CHAKRAVARTTI, C.J. - It has not been easy for us to follow the course which this matter has had, because no one seems to have known on what ground he was standing or stood long on the same ground.
The assessees are the Hongkong & Shanghai Banking Corporation. In their assessment year 1946-47, they climed a deduction of Rs. 4,23,271 which was the total of two debts of Rs. 2,90,458 and Rs. 1,32,813 due to them from a customer, named Messrs. C. M. Karanjia & Co. The first of the debts was due to the Calcutta branch of the assesses and the second to their Bombay branch.
The Income-tax Officer disallowed the claim on the ground that, in his view, the bank had arisen have was upheld by the Tribunal in a further appeal to them.
The transactions in the course of which the debts had arisen have been described by the tribunal in the statement of case originally submitted to this Court and the further statement submitted in accordance with the direction issued to them under section 66(4) of the Act. It appears that between July and December, 1941, Messrs. C. M. Karanjia & Co. drew on their Hongkong office various export bills covering gunny bags, jute, wine and textiles, exported by them. Such bills amounting in all to about Rs. 5,90,000 were negotiated by the Calcutta and Bombay branches of the assessee with whom Messrs. C. M. Karanjia & Co. had opened a letter of credit. Some collections were made by the assessees in respect of those bills, but it appears that at the time when the Japanese came to occupy Hongkong, there was an amount of Rs. 4,23,271 still outstanding. It will be recalled that this was the sum which the assessee claimed to deduct from their profits of the accounting year relative to the assessment year 1946-47. After the Japanese occupation of Hongkong had ceased and Allies had resumed possession of the place, the assessees enquired from their Hongkong office on the 12th of November, 1945, whether there was any possibility of the debt being realised. On the 23rd of November following, they received a reply from Hongkong that the outstanding bills were uncollectable at that place. Thereafter, the amount outstanding was written off on the 30th of November, 1945, the last day of the relevant previous year. I might state here that the accounting year relative to the assessment year 1946-47 was the twelve months from the 1st of December, 1944, to the 30th of November, 1945.
It will be remembered that the Income-tax Officer disallowed the claim on the ground that the assessee had been unable to establish that the amount in question had really become irrecoverable. It appears to have been argued against that view before the Tribunal that in order to qualify for the deduction provided for in clause (xi) of section 10(2) of the Income-tax Act, it was not necessary that a debt should be bad or irrecoverable, but it was sufficient if the debt was a doubtful one. The department, on the other hand, contended that whether there was a bad or a doubtful debt, was wholly irrelevant in the present case, inasmuch as the assessees were a banking company and, therefore, they could claim a deduction only if the sum concerned was a loan made in the ordinary course of their banking business and if it was proved to the satisfaction of the Income-tax Officer to have become irrecoverable in the year of account. It is quite obvious that, according to the department, the assessees, being a banking company, came not under the first part of section 10(2) (xi), but under its second part. Having put forward that view of the legal position of the assessees, the department proceeded to rely upon the circumstances which, according to them, justified the finding of the Income-tax Officer that the amount in question had not been proved to have become irrecoverable. It is really not necessary for the purposes of this reference to set out what those circumstances were, but in order that the question referred to this Court may be better understood, I may refer to some of them. It was pointed out that between the 25th and the 30th November, 1945, the Bombay branch of the assessees informed their Calcutta branch that they had not even made a formal demand from the debtor and were very doubtful if the amount could be claimed as a bad debt. Reference was also made to the admission made by the learned counsel for the assessees that they had a claim against the insurance companies with whom the goods covered by the bills had been insured and that there was a question of a claim against Government as well. One other fact referred to was that subsequent to the writing off of the amount, the assessees had realised a sum of Rs. 2,00,000. It was further pointed out on behalf of the department that the writing off of the amount had not taken place in the ordinary way, but it appeared clearly from the inter-branch correspondence of the assessees that the amount had been written off, because they were advised by their taxation experts to write it off during the year 1945, in order to get the maximum benefit out of the expected deduction in excess profits tax in the following year.
The Tribunal, it appears, agreed with the contention of the department that the assessees, being a banking company, could not claim a deduction on the basis of the debt concerned being doubtful or bad, but that they could claim a deduction only if the sum in question was a loan and if it was proved to have become irrecoverable. The reply of the assessees appears to have been that the assessees could sustain a claim of deduction also on the basis of the debt being a bad or a doubtful one and that if a debt was even a doubtful debt, although it might not have yet become a bad debt, there would be sufficient reason for the assessees to claim the deduction. It was also contended that the amount in question was not a loan, but it was a debt which had arisen out of the negotiation of certain documentary bills by which the assesses had virtually carried out a transaction of purchase.
