TaxTMI 
TaxTMI 
1987 (10) TMI 77
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed on 30-9-1975. 3. For the year under consideration the company filed its return on 29-6-1976 declaring a loss of Rs. 2,45,860. As per its accounts it claimed bad debts as under : Debit Credit Rs. Rs. Opening Balance B/F - 24,500 Short-term Investment &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; Investment deductions ------------------------------------------------------------------------ 1 2 3 4 ------------------------------------------------------------------------ Rs. Rs. Rs. 1969-70 5,82,723 31,845 34....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ities committed by the officers of the company but also had recommended that an amount of Rs. 3,17,670.30 Ps. be recovered from the Gujarat Investment Trusts Ltd., a separate company, and an amount of Rs. 37,010 from Mansukh Bhaidas Dalal. The ITO further observed that in the 37th Report of its Directors, neither the Directors nor the auditors had found anything wrong with the Short-term Investment, then amounting to Rs. 4,88,349 as no remarks were made by them in that behalf. In answer it appears to have been argued on behalf of the assessee that the observations of the Special Auditor, being in the nature of.opinion only were not binding on the company and that since both the parties, named by the Special Auditor, had denied their liabilities the two amounts were required to be written off and were written off during the accounting period under consideration as per Resolution passed on 22-12-1975. In this behalf reliance was placed on the observation of the Tribunal in its order dated 14-7-1978 in the assessee's appeals [ITA Nos. 2175 & 2176 (Ahd.) /77-78] which were to the effect that it was not disputed that even in earlier years the company had made short-term deposits and tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me even in the ledger." To the argument advanced on behalf of the company that one of its former Managers was handling the short-term deposits and after his death in 1971 no one in the company had any idea as to what those deposits were, the CIT (A) observed that such an explanation itself was consistent with the ITO's observation that the income from investments had been shown for the accounting year ended 30-9-1971 and a very small amounts of Rs. 85 had been shown for the subsequent period which indicated that the interest had accrued to the company on those alleged investments after that former Manager died in 1971. Quoting extensively from the company's letter dated 22-11-1983 with regard to the several attempts stated to have been made to find out as to what exactly its investments were with a view to recover them, the CIT (A) observed that the company itself had not been able to find out what amount had been invested on behalf of the company by its old Manager. The CIT (A) held that the company was not even able to give the particulars of the debt in question and, therefore, in that situation the assessee could not be allowed any deduction u/s 36(2) of the Act. The CIT (A) ev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing hire-purchases, that it was in connection with the business of the company that its then deceased Manger had invested the amount in question sometimes in 1968-69 or even before and the income of interest from such investments was not only offered for taxation but was also taxed by the department in earlier years as company's business income, that since after the death of the said Old Manager of the company it was not definitely known as to where and how the said amount was invested, the company took all the pains to get the liability of the debtor fixed and determined through its Auditors who could not positively recommend any specific liability of any particular person and the company was advised by its legal consultants not to waste its good money for bad money and that it was left with no alternative but to write off the amount in question as bad debt and that was done in the relevant accounting year in its books. Mr. Shah submitted that M/s Gujarat investment Trust Co. upon which the Auditors had sought to fix the liability or a part of the liability, had already gone into liquidation and thus the sum in question had in fact become quite irrecoverable and has rightly been w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rust Ltd. for the recovery of any debt due from them, when the affairs of the company and the conduct of its Directors are viewed in this perspective, contended Mr. Banthia, it becomes quite clear that neither it is known as to when and to whom the amount in question was given as a debt nor is it known as to for what purpose that was given. Mr. Banthia stressed that if on such facts and under such circumstances the CIT (A) has concluded that the claim of the appellant was not allowable either as a bad debt u/s 36 or as a business expenditure u/s 37(1) of the Act, the learned CIT (A) had simply followed the principles and guidelines outlined by the Supreme Court in A. V. Thomas & Co. Ltd. v. CIT [1963] 48 ITR 67. 11. Challenging the reliance of the appellant upon the observations of the Tribunal in its orders dated 14-7-1978 and 6-2-1979, referred to above, for the purpose of either advancement of the amount in question by the.company in the ordinary course of its business or treating it as a business loss, Mr. Banthia submitted that irrespective of the fact that the doctrines of estoppel and res judicata were not applicable to the proceedings under the Act, when the orders of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing which if recovered would swell the profits. It is not merely money handed over to someone for purchasing a thing which that person has failed to return even though no purchases were made. To be claimable as a debt or doubtful debt it must first be shown as a debt. It must spring directly from the carrying on of the business of the assessee and should be incidental to it and should not be any loss sustained by him, even though it may have some connection with his business vide A. V. Thomas & Co. Ltd.'s case. For the purposes of sec. 36(2), it must represent money lent it the ordinary course of business of banking or money-lending which is carried on by the assessee and should appear in the balance sheet as a trading debt in the trade. If it is not a loan by a banker or money-lender, the debt to be a debt proper has to be one which, if good and recovered would swell the taxable profits. It should not be simply in the nature of repayment of moneys advanced by the assessee to the other person. 