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TMI Blog1953 (5) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... s tax assessment. The Income-tax Appellate Tribunal came to the conclusion that as early as 1934-35 assessment year, the applicant company knew that the loans advanced to the two debtor companies would not be realised in full. The applicant company had therefore started the practice that the interest amounts on the loans due from the debtor-companies were credited to an interest reserve account and were not taken to the credit of profit and loss account. These credits to the interest reserve account were made up as follows : Assessment Years. 1934-35 ₹ 53,221 1935-36 ₹ 45,221 1937-38 ₹ 90,137 ₹ 1,88,579 1938-39 ₹ 44,663 1938-39 ₹ 53,281 1939-40 ₹ 48,978 1939-40 ₹ 54,446 ₹ 2,01,368 The interest reserve account was treated as a suspense account and in the balance sheets prepared by the applicant company for the years pertaining to the assessment years 1934-35 onwards, the amount standing to the credit of interest reserve account was deducted out of the total debts due from the debtors. Thus, to the extent of the interest reserve account the debts due from the two debtor companies were considered as written off f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,000 less ₹ 1,88,579 standing to the credit of the interest reserve account for the years 1934-35 to 1937-38 for which no income-tax had been paid during those years. The Tribunal further found that even in this excess profits tax assessment, the applicant took up the same position at the time of the assessment by the Excess Profits Tax Officer. In the computation statement submitted by the applicant to the Excess Profits Tax Officer, the bad debt chargeable was shown as ₹ 8,11,421 and not ₹ 10,00,000. It was before the Appellate Assistant Commissioner for the first time that the claim for ₹ 10,00,000 was made in place of ₹ 8,11,421. 6. The applicant company keeps its books on mercantile basis. Its contention before the Tribunal was that the sums of ₹ 1,88,579 and ₹ 2,01,368 were incomes of the applicant for the years in which these sums were credited to interest reserve account. It was said that the department had duly assessed ₹ 2,01,368 during the assessment years 1938-39 and 1939-40 and that it was under a mistaken idea that ₹ 1,88,579 had not been assessed to income-tax in the years 1934-35 to 1937-38. 7. The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal. In order to appreciate the true import of the question referred, it is necessary to state first the facts out of which it has arisen. The assessee, Messrs. Begg Dunlop and Co. Ltd., are, or rather were, the managing agents of two other companies, namely, Craig Jute Mills Limited and Waverly Jute Mills Limited. It appears that, as such managing agents, they had made advances to each of the managed companies, having lent a sum of ₹ 10,00,000 to the Waverly Jute Mills Limited and a little less than ₹ 10,00,000 to the Craig Jute Mills Limited. The companies apparently did not flourish and as early as the assessment year 1934-35, the assessee company began a practice which has formed the subject of much debate at our Bar. The practice was that interest amounts, due on the loans advanced to the two managed companies, were credited to an account called the interest reserve account and they were not taken to the credit of the profit and loss account. The interest reserve account, it is not disputed, was treated as a suspense account and the amounts credited to it were kept to meet bad debts which might or seemed likely to come into existence. The amount so credited to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment previously. The Tribunal has pointed out that even in the excess profits tax assessment, the assessee took up the same position before the Excess Profits Tax Officer and in the return, or rather the computation statement submitted by it, the bad debt chargeable was shown as ₹ 8,11,421 and not ₹ 10,00,000 as subsequently claimed. This amount of ₹ 8,11,421 was arrived at by deducting the sum of ₹ 1,88,579 from the total had debt of ₹ 10,00,000. The Excess Profits Tax Officer, as I have already stated, allowed only a sum of ₹ 6,10,052 and that decision was upheld by the Appellate Assistant Commissioner and subsequently by the Income-tax Appellate Tribunal. The assessee thereafter asked for a reference to this Court of a question of law arising out of the Tribunal's order and in pursuance of that application the following question has been referred : " Whether on the facts and in the circumstances of this case, the claim for the allowance of bad debts at ₹ 10,00,000 for the relevant chargeable accounting period was justified as against ₹ 6,10,052 allowed ? " In opening his argument, Mr. Mitra, who is appearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax or the Excess Profits Tax Officer would not be bound to allow the whole of that amount, because the section gave him an option to allow only such amount as he might deem to be irrecoverable, but the section, nevertheless, required that in order that the Income-tax Officer might treat any amount as having become a bad debt in a particular year, that amount or some larger amount must actually be written off in the accounts. The conclusion to which that argument, as we understood it, was intended to lead was that inasmuch as there was no amount at all actually written off in the previous years or, to put it in another way and in Mr. Mitra's own language, the actual amount written off was zero, the Income-tax Officer was only entitled to allow an amount less than zero and, therefore, not entitled to allow anything in respect of any previous year at all or to allocate any part of the amount claimed for the year 194041 to any previous year. So regarded, the question submitted for our consideration was a pure question of law and Mr. Mitra himself said so, as we understood it, several times. Subsequently, however, Mr. Mitra explained in the course of his reply that what he had re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad debts for that year, must not allow anything in excess of the amount which the assessee has himself written off. Mr. Mitra reminded us of the well known expression of opinion by the Privy Council that in construing a taxing statute, the actual terms must be literally construed and that nothing like a substantial compliance would do duty (sic) for a literal observance which the statute required. That principle need not be disputed, but the clear language of Section 10(2)(xi) does not, to my mind, admit of the construction which Mr. Mitra proposed for it. If it be not an essential requirement of the section that any amount, in order to be allowable as a bad debt, must be actually written off as irrecoverable in the books of the assessee or must be included in such amount, the rest of the argument of Mr. Mitra, on the basis of the construction he adopted, will be found to fall immediately to the ground. If an actual writing off in the books of the previous years was not necessary, there was no bar to the Excess Profits Tax Officer regarding portions of the amount of ₹ 10,00,000 having become irrecoverable, not during the accounting year concerned but at prior points of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company itself in its own accounts and lastly when it points out the position taken up by the assessee company in the income-tax and excess profits tax assessments, it is quite clearly reciting the evidence on which it bases its conclusion that the amount of ₹ 3,89,948 became irrecoverable during the earlier years. Pointed reference is made to the circumstance that not only were the amounts credited to the interest reserve account which was treated as a suspense account and which was admittedly intended to meet cases of irrecoverable debts, but the amounts were also deducted out of the total debts due to the assessee company from the debtors for balance sheet purposes and thus the constituents of the company were told that these debts no longer formed part of the assets of the company. The departmental authorities obviously saw no reason to disagree and, in fact, the Tribunal has expressed that conclusion not only directly, but also indirectly by holding that the amount of ₹ 2,01,368 was wrongly assessed for income-tax purposes. Mr. Mitra invited us to the actual terms of the assessment order in order to point out that all that the Excess Profits Tax Officer had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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