1. The assessee in this group of income-tax references is M/s. Chettinad Company Private Limited, Pudukottai, which went into voluntary liquidation on March 15, 1963, and got ultimately dissolved on March 31, 1966. For the assessment years 1966-67, 1967-68 and 1968-69, the liquidation of this company claimed deduction of a bad debt in the following circumstance : To a company in Calcutta, viz., M/s Badani Brothers Limited, the assessee had advanced a sum of Rs. 1,00,000 on July 15, 1949, as a loan in the course of its money lending business. In 1953, the assessee company obtained a decree against the debtor company in the Calcutta High Court. Towards realisation of this debt, the debtor company had paid Rs. 10,000. There was a balance of principal and interest outstanding amounting to Rs. 99,546. The assessee wrote off in its accounts this amount as a bad debt and claimed an allowance in the computation of its taxable income for the assessment year 1966-67. The ITO reject the claim. The assessee reiterated the claim in the two subsequent assessment years 1967-68 and 1968-69. In support of the claim that the debt has become bad, the assessee represented that the immovable properties belonging to the debtor company in Banaras and Ranchi had been attached in execution of a decree. It was further represented that the LIC of India had a first mortgage in respect of the debtor's properties and had filed a suit in the Patna High Court in enforcement of its claim against the debtor. It was also represented that the company had gone into liquidation. This was the position as ascertained from one of his colleagues in Calcutta that as on February, 1971, the liquidation proceedings of the debtor company had not yet been finalised.
2. On an appraisal of these facts relating to the position of the debtor company, the ITO held that the debt owed by this company to the assessee company was not proved to have become a bad debt in any of the account years relevant to the assessment years 1966-67, 1967-68 and 1968-69. He accordingly rejected the claim for write-off of the bad debt put forward by the assessee in these assessment years. The matter was taken in appeal by the assessee to the Tribunal in due course. Before the Tribunal the assessee placed all the facts referred to by the ITO in his order of assessment and urged that on these facts it should have been held that the debt had become bad in one of these there years and the claim for write-off ought properly to have been allowed in any one of these years. The Tribunal, however, rejected the assessee's contention on the ground that even as late as 1973 there was no clear information as to at what stage the liquidation proceeding of the debtor company stood, although it was clear that they were still pending. The Tribunal observed that, in any case, during the account year relevant to the assessment years 1966-67 to 1968-69, there was no evidence to show that there was no chance whatever of the debt question whether a debt had become bad become bad in any Tribunal observed that the question whether a debt had become bad in any given year would depend not only upon the claims made by the creditors the extent of attachment, the amount of the decree to be satisfied as against the debtor's properties and the like. The Tribunal further observed that it was quite likely that the value of the properties of the debtor company might be such that even after satisfying the claims of other creditors like the LIC of India, there might be a surplus to pay for the assessee company's claims. In these circumstances, the tribunal held that so long as there was no evidence to show that the entire realisations from the properties had gone in discharge of the mortgage debt of the LIC of India, it cannot be held that the assessee company's debt had become had or irrecoverable either in part or in full. In this view, the Tribunal confirmed the orders of the ITO and of the AAC disallowing the claim for write off of bad debt in all these assessment years.
3. In this reference the assessee has challenger the decision of the tribunal on the basis of the following question of law :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to the allowance as a deduction of the claim of bad debt of Rs. 99,546.07 in none of the assessment year 1966-67, 1967-68 and 1968-69 ?'
4. For deduction of a bad debt as an allowance is the computation of taxable profits under the head 'Business', s. 36(1)(vii) of the I.T. Act requires that the debt should have been established to have become a bed debt in the previous year concerned. Elaborate provision is made under s. 36(2) of the I.T. Act laying down the tests on the basis of which alone an allowance of bad debt may be granted to an assessee. Under s. 36(2)(iii) for instance, it is essential that the assessee should establish before the ITO that the debt had become a bad debt in the relevant year of account.
5. More or less similar provisions were in existence under s. 10(20)(xi) of the Indian I.T. Act, 1922. Courts have uniformly held that the opinion or value judgment of the assessee as to whether a debt had become bad and value judgment of the assessee as to whether a debt had become bad and when precisely the debt had become bad is not decisive for enabling the assessee to claim an allowance under that head. Decisions have laid down that the ITO must be satisfied on evidence that the debt had actually become had during the account year in order that the assessee may be eligible for the allowance. In this sense, therefore, the question whether the assessee is entitled to a bad debt being written off is predominantly a question of fact. The correctness of the decision of the ITO or of the Tribunal on this question has got to be considered only on the basis of the justification for the ultimate finding as to whether the debt had become bad at all or that it had become bad during any particular account year.