The Tribunal rejected the contention of the assessees that they were entitled to claim a deduction on the basis of a bad and doubtful debt, but they seem also to have tried to meet the assessees on their own ground. They held that it appeared to them to be clear that in November, 1945, the bank authorities had not been yet in a position to determine what part of the loan of Rs. 4,23,271 had become irrecoverable, although a substantial part of the loan did look doubtful of realisation. The contention of the assessees, it will be remembered, was that even a doubtful debt would suffice to sustain a claim of deduction, but the Tribunal do not appear to have considered it necessary to deal with that contention specifically. In their view, the assessees being a banking company, the second part of section 10 (2) (xi) was applicable to them and, therefore, they could claim a deduction only if the sum in question was proved to have been irrecoverable to the satisfaction of the Income-tax Officer. The question as to whether a deduction could be claimed under the first part of section 10(2) (xi) on the basis of the debt being under doubtful as distinguished from bad was not, in the opinion of the Tribunal, relevant, since the first part of section 10(2) (xi), which spoke of bad and doubtful debts, was not applicable to the assessee.
It must be clear by now that the basis on which the Tribunal disposed of the assessees claim was that they were bankers, that they could claim a deduction under section 10(2) (xi) only in respect of loans and that the question of a debt being bad or doubtful did not arise in their case, inasmuch as the first part of section 10(2) (xi) was not applicable to them. Surprising as it might seem, the Tribunal after taking the view I have set out in detail earlier and just summarised, appear to have changed their ground or changed their mind altogether and when asked to refer the matter to this Court, referred the following question :-
'Whether in the facts and circumstances of this case, the applicant bank was entitled to claim this debt as bad and doubtful under section 10(2) (xi) even without determining as to what part of the debt was really irrecoverable.'
If any thing is clear about this question, it is clear that it proceeds on several assumptions. The first assumption is that the assessees are entitled to make a claim of deduction under section 10(2) (xi). The second assumption is that they are entitled to make a claim in respect of an amount on the basis of its being a bad and doubtful debt. The question thus proceeds on the basis that the assessees do come under the first part of section 10(2) (xi). Having thus laid the basis on which the assessees claim was to be taken to rest and having said that the basis was that the amount in question was a bad and doubtful debt, the only question asked is whether the assessees were entitled to maintain the claim 'even without determining as to what part of the debt was really irrecoverable'. It is not very easy to understand what the extremely narrow question asked really means, but perhaps the much-needed light is thrown by a sentence in the statement of case. There, in stating what the assessees case was the Tribunal observed as follows :-
'The applicants contention was that immediately there was some doubt in the mind of the banks executive with regard to the realisation of a debt in full, the bank would be entitled to write off the debt as bad, although no step had as yet been taken to determine as to what part of the debt was likely to become irrecoverable.'
It appears to me that what the question intends to ask is, given that the assessees came under the first part of section 10(2) (xi), and given that they were entitled to claim a deduction on the basis of the amount in question being a bad and doubtful debt, were they entitled to sustain that claim merely by a state of doubt in their mind as regards the chances of realisation or was it necessary that they should come to be of the view that the amount had become really irrecoverable About the utility of asking such a question, I shall have to say something later, but I hope what I have said is sufficient to indicate the nature of the question asked.
It appears that on the 3rd of January, 1951, the reference came up for hearing before Harries, C. J, and Banerjee, J., when they made an order under section 66(4) of the Act, directing the Tribunal to submit a further statement of case. The Judgment of the Court was delivered by Banerjee, J., with whom Harries, C.J., agreed. His Lordship observed that it could not be and had not been disputed that if the transaction amounted to a loan, then having regard to the finding of the Appellate Tribunal that the amount had not become irrecoverable on the 30th November, 1945, the assessees could not claim a deduction in respect of the amount. His Lordship, however, considered it necessary to find or have it found, whether the amount in question was really a loan or it could be said to be a debt. He pointed out that the taxing authorities had treated it as a loan, but observed that no facts had been stated in the statement of case in support of the conclusion. As the case would come under the first part of section 10(2) (xi), if the amount in question was a debt, but would come under the second part, if it was a loan, their Lordships thought that they ought to know the true nature of the transaction and accordingly they directed the Appellate Tribunal 'to state additional facts in the light of the observations' made by them. In pursuance of that direction, the Tribunal have since submitted a further statement of case.
