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TMI Blog1932 (1) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... second the learned Judicial Commissioner held that the estimate made by the Directors of bad and doubtful debts could not be characterised as false. On the third head the charge was held to be prima facie established and the Official Liquidators were directed to prosecute four of the Directors, both the Auditors and the Manager of the Bank. The learned City Magistrate who heard the case came to the conclusion that it had not been established beyond reasonable doubt that the accused had wilfully made a false statement in the balance sheet for the year 1927 knowing it to be false. From the order of discharge the Liquidators have preferred this revision application; and the question to be decided here is whether the Magistrate's order is unjustifiable, and if so, whether it should be set aside and further hearing of the case ordered. I have heard at very great length Mr. Partabrai for the Liquidators, Mr. Tyabji for the Crown, and Messrs. Kimatrai, Dipchand, D'Sa, and Motiram for the opponents. I have carefully gone through the voluminous record referred to in the arguments of the learned counsel; and I have come to the conclusion that the order of the learned Magistrate does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 41,000 was the estimated interest on the Bad and Doubtful Debts it should have been shown in the Interest Suspense Account and not included in the total item of interest of about Rs. 1,95,000 and odd appearing in the Profit and Loss Account. Even if the prosecution can be allowed thus to change front, it is to be seen whether the case as put before the Magistrate has been proved prima facie so as to justify the framing of a charge. The contention of Mr. Partabrai put in a nut-shell is this; Rs. 41,000 and odd had been calculated as interest on what might be considered as Dormant Accounts as shown at page 20 of the Report of the Liquidators which is Ex. 5. In these accounts out of the total amount of about Rs. 7,00,000 due to the Bank Rs. 2,92,000 and odd were considered by the Directors as irretrievable; no interest can, therefore, be said to have been really earned. So that the item of Rs. 41,000 and odd by way of interest on these accounts cannot be shown as profit. There are several fallacies in this contention. In the first place, such a process of reasoning is a clear case of ignoratio elenchi, inasmuch as the premise that about Rs. 3,00,000 out of the debts due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s prescribed by section 132 of the Act and is given as Form "F" in the Third Schedule. On the credit side of the Profit and Loss Account there is the heading of Interest Accrued on Investments. The heading is not restricted merely to interest actually realised. It follows, therefore, that the opponents cannot be found fault with for including the amount of Rs. 41,000 and odd (which is the calculated interest on about Rs. 7,00,000 of debts really due to the Bank) in the total amount of Rs. 1,95,000 and odd under the heading of "Interest, Discount, etc ." In fact, they could have been found fault with if they had not included that amount in the total interest which had accrued due for the year. Batliboi in his Lectures on Auditing at page 41 says: "Any item of income such as interest or dividend on investments, rent, commission, etc ., belonging to the period and which may have accrued due to the business but may not have been received at the time of balancing should be brought into account as accrued income." If the interest is considered to be bad or doubtful it might be shown on the credit side under the heading of 'Book Debts'. That is plain from the heading of "Book Debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total amount due to the Bank on what are known as Dormant Accounts shown at page 20 of Ex. 5 aggregating to some Rs. 7,00,000 or so, roughly speaking Rs. 4,00,000 were rightly regarded as good debts and Rs. 3,00,000 as bad or doubtful. We may even proceed upon the assumption that although the expression ' bad and doubtful' does not necessarily ignify "irretrievably lost," still these debts should be regarded as hopelessly bad. In that case the interest of Rs. 41,000 would be the interest not on the whole of Rs. 7,00,000 but on the Rs. 4,00,000 considered to be safe and sound. Still the estimate is not based on extravagant or fantastic computation. The Bank's rate of interest was much higher than that. It is admitted by Mr. Whitby that there can be no objection to considering as profits interest on good debts even though it may not have been actually realized during the period covered by the balance sheet. Looked at from this view point too the balance-sheet for 1927 which is Ex. 6 on the record is not shown to be false in any material particular. In support of the argument of the opponents that interest had been calculated only on the good part of the debts and not on the bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 is a statement showing the amounts recovered in 1927 out of only those debts which are shown as bad and doubtful at page 20 of Ex. 5 and it shows that as much as Rs. 98,000 had been recovered during the year 1927. It may be observed in passing that there is nothing to prevent the Bank from appropriating apart of this first towards the interest and then the remainder towards the principal sum, but even if that is not strictly speaking permissible, the bare fact remains that Rs. 98,000 had been actually recovered, which means that all hopes of recovery in the case of Dormant Accounts should