VEERASWAMI J. - This is a reference under section 66 (2) in the Income-tax Act 1922, in which the question for consideration is :
'Whether, on the facts and in the circumstances of the case, the disallowance of either or both the sums of Rs. 5,211 and Rs. 1,080 of the bad debts claimed by the assessee was right in law ?'
The reference relates to the assessment year 1956-57 corresponding to the accounting year ended April 12, 1956. The assessee was carrying on business of money-lending at Tiruchirapalli. On a promissory note date June 13, 1945, he lent Rs. 8,500 to one A. T. B. SB. Subramanian Chettiar. Deducting payments, the balance due as on April 12, 1954, was Rs. 3,986-12-10. On account of an earlier debt incurred by the same debtor, a sum of Rs. 5,000 was due from him to the assessee as on June 14, 1942. As on June 13, 1945, the amount due to Rs. 7,752-10-0. On that date the assessee got a promissory note for Rs. 6,528 leaving a balance of Rs. 1,224-10-0 which was transferred to the former account on April 12, 1954. Thus, a total sum of Rs. 5,211-6-0 stood outstanding from Subramanian Chettiar. In 1952 the assessee filed a suit against him, got a decree and on execution on September 24, 1952, realised on October 9, 1953, Rs. 4,074-14-11. The outstanding balance of Rs. 5,211-6-0 was arrived at after giving credit to the realisation on execution of the decree. One AL. KR. Alagappa Chettiar was another debtor of the assessee and had borrowed from the latter a sum of Rs. 1,000 on a promissory note date August 3, 1946. The assessee made one or two further advances of small sums. But the debtor repaid only Rs. 10 on August 10, 1952. The total amount due as on that date was Rs. 1,080. In 1953 Alagappa Chettiar Was adjudicated an insolvent and no divided was declared in insolvency up to the assessment year. The assessee claimed deduction of the two debts as bad debts in the accounting year.
The Income-tax Officer the claim. His reason for disallowing the first debt was that the execution of the decree was long prior to the accounting year, that the assessee was aware at the time of the execution that the judgment-debtor had no other properties to be proceeded against and that, therefore, the debt, in fact, became bad at that point of time. With regard to the other debt, in fact, the Income-tax Officer said that according to the assessee himself, the petition for adjudication of Alagappa Chettiar had been filed three or four years before the accounting year and that the assessee was fully aware of the fact of Alagappa Chettiar had no properties. The Appellate Assistant Commissioner accepted those findings and dismissed the assessees appeal observing that it was not shown that the debtor, Subramanian Chettiar, had any other properties or other means of repayment after the execution of the decree in September, 1953, and so, the debt had become bad either in 1952 or in previous year ending April 12, 1954. The Appellate Assistant Commissioner went on to observe that the only excuse given for not writing off this debt then and there was that the assessee expected somehow some repayment but there was no evidence to support this connection. As to other debt, the Appellate Assistant Commissioner was of opinion that there was nothing to show that it was only in the accounting year that the debt had become bad and that on the other hand the fact that Alagappa Chettiar became insolvent in 1953, and no dividend was declared till the accounting year. The assessee again failed in his appeal before the Tribunal which agreed with the finding of the Appellate Assistant Commissioner. The Tribunal observed that there was no evidence furnished to show why the assessee waited till the assessment year 1956-57 to write off and what reasonable hope of recovery he had after he had brought to sale the property of the debtor (Subramanian Chettiar) and that, in the other case, Alagappa Chettiar became an insolvent in 1953 and there was no evidence to prove that the debt became bad only in the accounting year.
It is contended before us that there was no evidence before the assessing or appellate authorities to justify the finding that the two debts had become bad debts prior to the accounting year and that, in the absence of any material to justify the finding, the claim of the assessee that they became bad debts in the accounting year should have been accepted. For the revenue it is stated that the question when a debt became a bad debt being one of fact, the Tribunals finding cannot be taken exception to in a reference under section 66 (2) of the Act and that in any case the finding is supported by evidence.