6. In the present case, the Tribunal in its order has given a proper consideration of the facts put forward by the assessee in support of its claim for write off of the bad debt. The principal ground urged by the assessee before the Tribunal was that the LIC of India was a mortgagee of the properties of the debtor-company and the debtor company itself had gone in liquidation. The suggestion of the assessee before the Tribunal was that should the LIC of India proceed against the properties the debtor company in realisation of its mortgage debt, nothing would be left for the simple money creditors of the debtor-company in liquidation of whom the assessee was one. The Tribunal in our judgment rightly rejected these contentions on the ground that there was no evidence to show that the LIC of India had actually brought to sale the debtor's properties in enforcement of its mortgage. The finding of the Tribunal in short comes to this that there was no evidence at all in support of the assessee's plea that the debt had become bad in the sense that all the debtor's properties had gone in for discharge of debts of secured creditors who were entitled to payment in preference to the assessee. We would supplement the reasons given by the Tribunal by one of our own which is that there is no material whether to show the value of the debtor's properties and the amount payable by the debtor-company to the LIC of India towards the discharge of the mortgage debt. In the absence of particulars regarding these matters, it would not be proper to act on the ipse dixit of the assessee that there was no chance of recovery by the assessee of the outstanding debt of Rs. 99,546,07 from the debtor-company. We, accordingly, answer the question of law in the affirmative and in favour of the Department.
7. Another question of law which has been referred to us by the Tribunal at the assessee's instance is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to the deduction of the capital loss of rupees twelve and a half lakhs in none of the assessment years 1966-67, 1967-68 and 1968-69 ?'
8. In the assessment year 1966-67, the assessee claimed a disallowance of capital loss of Rs. 12,50,000 in the following circumstance : The assessee held 25,000 equity shares of the face value of Rs. 100 each in a private company called South India Corporation (Madras) Private Limited. In the money-lending business of the assessee, the holding of shares in South India Corporation (Madras) Private Limited had always been exhibited as one of its investments. It appears from the records that the South India Corporation (Madras) Private Limited went into liquidation of March 26, 1966. Within five days of the liquidation of that company, the assessee proceeded to revalue all its holding of 25,000 shares in that company The revaluation was made as at March 31, 1966. The shares were revalued at 12,50,000. A difference of Rs. 12,50,000 was written off as a loss and the assessee claimed this loss on revaluation as an admissible deduction. It was in evidence that, in the course of liquidation, the liquidator of South India Corporation (Madras) Private Limited paid over to the assessee-company as a contributory, a sum of Rs. 14,47,479 in the subsequent year ended March 31, 1967. In the relevant year of assessment 1967-68, the assessee gave credit to this amount of Rs. 14,47,479 and returned a capital gain of Rs. 1,97,479.
9. The ITO while making an assessment for the year 1966-67, disallowed the claim of the assessee-company to obtain an allowance in respect of the loss of Rs. 12,50,000 claimed by the assessee on the revaluation and writing down of value of its 25,000 shares in South India Corporation (Madras) Private Limited. He however, made a protective assessment of the amount of Rs. 1,97,479 without questioning the assessee's plea that it represented taxable capital gain. The assessee appealed against the tax treatment of the capital loss of Rs. 12,50,000 for the year 1966-67 as well as the assessment of the capital gain of Rs. 1,97,479 for 1967-68. The AAC held that the assessee was not entitled to claim any allowance in respect of write off of Rs. 12,50,000 arising out of the revaluation of its investment in South India Corporation (Madras) Private Limited shares. The AAC, however, held that the ITO was no justified in bringing to tax Rs. 1,97,479 as capital gains in the assessment year 1967-68. When the matter came before the Tribunal confirmed the orders passed by the AAC.
10. Before us the assessee's counsel, Mr. S. V. Subramaniam, contended that the Tribunal ought to have granted an allowance in respect of the capital loss of Rs. 12,50,000 in the assessment year 1966-67 or in either of the subsequent two assessment years 1967-68 and 1968-69. Learned counsel, however, was at a loss to point out the precise statutory provision under which according to him the assessee was entitled to this deduction of a capital loss. Admittedly, the assessee's holdings of shares in South India Corporation (Madras) Private Limited were regarded by the assessee-company itself as an investment although the assessee-company was carrying on a money-lending business. In other words, the assessee-company never regarded its shareholdings as part of its stock-in-trade. If an assessee being a money-lender incurs loss by way of loss in the value of its stock-in-trade, such a loss would be allowable under general principles of commercial trading as applicable to the computation of business profit or business loss of a money-lender. Since it is the case of the assessee that the South India Corporation's shares only represented its capital investment, the loss necessarily is on capital account. Allowance of capital loss in unknown in income-tax law as one of the components of the computation of taxable income.