With greatest respect to their Lordships who heard the reference on the previous occasion, I find it impossible to understand why they should have considered it necessary to direct a further enquiry as to whether the amount in question was a debt or a loan. It is quite true that before the Tribunal the assessees had claimed it to be a debt, whereas the department had insisted that it was a loan and it is also true that the Tribunal favoured the latter view. But the question, as referred to this Court, had left that controversy behind and the competition between a debt and a loan was in no way reflected in its terms. Instead, as I have already pointed out, the Tribunal had framed the question on the basis that the assessees were entitled to claim a deduction of the amount as a bad and doubtful debt and it only asked this Court to say whether they could do so before they had definitely decided that the amount or any part of it had become irrecoverable. In those circumstances, it appears to me that it was no longer necessary to enquire whether the amount in question was a loan or a debt, because the Tribunal had asked this Court to answer the question referred on the basis that it was a debt and that the assessees were entitled to make a claim on that basis. In that view of the matter, I do not propose to go into the further statement of case and embark upon an enquiry as to the true nature of the transaction which gave rise to the liability.
To revert now to the question to be answered, I am not quite clear in my mind what advice the Tribunal wanted by it or that it would do any good to anybody, if we answered it. It will be noticed that the question is not whether, in order that a deduction may be allowed, the Income-tax Officer must find the amount in question to have become irrecoverable, but the question is whether the assessee himself can make a claim without determining, so far as he is concerned, that the debt or a part of the debt had become irrecoverable. What is important for taxing purposes is not an assessees right to make a claim, but his right to have a claim allowed. It is, therefore, somewhat surprising that the question should be limited to only the initial stage of a claim of deduction, namely, the circumstances in which the assessee would be entitled to make a claim without, apparently, any reference to the conditions required to be fulfilled, if the claim is to be allowed. Unless a mere claim made by the assessee is final, there is no point in asking in what circumstances the assessee can make a claim. I do not think that even if one confines oneself solely to the first part of section 10(2) (xi), one can say that the assessees claim that a particular debt is bad and doubtful is conclusive, so long as he himself bona fide thinks that it is so. In my view, however, there is a broader and far stronger reason to hold that the question referred in the present case is entirely pointless. The subject-matter of clause (xi) of section 10(2) of the Income-tax Act is one of the numerous allowances which that sub-section provides for. To set it out in its proper context of the opening words of sub-section (2) and to set out only the material part, it reads as follows :-
'Such profits or gains shall be computed after making the following allowances, * * *
(xi) * * * such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable in the books of the assessee.'
Clause (xi) therefore provides for an allowance of two sums, describing each as 'such sum.' The first of those two sums, as more fully described, is 'such sum in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation.' It will be noticed that the phrase is not complete, but remains to be completed by providing the consequent to the word 'such'. The second of the two sums, as more fully described, is 'in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business.' It will again be noticed that this phrase also is not complete, but remains to be completed by the addition of the consequent to the word 'such'. The two phrase are connected by the conjunction 'and' and, at the end of the second, comes the further phrase 'as the Income-tax Officer may estimate to be irrecoverable.' To my mind, it is patent and beyond argument that the phrase 'as the Income-tax Officer may estimate to be irrecoverable' supplies the consequent to both the phrases occurring earlier and each commencing with word 'such'. In other words, the condition 'as the Income-tax Officer may estimate to be irrecoverable' governs not only the sum referred to in the phrase immediately preceding, namely, 'loans made in the ordinary course of such business,' but also the sum referred to in the earlier phrase, namely, 'bad and doubtful debts, due to the assessee.' To my mind, it is good grammar to follow up the two phrases, each commencing with the word 'such' by the common consequent 'as the Income-tax Officer may estimate to be irrecoverable' and unless the latter phrase is taken to relate and refer back also to the earlier of the two sums the first of the two phrases would become wholly unconstruable, the word 'such', to use an expression I used in the course of the argument, hanging in the air. In my opinion the meaning I have suggested makes both good sense and good grammar and is the only meaning possible. It appears that it has also the support of authority and the same view has been taken in at least two decided cases, R. B. Seth Ganga Sagar v. Income-tax Appellate Tribunal and Tejpal Jamunadas v. Commissioner of Income-tax, U. P. & V. P., Lucknow, though in the latter case the question does not appear to have been argued.
