Bank Of Bihar Ltd., Patna vs Commissioner Of Income-Tax, Bhiar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 27 March 1962

Coram: J.C. Shah, M. Hidayatullah

In the assessment of income‑tax for the year 1950‑51, the assessees, a public limited company carrying on banking business, asserted that an amount of Rs 4,22,582 due from Messrs Nandlal Inderchand and actually written off as irrecoverable in the accounting year 1949, should be allowed in that year’s profit assessment as a bad and doubtful debt under section 10(2)(xi) of the Indian Income‑Tax Act. The total sum of Rs 4,22,582 was comprised of three separate components: first, Rs 2,11,089 due from the firm styled Messrs Nandlal Inderchand, arising from an account opened in 1943, against which the debtor had pledged shares valued at a little over Rs 28,000; second, Rs 1,02,325 originally due from a business carried on under the name B I G Co., Calcutta; and third, Rs 1,09,168 originally due from a business carried on under the name Fulchand Srinarain, Calcutta. For the amounts due under the accounts of B I G Co. and Fulchand Srinarain no security was furnished. Those two accounts were transferred by the assessees on 3 December 1947 to the account of Messrs Nandlal Inderchand and were amalgamated with that account. The Income‑Tax Officer rejected the claim of the assessees, holding that the whole sum of Rs 4,22,582 had become irrecoverable in 1947 and therefore could not be treated as a bad debt for the year of account 1949. The Appellate Assistant Commissioner thereafter held that the portion of Rs 2,11,089 owed by Messrs Nandlal Inderchand had not become irrecoverable in 1949 but only in the accounting year 1950, whereas the sums due from B I G Co. and Fulchand Srinarain had become irrecoverable in 1947; consequently, the assessees were not entitled to treat the entire amount of Rs 4,22,582 as a bad debt for 1949. The Income‑Tax Appellate Tribunal accepted the findings of the Appellate Assistant Commissioner regarding the amounts due from B I G Co. and Fulchand Srinarain, concluding that those amounts had indeed become irrecoverable in 1947 and therefore could not be allowed as bad or doubtful debts in the profit assessment for the year 1949. The Tribunal did not receive any challenge to the Appellate Assistant Commissioner’s finding on the amount due from Messrs Nandlal Inderchand, and this appeal does not concern the disallowance of that particular sum. Finally, the Tribunal declined to refer the statement of the case concerning the amounts due in the two accounts of B I G Co. and Fulchand Srinarain to the High Court under section 66(1) of the Income‑Tax Act.

In this matter, the High Court issued an order on July 31, 1957, directing the Income‑Tax Tribunal to state a case under section 66(2) of the Income‑Tax Act. The question the Court asked the Tribunal was whether, given the facts of the case, the income‑tax department was legally justified in rejecting the assessee’s claim under section 10(2)(xi) of the Act concerning the amount of Rs 2,11,493 that the assessee had claimed as a bad debt for the assessment year 1950‑51. At the hearing of the reference, the High Court held that the determination of whether a debt had become irrecoverable in 1947 and therefore should be treated as a bad debt was a question of fact. The Court said that such a factual conclusion could not be reopened in a reference under section 66 because there was evidence on which the Appellate Assistant Commissioner and the Tribunal had based their findings. With special leave, the assessee appealed this decision to this Court.

The factual background revealed that on December 3, 1947, the amounts due from the accounts of B I G Co. and Fulchand Srinarain were transferred to the account of Messrs Nandlal Inderchand and the three accounts were amalgamated. It also appeared that Messrs Nandlal Inderchand had an interest in the two businesses, B I G Co. and Fulchand Srinarain, although the Tribunal found that they did not guarantee the loans advanced to those firms. The two accounts had not been operated since 1946, and by 1947 the firms were not in a position to pay the sums due. In view of these circumstances, the Tribunal concluded that the debts had become bad in 1947 and therefore could not be allowed as a deduction under section 10(2)(xi) in the year of account 1949.

Counsel for the assessee argued that the assessee was free to amalgamate the three accounts of the same debtor and that if the debtor was capable of paying and actually made payments toward the consolidated account, it could not be said that the debts must be deemed bad for the earlier years simply because no recovery had occurred before the amalgamation. However, there was no evidence to show that Messrs Nandlal Inderchand were the exclusive owners of the businesses carried on in the names of B I G Co. and Fulchand Srinarain. The income‑tax authorities had found only that they were interested in those businesses. Apart from a pledge of shares of small value, there was no evidence of any assets of Messrs Nandlal Inderchand that could be used to satisfy the liability for the debts of the two firms. If those two debts had indeed become irrecoverable in 1947, merely amalgamating them with the debt due from Messrs Nandlal Inderchand resulted in a total amount exceeding two lakh rupees, while the value of the pledged shares was less than one‑seventh of that total, indicating that the security was wholly insufficient to satisfy even the debt for which it was given.

The shares that were pledged as security represented less than one‑seventh of the total sum owed on that account. Consequently, the security offered was wholly inadequate to satisfy even the specific debt for which the pledge had been made. The determination of whether a particular debt qualifies as a bad debt is a question of fact, not of law. When there is some evidence supporting a conclusion that a debt is bad, the High Court, even under a reference made pursuant to section 66 of the Indian Income‑Tax Act, is not authorized to re‑appraise that evidence. The Privy Council, speaking in Commissioner of Income‑Tax v. S. M. Chitnavis while interpreting section 24 of the Indian Income‑Tax Act, 1922, explained that the existence and the timing of a bad debt are factual matters. According to that decision, such questions must be decided, if disputed, by the appropriate tribunal and cannot be determined merely by the ipse dixit of any party. The assessee, therefore, does not possess a unilateral right to declare a debt as bad‑debt; every claim of bad‑debt status must be examined in light of all relevant circumstances. Although at the time the present case was decided the statute did not contain a provision such as section 10(2)(xi) that expressly authorized deductions for business bad debts, the Court held that such a deduction was nonetheless necessary. To refuse the deduction would have produced a statement of profits and gains for the year that did not reflect the true financial position of the taxpayer. In the tribunal proceedings, there was evidence on record sufficient to conclude that the debt in question had become a bad debt in the year 1947. Even though the creditor later amalgamated that debt with another debt that remained recoverable, the earlier characterization as a bad debt persisted and was not eradicated by the amalgamation. Consequently, the appeal was dismissed, the appellant was ordered to pay costs, and the final order affirmed the dismissal of the appeal.