11. Before the ITO the assessee appears to have relied on the provisions of s. 2(47) read with section 46 of the I.T. Act as being in support of its claim for allowance of this item of capital loss. We are, however, unable to see how the assessee's claim can find any support from this provision. Section 2(47) of the I.T. Act defines transfer of a capital asset as including a sale, exchange, relinquishment or extinguishment of a capital asset or the compulsory acquisition of a capital asset. Section 46(2) of the I.T. Act provides that where a shareholder receives any money or other assets from a company in liquidation the assessee shall be charged to income-tax under the head 'Capital gains' in respects of the money so received or the market value of the assets on the date of the distribution subject to creation other deductions. In terms, however, the provisions of s. 46(1) and (2) cannot apply to the facts of the present case. It is not suggested that during the previous year ended March 31, 1967, relevant to the assessment year 1967-68, the assessee had received any money from the liquidator of South India Corporation or any assets in specie by way of distribution from that liquidator so as to invoke the provisions of s. 46(2) of the I.T. act. The amount of Rs. 14,47,479 which the assessee is stated to have received from the liquidator of South India Corporation in the year ended March 31, 1967, does not represent the market value of any assets received in specie by the company from the liquidator. Apparently it only represents the value put down by the parties themselves. In any case this sum of Rs. 14,47,479 has not been brought to assessment by the Department as a capital gain under s. 46(2) of the I.T. Act even for the year 1967-68. All that the Department did by way of sharply reacting to the assessee's claim for deduction of capital loss was to go in as a protective measure, for an assessment of Rs. 1,97,479, as capital gains for the assessment year 1967-68, following the assessee's voluntary act of returning that amount as assessable capital gains. This amount, as already mentioned, represents the difference between the value of the assets taken over by the assessee from the liquidator of South India Corporation amounting to Rs. 14,47,479 and the write-off of loss in the sum of Rs. 12,50,000 made in the books of the assessee-company in the prior year ended March 31, 1966, relevant to the assessment year 1966-67. This amount can by no means be regarded as a capital gain under s. 46(2) of the I.T. Act. Nor can the corresponding claim of the assessee for write-off of capital loss of Rs. 12,50,000 on a mere revaluation of its capital investment be allowed under any provision of the I.T. Act, 1961, let alone under s. 46(2) of the I.T. Act. Our answer to the question we have earlier set out is that the Tribunal was right in holding that the assessee was not entitled to the deduction of the capital loss of Rs. 12,50,000 in any one of the assessment years 1966-67, 1967-68 and 1968-69.
12. It only remains for us to deal with one more question of law in this reference which has been referred by the Tribunal at the instance of the Department. As might be seen from the text of the question, it relates to the protective assessment made by the Department, since cancelled by the AAC and the Tribunal of Rs. 1,97,479 as capital gains following a return of the said sum by the assessee for the assessment year 1967-68. The question referred to us on this subject is an follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 1,97,479 was not assessable as capital gains in the assessment for the year 1967-68 ?'
13. We have earlier discussed the proper treatment of this amount of Rs. 1,97,479 while we discussed the eligibility of the assessee's claim for deduction of the capital loss of Rs. 12,50,000 by way of revaluation of its investment with the South India Corporation. As we earlier remarked, the sum of Rs. 1,97,479 merely represents the difference between the amount written off in the earlier year and the value of the assets which the assessee had received from the liquidator of the South India Corporation in the subsequent year. We have also indicated that s. 46(2) cannot be fitted in with the protective assessment made by the ITO of the amount of Rs. 1,97,479. We have pointed out that whereas s. 46(2) enable the ITO to regard the market value of any assets distributed in specie by a liquidator or any difference in money received from a liquidator as the full value of the consideration for the purpose of s. 48 of the I.T. Act, the provision does not provide for an assessment which has been made by the ITO for 1967-68 on a protective basis. Our answer to this question, therefore, is that the Tribunal had rightly confirmed the order of the AAC setting aside the assessment on Rs. 1,97,479 as capital gains in the assessment year 1967-68.
14. In view of our answer to the question of law referred to us by the Tribunal in this reference, each party will bear its own costs.