AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
1964 (10) TMI 7
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....te the business of the a bank. On August 23, 1949, the liquidator submitted a return for the assessment year 1948-49 disclosing for the previous year ending June 30, 1947, business loss computed at Rs. 9,71,664 after debiting against the gross profits in the profit and loss account an amount exceeding Rs. 12,00,000 as, debts which became irrecoverable. On February 26, 1953, the liquidator informed the Income-tax Officer that in the course of investigations it was found that the bad debts of the bank including the amounts embezzled by the secretary amounted to Rs. 48,50,952. It is common ground that entries adjusting the books of account and writing off the amounts claimed to be irrecoverable were not posted in the books of account either before the return was filed, or even till the proceeding reached the Tribunal. The departmental authorities and the Tribunal rejected the claim for allowance of bad debts on the ground that the bad debts were not written off in the books of account of the bank as required by section 10(2)(xi) of the Income-tax Act. The claim for allowance of Rs. 10,15,000 and Rs. 99,892 being the loss resulting from embezzlements by the secretary was rejected by ....
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....that bad debts were not admissible deductions because the debts were never written off in the books of account of the bank, and that the time when loss resulting from embezzlement or defalcation by a servant or agent of the assessee occurs must be decided on the facts and circumstances of each case, and no general rule could be laid down in that behalf. In the view of the High Court loss of Rs. 10,15,000 did not occur when fictitious entries had been posted at the instance of the secretary in the books of account of the bank, but much later. The item of Rs. 98,892 was also not admissible as a business loss in the year of account for the same reason. With certificate granted by the High Court, this appeal is preferred by the liquidator of the bank. In considering whether writing off in the books of account is a condition precedent to the admissibility of allowance for bad debts, attention must first be directed to the terms of section 10(2)(xi). The clause provides : " (2) Such profits or gains shall be computed after making the following allowances, namely : ... (xi) When the assessee's accounts in respect of any part of his business, profession or vocation are not kept on th....
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....e judgment under appeal, held that the view that writing off in the books of account was a condition precedent to the admissibility of a bad or doubtful debt was in conformity with the view which the courts had consistently taken for many years in interpreting section 10(2)(xi). The learned Chief Justice observed : " We are not aware of any single case where either the department or the assessee ever contended in this court that an assessee is entitled to a certain amount as a bad debt which amount has in fact not been written off in his books of account. But apart from the settled practice, there are decisions of this court which have also proceeded on that view of the section." The Calcutta High Court in Begg Dunlop and Co. Ltd. v. Commissioner of Excess Profits Tax has expressed an equally emphatic opinion to the contrary. Chakravartti C.J., who delivered the judgment of the court, observed that by the last clause of section 10(2)(xi) 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 is necessary in resol....
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....he year. But the entries need not be in respect of each individual debt regarded by the assessee as bad or doubtful : a composite entry relating to the debts regarded as bad or doubtful may suffice. After the judgment of the Privy Council in Chitavis' case the legislature has inserted by section 11 of the Indian Income-tax. (Amendment) Act (7 of 1939) clause (xi) in sub-section (2) of section 10, which expressly deals with the admissibility of bad or doubtful debts as allowances in the computation of profits and gains. In cases governed by the amended Act undoubtedly the question of admissibility of bad or doubtful debt as allowance must be adjudged in the light of the express provision of the statute, and not on general considerations of commercial accountancy, or business necessity. It is pertinent to bear in mind the language used by the legislature : the clause does not say that the Income-tax Officer cannot allow a bad or doubtful debt, unless it is written off in the books of account ; it merely states that the Income-tax Officer shall not allow any amount in excess of the amount actually written off as irrecoverable. It is, therefore, for the Income-tax Officer to ascertai....
