1. This is a reference under Section 21, Excess Profits Tax Act, read with Section 66(1), Income-tax Act, of a short question of law under Section 10(2)(xi) of the latter Act. The reference has been made by the Calcutta Bench of the Income-tax Appellate Tribunal. In order to appreciate the true import of the question referred, it is necessary to state first the facts out of which it has arisen.
2. The assessee, Messrs. Begg Dunlop and Co., Ltd., are, or rather were the managing agents of two other companies, namely, Craig Jute Mills Limited and Waverly Jute Mills Limited. It appears that as such managing agents they had made advances to each of the managed companies having lent a sum of Rs. 10,00,000/- to the Waverly Jute Mills Limited and a little less than Rs. 10,00,000/-to the Craig Jute Mills Limited. The companies apparently did not flourish and as early as the assessment year 1934-35, the assessee company began a practice which has formed the subject of much debate at our Bar.
The practice was that interest amounts due on the loans advanced to the two managed companies were credited to an account called the Interest Reserve Account and they were not taken to the credit of the Profit and Loss Account. The Interest Reserve Account, it is not disputed, was treated as a Suspense Account and the amounts credited to it were kept to meet bad debts which might or seemed likely to come into existence. The amount so credited to the Interest Reserve Account totalled a sum of Rs. 1,88,579/- during the assessment years 1934-35 to 1937-38 and those credited during the assessment years 1938-39 to 1939-40 totalled Rs. 2,01,368/-.
3. It appears that in 1940 schemes of reconstruction were framed and approved of by theHigh Court in respect of both the managed companies and one of the provisions of the schemes was that the managing agents would write off their dues to the extent of Rs. 5,00,000/- in the case of each company. An amount of Rs. 10,00,000/- was therefore, written off during the chargeable accounting period which was April 1, 1940 to March 31, 1941, and the manner in which it was done was that the sum of Rs. 3,89,948/- which was the total of the two sums I have already mentioned was first adjusted against the amount of Rs. 10,00,000/- and only the balance of Rs. 6,10,052/-was adjusted against the profit of the chargeable accounting period. The question in the present case is whether the assessee is entitled to deduction as a had debt, against the profits of the chargeable accounting period, of the whole amount of Rs. 10,00,000/- as claimed by it or whether it was-rightly allowed only a sum of Rs. 6,10,052/- by the departmental authorities.
4. A few other facts remain to be mentioned. It appears that in the relevant income-tax assessments, the interest amounts credited year after year to the Interest Reserve Account during the years 1934-35 to 1937-38 were not treated as the income of the assessee company in accordance with submissions made by the company itself. With respect to the amounts credited in the later years,, namely, the amounts credited during the years 1938-39 to 1939-40, the Income-tax Officer took a different view and treated the amounts as the income of the assessee company and brought them under assessment. The position, therefore, is that out of the disputed amount of Rs. 3,89,948/- a sum of Rs, 2,01,368/- had suffered assessment for income-tax purposes, whereas the balance of Rs. 1,88,579/-had not been so assessed.
5. It appears further that in the Income-tax assessment for 1941-42 which is the previous year relative to the chargeable accounting period, the-assessee company admitted that the amount of bad debts chargeable against its profits for that year was-Rs. 10,00,000/- less Rs. 1,88,579/- which, as 1 have said, had not suffered assessment previously. The Tribunal has pointed out that even in the Excess Profits Tax assessment, the assessee took up the same position before the Excess Profits Tax Officer and in the return or rather the computation statement submitted by it, the bad debt chargeable was shown as Rs. 8,11,421/- and not Rs. 10,00,000/-as subsequently claimed. This amount of Rs. 8,11,421/- was arrived at by deducting the sum of Rs. '1,88,579/- from the total bad debt of Rs. 10,00,000/-.
6. The Excess Profits Tax Officer, as I have already stated allowed only a sum of Rs. 6,10,052/-and that decision was upheld by the Appellate Assistant Commissioner and subsequently by the Income-tax Appellate Tribunal. The assessee thereafter asked for a reference to this Court of a question of law arising out of the Tribunal's order and in pursuance or that application the following question has been referred:
'Whether on the facts and in the circumstances-of this case, the claim for the allowances of Bad' Debts at Rs. 10,00,000/- for the relevant chargeable accounting period was justified as against Rs.6,10,052/- allowed.'
7. In opening his argument, Mr. Mitra, who is appearing on behalf of the assessee stated that there was no dispute as to the facts and the only question was whether Section 10(2)(xi) of the Income-tax Act had been correctly applied to the facts by the Income-tax Officer. That section to quote only She relevant part reads as follows:
'10(2): Such profits or gains (that is, profits or gains of any business, profession or vocation) shall be computed after making the following allowances, namely:
* * * (xi) when the assessee's accounts in respect ofany part of his business, profession or vocationare not kept on the cash basis such sum, in respect of bad and doubtful debts, due to theassessee in respect of that part of his business,profession or vocation * * * suchsum in respect of loans made in the ordinarycourse of such business as the Income-tax Officermay estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee.'
