The Income-tax Officer appealed to the Tribunal, which restored the Income-tax Officer's order on two points-(1) That the sale of the mortgaged property was not evidenced by any notice and no public notice had been given to show that the mortgaged value had been realised. Secondly, there was no evidence to show that any attempt had been made to realise the shortfall in accordance with the provisions of the mortgage deed.
8. Learned counsel for the assessed has tried to press the fact that this is a claim for bad debt which had to be allowed for the reasons given by the Appellate Assistant Commissioner in his order. We think that the facts speak for themselves in this particular case. Assuming that there was a proper advance to M/s. Jai Hind Foundry Works Ltd., from which a sum of Rs. 84,190-14-0 was due, it is also clear that the assets of that company had come to the creditor as long ago as in 1953, but no attempt was made to realise the same till 1960. Even in 1960, there was a sale of the assets to M/s. National Engineering Works in which the assessed himself appears to be a partner. This does not seem to be a genuine effort to realise the bad debts. There is no evidence to show that the amount of Rs. 49,000 represented the real value of the assets. We fully agree with the view of the Income-tax Officer that in this case, the assessed was, according to his own case, the mortgagee of the property to M/s. Jai Hind Foundry Works Ltd. In furtherance of the notice for Realizing the mortgaged property, the property was handed over to the assessed and so he became the owner. In other words, the mortgage came to an end by the transfer of the property in favor of the mortgagee. The Appellate Assistant Commissioner was of the view that the claim was not barred by time even in 1960. What was omitted from consideration was the fact that no claim could be filed by the assessed against himself. If the interest of the mortgagor and the mortgagee happens to come to the same hands, then the mortgage comes to an end. In other words, there was no debtor-creditor relationship remaining after the mortgaged property came into the hands of the assessed. If there was no debt, there could be no bad debt. thereforee, for a different reason, it has to be held that the bad debt cannot be allowed.
9. In order to sustain a claim for deduction in respect of a bad debt, the provisions of section 36(1)(vii) and sub-section (2) of section 36 of the Act have to be satisfied. In other words, the bad debt must have become bad in the previous year and also, the debt must become irrecoverable and be written off from the accounts. Furthermore, the money must be lent in the ordinary course of business of banking or money-lending carried on by by the assessed or should have been taken into account in computing the income of the assessed in that previous year or in any earlier previous year. So, in determining whether an amount is a bad debt or has become irrecoverable in any year, various factors have to be taken into consideration. We may assume for the sake of convenience that the amount advanced in this case was a loan made by the assessed during the course of business and we can also assume that this debt could have become bad if other conditions were satisfied. The question we have to examine is : did this debt become bad, and if so, when it became bad. In order that there be a debt, there has absolutely to be a debtor as well as a creditor. In other words, there must be somebody who owes the money to the assessed. As there was a mortgage on the property in question, till the mortgage subsisted, there was a debtor and creditor relationship. When the assessed was able to call in the security from the debtor, the debt got liquidated. The security came into the hands of the assessed himself. There are two possibilities-either the security liquidated the debt or, there was a shortfall, which could be realised from the debtor. In this case, there is no evidence that any amount, over and above the mortgaged assets, was claimed by the assessed. So, it would follow that the debt became liquidated as soon as the mortgaged assets came into the hands of the assessed. Those assets became his own assets and not those of the mortgagor. This happened in 1953. Thereafter, no further amount could be claimed from any one. According to the assessed, this property was sold to M/s. National Engineering Works, but the assets were sold by the assessed as his own property. There was no debt subsisting at that time and so there was no debt which could become bad. It is very important to emphasise the fact that a debt can only become bad if there is a debt. Before the sale of the assets to M/s. National Engineering Works, the assessed could not have sustained any claim for recovery of any amount from M/s. Jai Hind Foundry Works as the entire mortgaged assets had come to his own hands. The normal method of Realizing money due on a mortgage is to get the property sold through court, but if the mortgagee takes the security for mortgage into his own hands, then the debt no longer subsists. No claim can be sustained in any court after such an event. In fact, no debt remains which can be enforced in a court. More simply stated, what it means is that the facts in this case have led to the debtor and the creditor being one and the same. The money was owed to the assessed and he got the property in lieu thereof. This brought to an end the existence of the mortgage. There was no debt remaining after this debt. As all this happened in 1953, we fail to see how a non-existent debt could become bad several years later. So, there was no debt in 1960 or 1959, which could become bad, and clearly the Tribunal is right in holding that the deduction could not be allowed on the ground of the debt becoming bad. The primary requirement for allowing a deduction on account of a bad debt is-(a) the existence of debt, and (b) the debt becoming irrecoverable. In fact, the debt became irrecoverable in 1953 when the debt stood liquidated by the transfer of the mortgaged property to the assessed. So, it could not become bad in 1959 or 1960. There being no debt, it could not become a bad debt.
10. Consequently, the question referred to us has to be answered in the affirmative, in favor of the Department and against the assessed. The Department will be entitled to its costs. Counsel's fee Rs. 500.