14. Now a bad debt, in order to qualify for its deductability u/s36(2) must fulfill, as laid down in the case of Sarangpur Cotton Mfg. Co. Ltd., the following requirements, viz. (i) it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... had stopped accepting or renewing deposits thus thereby discontinuing its "client's Deferred Payment/Scheme" and "Nanakiya Sahaya Schemes". In view of these activities of the company it is not difficult to hold that the business of the assessee-company was that of banking and money lending for the purposes of sec. 36(2) as also for sec. 28 of the Act. We hold accordingly. 17. Now with a view to appreciate the true nature of the "Short-term Investments" (Badla Transactions), in respect of which the deductibility or allowability of the amount in question has been sought as bad debt or as a business loss, and in order to know whether those transactions could be said to be incidental to its business we shall have to refer to some more facts. 18. In the 37th Director's Report and Statement of Accounts for the year ended 30-9-1972 the Directors had informed the share-holders that since the Accountant and the Secretary of the company were unable to reconcile the Short-term Investment Account and a serious view had been taken of the matter by the Board of Directors, Mr. I. J. Desai of M/s. I. J. Desai & Co., Chartered Accountants, Surat had been appointed by the Board to investigate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r. Desai opined that if the following entries were passed the mistakes committed from 1967-68 to 1971-72 would stand corrected : Rs. P. Rs. P. Gujarat Investment Trust Ltd. A/c Dr. 3,17,670.30 Short Investment Suspense A/c Dr. 1,47,969.15 Cash A/c (Deficit) &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cted in place of debit to Gujarat Investment Trust Ltd. He clearly pointed out that apart from cash deficit for which 1/2 liability would have to be fixed, the additional amount of Rs. 3,17,670.30 which stood debited to Gujarat Investment Trust Ltd. should be recovered from them along with the interest thereupon, if any. Besides pointing out at a number of anomalies in the accounts (at pp. 28, 29), Mr. Desai clarified that though there had been a change in the personnel in 1971 in the case of secretary and in 1968-69 in the case of auditors, yet the secretary and the auditors of the assessee-company, Gujarat Investment Trust Ltd. and of Gujarat Dairy Co. Ltd. had been common and their registered offices had also been at the same place and that the cash box of at least two of them had also been common. Mr. Desai could gather that much information despite the difficulties faced by him in this behalf as expressed by him in the last para of his report, which reads as under : "From the clarifications received, it will be seen that my attempt to elicit information of Short Investments Account and other related matters from the Secretary failed as I did not receive replies to my specif....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or individual unless some one is able to explain the contents of the report. I am told that reconciliation work is being done by the office. If after this I am approached again I might be able to look into the matter and be of assistance to you." 23. Thereafter the company appears to have asked Kum. Hemlata M. Patel, Advocate, to advise it for possible action and the said Advocate advised on 3-9-1974 that it would be wasteful to start proceedings in Court as had been suggested to her by the company itself and, therefore, no action was advised to be taken in the matter. Her letter reads as under : "I have gone through all the papers connected with the recovery of the above amounts and your instructions to proceed for recovery through Court or any other measure. Having considered the details, the correspondence exchanged and other particulars, I have come to the conclusion that it would be wasteful to start proceedings in Courts suggested by you and I advise you not to take any action in the matter." 24. It was under the above background that the company vide its notice dated 27-7-1974 (page 62) called the Extra ordinary General Meeting on 14-9-1974 to consider and if tho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se it would have been simply an outstanding, which if had been recovered would have not swelled the profits of the company. 27. Again assuming, without holding, that it was a 'debt' then we find that it had not become bad and irrecoverable in the accounting year under consideration. Irrespective of the fact whether Mr. Desai was or.was not given proper and sufficient assistance by the officers of the company in locating the exact position of the 'debt' we find that he had specifically suggested for recovery of a huge amount from M/s. Gujarat Investment Trust Ltd. but for no good reasons the company had taken no steps to recover that. Mr. Gandhi, Advocate had simply informed that he necessitated the services of some one to help him to understand the report of Mr. Desai to fix liability of some officer in the company and not the debtor of loan and that he had been reported about the efforts being taken by the officers of the company to reconcile the entries. And Km. Patel had simply advised the company not to start proceedings in Court as had been suggested to her by the company itself on 27-7-1974, when the company issued notice (page 62) it intended to appoint M/s. Mody & Mody, ....