not be abandoned as a rule. Still it has been argued by Mr. Partabrai for the Liquidators that these accounts were Dormant Accounts, i.e., accounts on which nothing had been realized for 4 or 5 years; and that, therefore, the whole of the bad and doubtful amounts of these accounts should have been provided for before any interest on it or on any part of it could be taken into calculation as having accrued or having been earned in 1927. But, as I have already observed above, it is undisputed, Mr. Whitby as well as all the authorities on the subject say so that the classification of debts into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest Adjustment Account or Suspense Account sufficient to cover the Bad and Doubtful Debts, a Bank would be justified in declaring a dividend out of profit. And under such circumstances a Bank would be justified in carrying to part and loss account interest on bad or doubtful debts not actually realized." This clearly knocks the bottom out of the prosecution case. I hold that on this admission of the Liquidators' own expert the Directors were justified in taking Rs. 41,000, the unrealized interest on the Dormant Accounts into the Profit and Loss Account: (See Whitby's evidence lines 511 to 519). If another authority is wanted in support of this proposition it is to be found in the case of G.S. Clifford v. Emperor (22 Ind. Cas. 432) in which in the summing-up of the learned Judge which was considered correct by the Full Bench, there is a remark that a Bank is of course entitled to reckon as profit the unpaid interest on any debt which v/as honestly considered to be a good debt. Mr. Whitby at lines 873-878 admits that the total scope of the provision on the liability side was Rs. 2,31,000. The question then resolves itself into this: Was this adequate provision for the bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Doubtful Debts of the Company had opined that about Rs. 5,00,000 were doubtful, and that, therefore, there should have been provision to that extent. Now, Mr. Jamshed Mehta has admitted, as clearly appears from his letter (Ex. 52), that his was a very conservative and rigid view, and that there was every likelihood of a larger amount being recovered than, what he had originally estimated. Even the learned Judicial Commissioner who was moved to grant sanction for the prosecution of the opponents has conceded that the estimate of the Directors putting the Bad and Doubtful Debts at Rs. 2,92,000 was not wrong. Whitby at line 986 says, that if the Assets are available, interest can be allowed to be carried to the Profit and Loss Account. In case of Dormant Accounts, therefore, if it is contended that no interest should have been calculated at all, it was the duty of the prosecution to prove that securities for these debts were totally insufficient in 1927. To prove that they were partially so is not enough. The learned Magistrate rightly observes at line 138 of his judgment; that if in the opinion of the Directors the securities they held were sufficient to produce Rs. 4,00,000 with int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a business because such profits are naturally dependent upon the valuation of the assets of the concern. The proper ascertainment of profits in the case of company is of great importance only in order to avoid the possibility of payment of dividend wholly or partially out of capital which is strictly forbidden. Since that is guarded against, and as there was no idea of declaring a dividend, showing of profit on paper may not be so vitally misstating the position of the Bank after all. A balance sheet as defined by Spicer and Pegler is classified summary of the balances remaining in a set off books after those relating to profit and loss have been collected into one account, and includes the balance of that account so arranged as to show the assets and debit balance upon one side and the liability and credit balances upon the other. It is said, the balance-sheet represents the culmination of the system of book-keeping and should be a document setting out the true position of the business in such a manner as may be easily understood by men of business intelligence. The Report attached to the balance sheet is read by a man of business intelligence will easily disclose the fact th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they had done their duty and the final responsibility rested with the Directors only. It has been further argued that the Auditors were merely responsible to see to it that the accounts had been properly summed-up in the balance-sheet. In view, however, of my findings above, I do not consider it necessary to differentiate the case of the Auditors. From the correspondence that has been put in, it appears that they were not mere pusillanimous accountants; but that they actually interested themselves in the welfare of the Bank by insisting on the Directors adopting a more pessimistic and to that extent a safer estimate of the condition of the Bank. It is a pity that they were also put to the indignity and harassment of a criminal prosecution. On grounds of public policy too, I am not prepared to order further enquiry into this matter. No doubt, the crash of the Bank must have brought calamity and ruination upon several people. If the Directors by their imprudent or reckless management can at all be held responsible, they may be civilly liable. Once the personal coefficient is eliminated, it would appear that circumstances beyond the control of the Directors conspired to hasten the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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