Under section 10, tax is payable by an assessee on the profits or gains of the business carried on by him and such profits or gains must be computed after making the allowances specified therein. One of such allowances is that mention in section 10 (2) (xi), to it, the sum in respect of loans maid in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee is entitled to allowance. Whether bad or doubtful debts are synonyms with a sum irrecoverable, we are not called upon to decide. But what is a bad or doubtful debt That is a question of fact. When we say a debt is a bad debt, we understand that there is no possibility of repayment of the debt of the debtor has no means to repay and discharge the debt or that the creditor for some reason can no longer realise repayment. A bad debt is so called from the standpoint to there being no possibility of repayment or recovery, and, when we talk of a doubtful debt, it means that the facts are such that repayment or recovery is improbable. But whether it is a bad debt or a facts relevant thereto and not the hopes, fears or judgment of the creditor himself. The test of a debt being doubtful or bad is objective and naturally the authority to decide is either the departmental authority set up for the purpose or the Tribunal. It is, however, for the assessee who claims a debt to be bad or doubtful debt to prove the fact by relevant and proper evidence. The assessee has to show not merely that the debt he seeks to deduct as a loss is a bad or doubtful debt but also became bad or doubtful debt in the accounting year, for, what is charged to tax under the scheme of the Act is the profits or gains of any business of the accounting year. If, in point of fact, a debt became bad or doubtful prior to the accounting year, the assessee is of course not entitled to allowance in respect thereof in the accounting year. But if, on the other hand, the debt as a fact became bad or doubtful in the accounting year, the assessee as of right is entitled to deduction thereof. This is because in determining the true amount of profits or gains of a year, losses incurred in that year have necessarily to be taken into account. It should be remembered that in bringing to tax the profits and gains of a year, each year is a separate self-contained period of time, in regard to which profits earned or loses sustained before its commencement are irrelevant. As the Privy Council observed in Commissioner of Income-tax v. Chitnavis :
'It thus follows that a debt, which had in fact become a bad debt before the commencement of particular year, could not properly be deducted in ascertaining the profits of that year, because the loss had not been sustained in that year.'
In that case the Judicial Committee considered what a bad debt was :
'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 any one 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 goods. 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 view of the Privy Council was quoted with approval by the Supreme court in Bank of Bihar Ltd. v. Commissioner of Income-tax. In Harnand Rai v. Commissioner of Income-tax the Lahore High Court thought that, though the debtor absconded in 1928, the assessees had still three years to make up their mind whether to sue him or not and the debt could be said to have been bad only on July 10, 1931, the debt having been incurred on July 10, 1928. That was a case in which the assessee had advanced certain moneys to a contractor and on July 10, 1928, a certain sum was found deal it was agreed between the parties that it would be repaid by the debtor on receipt of cheques from the government for work done. Thereafter the contractor absconded and, in such circumstances, the assessee in the assessment year 1931-32 claimed deduction of the amount remaining due to him. The department was of the view and found that there was no evidence to support the finding. For the assessee his learned counsel relying on this decision contends that in every case an assessee would be justified in waiting for three years before treating the debt as bad. We do not think that the Lahore Court was of opinion that it would have been premature to write off the debt as bad prior to July 10, 1931, and that if became a bad debt actually in the accounting period. Nanak Chand Mamraj Mal v. Commissioner of Income-tax was also referred to for the assessee and it was urged for him that the assessee justifiably wait until the receiver in insolvency had completed the winding up. In that case, the debtor was adjudicated an insolvent in 1938, and the assessee received the sum of Rs. 13,000 as a first dividend. No further dividend was received till 1950 when he received another sum of Rs. 2,195. In the year 1949-50 the assessee claimed a sum of Rs. 1,00,000 as bad debt. The Tribunals finding was that the debt became irrecoverable soon after the year 1941, on the ground that subsequent to the payment in 1941 there was no visible asset belonging to the insolvent except a sum of Rs. 10,000 regarding which there was dispute. Therefore, the assessee could never hope to receive more than a sum of Rs. 2,500 in any case. The Punjab High Court, on a reference to it, expressed the view that there was no justifiable reason for the finding of the Tribunal as the receiver completed the winding up in 1950. This case again turned on the facts and did not lay down any general principle that, irrespective of other circumstances, an assessee could justifiably wait until the completion of the winding up by the receiver before he could treat a debt as a bad or a doubtful debt. We do not see why, if the official assignee had no assets of the insolvent in his hands, a creditor should wait until three years after he had knowledge of that position and then treat the debt due to him as a bad debt. As we already mentioned, a debt becomes bad not because the assessee was minded to treat it so at a particulate time but because at and from a particular point of time it was no longer possible to recover, as the debtor has no means or assets to repay and the circumstances made it plain that recovery would not be possible. We do to think that Muthukaruppan Chettiar v. Commissioner of Income-tax assists the assessee either, because there the learned judges of this court were clearly of the view that the assessee was not in a position to know whether the debts were recoverable or not until after a particular date. It is quite true, and we accept the contention for the assessee, that the Income-tax Officer should have materials before him to hold that the debts claimed as a loss should have been written off before a date on which the assessee claimed they became bad debts.