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.... bad debt as an allowance under section 10(2)(xi) writing off of the debt is a conditions precedent. The other case is Karamsey Govindji v.Commissioner of Income-tax. In that case the assessee had advanced in 1945 and 1946 without security certain loans to a flim producer and had written off the loans as bad debts in November, 1947. On the evidence in the case the income-tax authorities held that the loans had not become irrecoverable in 1947, and the High Court of Bombay in a reference under section 66(2) held that the finding of the income-tax authorities that the debts had not become bad in 1947 could not be regarded as not justified on the evidence. The case evidently did not directly deal with the writing off of a debt in the books of account of the assessee being a condition precedent to allowance under section 10(2)(xi). It was conceded by counsel for the revenue that the allowance of a bad debt may be granted even if the entry writing off the amount as irrecoverable is posted during the course of the hearing before the Income-tax Officer. The department therefore submits that though an entry writing off the amount of a debt claimed to be bad or doubtful is a condition p....
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....may be evolved, unless such implication is on the scheme of the Act intended. And in the scheme of the Act we find no such restraint imperatively intended, for it cannot be assumed in all cases that absence of an entry writing off the amount of bad debts necessarily implies that no debts become irrecoverable in the year of account. In our view Chakravartti C. J. was right when he observed in Begg Dunlop and Co. Ltd.'s case at page 284 : " 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 sum 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 ....
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....f--- (a) has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year......... " It is manifest that the material clause has been wholly redrafted and the legislature has expressed its intention clearly. In dealing with the second question some more facts may be stated. The secretary, M.C.Javeri, was invested with extensive powers of management and the directors of the bank appeared to have remained supine. The secretary helped himself to large amounts out of the assets of the bank. On November 1, 1946, the bank entered into an underwriting agreement with the Government of Bhopal underwriting a loan of the value of Rs. 2 crores issued by the Government of Bhopal. On December 3, 1946, V. R. Ranade and Sons applied to the bank for purchasing Bhopal Government loan and remitted in full the amount of Rs. 15 lakhs to the bank. This amount was in the first instance credited in the sundry deposi....
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....er the second question must therefore be restricted to Rs. 10,15,000. The income-tax authorities disallowed this claim. In their view it was not suffered by the bank in the course of its business and therefore could not be treated as a loss by the bank, and in any event the loss was not suffered in the year of account because it was ascertained in the year 1949 or later and could be taken into account in the assessment relating to that period alone. The embezzlements undoubtedly took place in the year of account ending June 30, 1947. The secretary misused the powers conferred upon him under the power of attorney and withdrew Rs. 18,00,000,by posting entries in the names of persons who did not exist, or who had no dealings with the bank. But until an investigation of the dealings of the bank was made, the embezzlements could not come to the knowledge of the directors of the bank or the liquidator. The bank had to pay Rs. 10,15,000 to its constituents to satisfy the liability arising out of the secretary's dealings with the funds of the bank. Loss has, therefore, been suffered by the bank as a result of the withdrawals made by the secretary, and the only question relevant for the pur....
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.... collected bills. By manipulation of accounts the clerk misappropriated large amounts at diverse times. In May, 1941, it was discovered that the clerk had embezzled Rs. 36,298-3-6 during the period between October 17, 1939, and October 24, 1940. In June, 1941, a criminal prosecution was launched against the clerk and about the same time a civil suit for recovery of the amount was also instituted. The claim was compromised in August, 1941, and the clerk paid the assessee Rs. 16,250 in full settlement of his liability. The assessee claimed in the assessment year 1942-43 (accounting year ending with April 12, 1942) a deduction of Rs 21,372 being the difference of the sum embezzled by the clerk and the amount recovered from him, and it was rightly held that the sum could be treated as a loss in the accounting period deductible from the profits of that period. In the case under discussion the embezzlements of funds of the bank took place in 1946. They were then unknown to the bank. Even after the embezzlements came to the knowledge of the liquidator, trading loss cannot be deemed to have resulted. We are unable to countenance the proposition that irrespective of other considerations, ....