8. As we understood Mr. Mitra at the time, hiscontention was that in order that the Income-tax Officer might allow any deduction on account of bad debts in any particular year, it was necessary that such a amount or a larger amount should appear as 'actually written off' in the accounts of that year. Mr. Mitra referred us repeatedly to what the departmental authorities had said as to the assessee having written off the amount credited to the Interest Reserve Account 'for all practical purposes' and contended that writing off in substance or in effect was not sufficient under the section at all, but an actual writing off was necessary.
As we understood him, the point in his contention was as follows. In the context of the facts of the present case, the position was that the Income-tax Officer instead of allowing the whole of the amount of Rs. 10,00,000/- actually written off during the accounting year, was allocating a portion of the bad debt to certain previous years and treating the portions so allocated as having become bad debts in those years. The contention of Mr. Mitra as we understood it, was that in those previous years nothing had actually been written off and, therefore, there was no warrant in Section 10(2)(xi) for what the Excess Profits Tax Officer had done.
Mr. Mitra conceded that if a certain amount was actually written off in a particular accounting year, the Income-tax or the Excess Profits Tax Officer would not be bound to allow the whole of that amount because the section gave him an option to allow only such amount as he might deem to be irrecoverable, but the section, nevertheless, required that in order that the Income-tax Officer might treat any amount as having become a bad debt in a particular year, that amount or some larger amount must actually be written off in the accounts.
The conclusion to which that arguments, as weunderstood it, was intended to lead was that inasmuch as there was no amount at all actually written off in the previous years or, to put it in another way and Mr. Mitra's own language, the actual amount written off was zero, the Income-tax Officer was only entitled to allow an amount less than zero and, therefore, not entitled to allow anything in respect of any previous year at all or to allocate any part of the amount claimed for the year 1940-41 to any previous year. So regarded, the question submitted for our consideration was a pure question of law and Mr. Mitra himself said so, as we understood it, several times.
9. Subsequently however Mr. Mitra explained in the course of his reply that what he had really intended to contend was somewhat different. His real contention, he said, was that in order that the Income-tax Officer might legally allocate any part of the amount of Rs. 10,00,000/- to any previous year, he would have to find definitely that that part had in his opinion become irrecoverable in that year.
The next link in the chain of reasoning was that there was no such finding recorded either by the Excess Profits Tax Officer or by the authorities superior to him. All that they had found was that the assessee himself had created certain amounts to the Interest Reserve Accounts which was treated as a Suspense Account but besides making that reference to the actings of the assessee, the Excess Profits Tax Officer had not himself found that any part of the amount now claimed as bad debt, had actually become irrecoverable at any previous point of time.
10. We shall deal with both the contentions of Mr. Mitra, although we must have misunderstood him very grievously if even before the mid-day adjournment he had intended to advance his second argument. It is, however, open to him to take the point that he took subsequently and, as I have said, we shall deal with it on the merits.
11. On the question of construction, I am entirely unable to hold that Section 10(2)(xi) of the Income-tax Act imperatively requires that in order that any amount may be allowed as irrecoverable in any particular year, such amount or a larger amount must be 'actually written off as irrecoverable in the books of the assessee'. The relevant language of the section, if I may recall its terms is 'such as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off'.
What that language means to my mind, clearly is that while the Income-tax Officer is given a discretion to allow such amount as he himself may estimate to be irrecoverable, a maximum limit or rather a ceiling is at the same time set beyond or higher than which he may not go. It does not seem to be even a requirement of the section that a debt which the Income-tax Officer may treat as irrecoverable must be written off at all. All that the section seems to mean, in my view, is that if a debt has actually been written off by the assessee in his books as irrecoverable in a particular year, then the Income-tax Officer, in making an allowance in respect of bad debts for that year must not allow anything in excess of the amount which the assessee has himself written off.
Mr. Mitra reminded us of the well known expression of opinion by the Privy Council that in construing a taxing statute, the actual terms must beliterally construed and that nothing like a substantial compliance would do duty for a literalobservance which the statute required. That principle need not be disputed, but the clear language of Section 10(2)(xi) does not, to my mind admit of theconstruction which Mr. Mitra proposed for it.
