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TMI Blog1962 (9) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and not in a position to pay the loss suffered by him, and the loss fell on the assessee. In the Samvat Year 2005, on the 28th December, 1948, Shantilal Jivraj somehow managed to pay ₹ 4,000 to the assessee in full settlement of his debt, and the assessee wrote off the balance as a bad debt. Now, in the assessment year 1948-49, for which the relevant accounting year was S.Y. 2003, the assessee had claimed an amount of ₹ 14,960 as a loss. In disallowing the said loss in that assessment year, the Appellate Assistant Commissioner held that the amount claimed had not become bad in S.Y. 2003, so that it could be written off as a bad debt in that year; it was in S.Y. 2005 that the assessee after having made attempts to recover it had succeeded in recovering only ₹ 4,000 out of that amount and had written off the balance, and, therefore, the said balance could be claimed as bad debt in S.Y. 2005. This order of the Appellate Assistant Commissioner was passed on 26th September, 1950. It may be pointed out at this stage that under the Essential Supplies Temporary Powers Act, the Spices Forward Control Prohibition Order, 1944 had been promulgated by the Government. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so held further that although the claim of the assessee was not enforceable in law, that did not affect the admissibility of the claim either under section 10(2)(xi) or section 10(2)(xv) of the Indian Income-tax Act. Looking to the transactions from a commercial angle, the amounts claimed by the assessee were revenue deductions which were liable to be deducted before arriving at his assessable profits in the years of account. According to the Tribunal, therefore, the claims made by the assessee in the assessments for the assessment years 1950-51 and 1951-52 should have been allowed. It accordingly allowed the appeals of the assessee and directed that the assessments be modified accordingly. Thereafter, at the instance of the Commissioner, it drew up the statement of the case and referred to this court the question which we have already stated. Although the Tribunal has treated the facts relating to the assessment years 1950-51 and 1951-52 as similar and has proceeded on the said basis, Mr. Joshi, learned counsel for the revenue, has sought to urge before us that the facts for the two assessment years are not similar and different positions will have to be considered with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting that the cases for both the years are similar on facts, and there is no distinction such as is sought to be made by Mr. Joshi. Mr. Joshi's argument is that, inasmuch as losses have arisen out of transactions which were forbidden by law and rendered illegal by providing a penalty for persons entering into such transactions in breach of the prohibition order, the losses could not get the character of debts at all, and consequently, there would be no question of their becoming bad or irrecoverable at a subsequent stage. Mr. Joshi says that the liability of the constituents to the assessee was unenforceable even from its very inception and did not constitute a debt at any time. It could not, therefore, be regarded as having been bad or irrecoverable at a subsequent time so as to entitle the assessee to claim a deduction thereof under section 10(2)(xi). If it could not be claimed as a bad debt, according to Mr. Joshi, there is no other basis on which the said losses could be claimed. For one thing, if a specific head is provided under section 10(2) and an item is not allowable under that head, it could not be allowed either under the residuary head or even under section 10(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be regarded as expenses of the business though not specifically provided for under any of the specific heads under section 10(2). The computation of profits under section 10(2) permits the deduction of dues or debts due to the businessman in the course of the business which have become bad or irrecoverable. The circumstance that the business is illegal so that neither the profits earned nor the losses suffered would be enforceable in law is not a circumstance which detracts from the profits being taxed. Equally so it should not be a circumstance which should detract from the losses being allowed. The argument, therefore, that because the liability of the constituent to the assessee was an unenforceable liability at law and, therefore, would not constitute a debt in the sense of a claim which is legally enforceable, would not be material in considering the deductibility of that claim in the matter of computation of the profits of the business of the assessee. Even in computing the profits of an illegal business, the expenses incurred in the running of the business, such as, for instance, the salaries to the employees or the rent paid for the premises occupied for the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dues owing to the assessee in these transactions were considered by him as good and recoverable until it was authoritatively decided by the Supreme Court that the transactions were illegal, with the consequence that the dues could not be recovered by the assessee from his constituents by legal action. If, in these circumstances, the constituent was either unable to pay dues or refuses to pay the same to the assessee, because of the legal disability on the part of the assessee to recover them from him, the loss resulting therefrom could be said to have fallen on the assessee at the point of time when the inability of the constituent or his refusal to pay occurred. If such position occurred in the year of account, the assessee would be entitled to treat it as loss of the year of account and have it deducted from his profits or gains of his business. In our opinion, therefore, the Tribunal was right in the view that it has taken, that the assessee was entitled to have the amounts allowed to him in the respective assessment years. In the view that we are taking, our answer to the question referred to us is in the affirmative. The Commissioner will pay the costs of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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