It was strongly contended by Mr. Mitra that we should not sacrifice good sense to grammar and should not overlook that the two parts of clause (xi) contemplated liabilities of entirely different kinds and that to make the phrase 'as the Income-tax Officer may estimate to be irrecoverable' govern both, would be not only to disregard the difference between the two classes of liabilities, but also to make the word 'doubtful', occurring in the first part of the clause, wholly redundant. I do not find myself able to agree with Mr. Mitra. For the purposes of his argument, I shall assume that 'loans', as contemplated by the latter part of clause (xi) are entirely different in nature from debts contemplated by the former part. But it seems to me that, even on that view, it cannot be denied that there is one feature common to both which is that both of them are liabilities owing to the assessee. The whole essence of clause (xi) is that it enables the assessee to deduct from his profits of the year amounts which other people owe to him, but which profits of the year amounts which other people owe to him, but which he no longer expects to be recoverable and which, he claims, can no longer be treated as a part of his assets, taking the word 'assets' in a general sense. If that be so, I see no objection in clause (xi) requiring that both in the case of a debt and in the case of a loan the claim will be allowed, only if and to the extent that the Income-tax Officer may estimate it to be irrecoverable. In other words, while the assessee may make a claim that his profits of the year should be reduced by a certain sum which is owing to him from others but which he does not expect to recover, the claim will be allowed only to the extent that the Income-tax Officer finds that the amount concerned or a part of it can no longer be regarded as recoverable by the assessee in any practical sense. Mr. Mitra contended that there was another ground why the first part of the clause could not be held to be governed by the provision as to the decision of the Income-tax Officer would have to find a doubtful debt to be irrecoverable, which, Mr. Mitra contended, was an impossibility. According to Mr. Mitra, the two words, 'bad' and 'doubtful' used with reference to debts, had different connotations and that a doubtful debt was of a lower degree of badness than a bad debt. A doubtful debt, he submitted, might become bad in course of time, but the two classes, bad and doubtful, were distinct. Even bad debts were not necessarily irrecoverable, but there was nothing inherently impossible that a bad debt should be found to be so. In so far as bad debts are concerned, Mr. Mitra did not dispute that the condition 'as the Income-tax Officer may estimate to be irrecoverable' would not be inappropriate, but what he contended was that if that condition was superimposed on doubtful debts as well, the consequence would be to reduce all debts contemplated by the first part of clause (xi) to bad debts and to extinguish doubtful debts altogether or, to put it in another way, to convict the Legislature of having used the word 'doubtful' although it really meant nothing different from 'bad', and thus committed an act of redundancy.
I do not think that the basis upon which Mr. Mitras argument proceeded is correct. It is to be noticed that the first part of clause (xi) does not speak of 'bad or doubtful debts', but it speaks of 'bad and doubtful debts.' As far as I am aware, the two words 'bad' and 'doubtful' are always applied adjectively to the same class of debts, meaning debts of which the chance of recovery is nil or slender. Mr. Mitra sough to support his contention by reference to the rules under Schedule D of the English Act and to the decision in Bristow (H. M. Inspector of Taxes) v. William Dickinson & Co. Ltd. I do not see that the decision holds that if a statute describes debts by a single phrase 'bad and doubtful', it must be taken to contemplate different classes of debts. As regards the inherent impossibility of doubtful debts being regarded as bad or irrecoverable, it appears to me that a complete answer to Mr. Mitras contention is furnished by rule 3(1) of the rules applicable to Cases I and II of Schedule D to the English Income-tax Act of 1918. That sub-rule, to quote only the material part, reads as follows :
'In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of....... any debts, except bad debts proved to be such to the satisfaction of the commissioners and doubtful debts to the extent that they are respectively estimated to be bad.'
It will thus be seen that estimation of doubtful debts to be bad is not an impossible notion and if bad debts could be held to be irrecoverable, wholly or in part, and doubtful debts could be held to be bad, I cannot see why doubtful debts cannot be held to be irrecoverable, if the circumstances justify that conclusion.
In my view, the contentions urged by Mr. Mitra against the plain and natural meaning of the word used in clause (xi) of section 10(2) are not convincing and cannot prevail.
It will now appear why I doubted the utility of referring to this Court a question like the one which has been referred in the present case. If the phrase 'as the Income-tax Officer may estimate to be irrecoverable' applies to both parts of clause (xi) of section 10(2) and if a claim of deduction made in respect of either a debt or a loan can be allowed only if and to the extent the Income-tax Officer estimates it to be irrecoverable, it becomes wholly immaterial to enquire for practical purposes of taxation on what basis the assessee may himself make a claim. If the decisive factor be the view taken by the Income-tax Officer, what contentions are urged by the assessee are of no relevancy at all and I cannot see what useful purpose can be served by our answering the question referred.
In my view, the question referred is pointless and in view of the terms of section 10(2) (xi) requires no answer. This Court has always declined to answer academic questions. The present question is not an academic one, but it is unrealistic and appears to me to have no practical bearing of any kind.
The reference is disposed of in the above manner.
The commissioner of Income-tax, West Bengal, will be entitled to his costs of this reference.
Certified for two counsel.
LAHIRI, J. - I agree.
Reference not answered.