12. If it be not an essential requirement of thesection that any amount in order to be allowable as a bad debt must be actually written off as irrecoverable in the books of the assessee or must be included in such amount, the rest of the argument of Mr. Mitra, on the basis of the construction he adopted, will be found to fall immediately to the ground. If an actual writing off in the books of the previous years was not necessary, there was no bar to the Excess Profits Tax Officer regarding portions of the amount of Rs. 10,00,000/- having become irrecoverable, not during the accounting year concerned but at prior points of time,
Ordinarily when a claim for deduction in respect of a bad debt is made and the Income-tax or Excess Profits Tax Officer is prepared to allow only a portion of it, he is not obliged to account for the balance and make out that the portion he is disallowing became a bad debt in a previous year. The question arises in this case only because a sum of Rs. 10,00,000/- had to be taken as written off because of the schemes of composition.
13. The second contention of Mr. Mitra really raises a question of fact, but there is perhaps a trace of law in it if the omission he complained of had occurred and if it was vital. I agree with him entirely that the assessee's state of mind cannot be the determining factor, as appears to have been held in the case of -- 'Seth Ganga Sagar v. Income Tax Appellate Tribunal : 15ITR16(All) which Mr. Meyer cited. The section quite clearly makes it the duty of the Income-tax Officer to estimate for himself what debts became irrecoverable in what year.
At the same time, however, it seems to me reasonable to hold that the manner in which the assessee himself treated a debt is a relevant consideration, because if the assessee, in the course of carrying on the ordinary commercial operation of his business, treats a particular debt as doubtful or irrecoverable, the Income-tax Officer does not act unreasonably, nor relies upon irrelevant evidence, if he treats the assessee's conduct as material evidence of the time when the debt became irrecoverable.
After all, it is the assessee who knows his debtor best and knows at least better than the Income-tax Officer what the chances of recovery are. As far as I can see, in the present case the Excess Profits Tax Officer or the departmental authorities do not seem to have treated the conduct of the assessee for any other purposes and their findings do not seem to me to have fallen short of finding that the amount of Rs. 3,89,948/- did, in their opinion become irrecoverable during the years when the component parts of it were credited to the Interest Reserve Account. When the Tribunal says in the statement of the case that
'as early as 1934-35 assessment year the Appellant Company knew that the loans advanced tothe two debtor companies would not be realisedin full'
and when it proceeds to point out the manner inwhich the interest amounts were treated by the assessee company itself in its own accounts and lastly when it points out the position taken up by the assessee company in the Income-tax and Excess Profits Tax assessments, it is quite clearly reciting the evidence on which it bases its conclusion that the amount of Rs. 3,89,948/- became irrecoverable during the earlier years.
Pointed reference is made to the circumstance that not only were the amounts credited to the Interest Reserve Account which was treated as a Suspense Account and which was admittedly intended to meet cases of irrecoverable debts, but the amounts were also deducted out of the total debt's due to the assessee company from the debtors for balance-sheet purposes and thus the constituents of the company were told that those debts no longer formed part of the assets of the company. The departmental authorities obviously saw no reason to disagree and in fact, the Tribunal has expressed that conclusion not only directly, but also indirectly by holding that the amount of Rs. 2,01,368/- was wrongly assessed for income-tax purposes.
14. Mr. Mitra invited us to the actual terms of the assessment order in order to point out that all that the Excess Profits Tax Officer had proceeded upon was a view that the assessee company had constructively written off certain parts of the debt by creating a special reserve. The Excess Profits Tax Officer did not hold that the assessee company had not been right in so writing off the amounts concerned or that it had made the book entries from any special design. The orders successively passed by the Excess Profits Tax Officer, by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal are capable, in my view, of only one construction and that construction is that they were relying on the actings of the assessee in support of their own conclusion that the amount of Rs. 3,89,948/- had, in fact, become irrecoverable in the earlier years.
15. I think it is right to add that although I have expressed my agreement with Mr. Mitra that the relevant decision under Section 10(2)(xi) is the decision of the Income-tax or Excess Profits Tax Officer and not of the assessee and that it is only the intention of the former which is material under the section, still, the form of the question referred is such that it is the action of the assessee which has to be considered. The question does not ask whether the Excess Profits Tax Officer was right in allowing Rs. 6,10,052/-, but whether the assessee was right in claiming the whole sum of Rs. 10,00,000/- as a bad debt allowance for the accounting year. From the point of a question so framed, the manner in which the assessee had himself dealt with the amount of Rs. 3,89,948/- in prior years, is clearly material.
16. For the reasons, I have given above, it appears to me that both on the question of construction and On the question of the alleged absence of the necessary finding Mr. Mitra's contentions mustfail. The answer to the question referred must, therefore, be in the negative.
17. The Commissioner of Excess Profits Tax, West Bengal, will have his costs of this reference.
18. Certified for two counsel.
19. I agree.