The question, therefore, is whether the finding of the Tribunal that the assessee should have written off the debts prior to the accounting year is supported by material. If it is, it will not be within the purview of a reference under section 66 (2) of the Act to examine the propriety of correctness of the factual conclusion unless unless it be that no court or authority on the facts and circumstances could reasonably reach such a conclusion. The assessee according of the decree against Subramanian Chettiar that he had no other property to proceed against. He also observed that the assessee when he applied for adjudication three or four years prior to the accounting year. It was because of this presumed knowledge on the part of the assessee that the Income-tax Officer considered that the assessee need not have waited to write off the bad debts until the accounting year. The Appellate Assistant Commissioner, through he concurred with the Income-tax Officer, put his reasoning slightly differently :
'It is not shown that the debtor had any other properties or other means of repayment. Therefore, ordinarily the debt had become bad either in 1952 or in the previous year ending April 12, 1954.'
In the case of the debt due from Alagappa Chettiar, the Appellate Assistant Commissioner said :
'He (Alagappa Chettiar) became an insolvent in 1953 and no dividend has been declared yet. The proceedings are said to be not yet over. Now it might have been said in the year 1953 that the debt had become doubtful. There is nothing to show that it is only in this year that the debt had become bad.'
The Tribunal dealt with the matter very cryptically :
'We agree with this finding of the Appellate Assistant Commissioner. We have not been furnished with any evidence to show why the assessee waited till the assessment year 1956-57 to write off and what reasonable hope of recovery he had after he had brought to sale the property of the debtor on the first occasion. We, therefore, hold that the claim was rightly rejected.'
With respect to the other debt, the Tribunal merely stated that the debtor became an insolvent in 1953, and that there was no evidence that the debt became bad only in the accounting year. From the manner in which the Tribunal has dealt with the matter, we should point out that there is no presumption one way or the other that the debt became a bad debt on a certain date or later and that a decision on the question will depend upon facts proved on evidence. It cannot be said that, merely because the assessee has not furnished evidence to show why he waited till the assessment year 1956-57 to write off and what reasonable hope of recovery he had after he had brought the property to sale on the first occassion, the debt became bad or doubtful prior to the accounting near. That the debt became bad prior to the accounting year will have to be found on proved facts relevant to the question. We have not been invited to any evidence or material on which the Income-tax Officer could say that the assessee had knowledge that the debtors had no properties from a particular point of time and they had no other means to repay the debts thereafter so that the debts could be treated as having become bad at that point of time. When the assessee claimed that the debts became bad in the accounting year, he was not called upon to show that it was not so and that the debts became bad prior to the accounting year. But the assessee should certainly satisfy the departmental authorities and the Tribunal on proper material or evidence that the debts became bad in the accounting year. We are of the view, therefore, that the finding of the Tribunal, though factual, is not based on any erroneous approach that the assessee had failed to show why we waited till the assessment year 1956-57 to write off the debts. We consider, therefore, that the disposal of the appeal by the Tribunal is not in accordance with the law. The question referred to us is answered in favour of the assessee with costs. Counsels fee Rs. 250.
Question answered in favour of the assessee.