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TMI Blog1967 (9) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... We state this here because accounts of the two companies with which we are concerned in this case - one is according to the English calendar and the other (of the assessee-company) is according to the Samvat year. The assessee is a private limited company, M. L. Dahanukar Co. Private Limited. This company is, so to say, the central organisation of a number of companies which one M. L. Dahanukar and his sons own and control. In all the group of companies the controlling interest is that of the Dahanukar family. It will be convenient therefore to refer to this group of companies as the Dahanukars. In 1948, the Dahanukars promoted the Worli Chemical Works Ltd. (hereinafter referred to as the Worli company) and in that company the assessee-company owned 662 shares, M.L. Dahanukar owned 11 shares and his son, D. M. Dahanukar, owned 330 shares, thus making a total of 1,003 shares. Of the share capital of this-company, only 50% has been called up. The directors of the assessee-company and the Worli company are common. From time to time the assessee-company used to finance the Worli company. It is not in dispute that the assessee-company carries on the business not merely of managin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs was bad in the particular year in which the same was written off and he pointed out a number of circumstances upon which he came to the conclusion that it could not be said that there was no reasonable expectation of recovering the whole debt or, the date on which it was written off by the assessee-company. He pointed to several transactions which the assessee-company continued to have with the Worli company even after the sum of Rs. 2 lakhs was written off and observed that " the position in fact is that the assessee-company continues to finance its sister concern without allowing that company to reduce its own indebtedness, and at the same time reduces its own profits by writing off a part of the debt and thus saves substantial tax. In other words, a part of its own profits is diverted to the Worli Chemical Works and that escapes taxation." When the matter was taken in appeal by the assessee to the Income-tax Appellate Tribunal in Bombay, the Tribunal confirmed the findings of the Appellate Assistant Commissioner and dismissed the appeal. The Tribunal dealt with all the circumstances and came to the conclusion that " a prudent businessman would not have considered the debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had made a disclosure of their true income to the income-tax department taking advantage of the disclosure scheme then announced. The assessee-company disclosed an income of Rs. 31,56,774 as profits which had not been disclosed before. This sum was credited to the " disclosure suspense account " and the sum of Rs. 86,249-11-3 was debited to the Worli company. The balance of Rs. 19,134 out of the sum of Rs. 1,05,384 represents the interest on Rs. 86,249. This amount alleged to have been advanced to the Worli company has not been disclosed, but since the Worli company was promoted only in the year 1948, and the disclosure of the concealed income was made in the year 1951, obviously the advance to the Worli company must have been some time between 1948 and 1951. Thus, the total indebtedness of the Worli company to the assessee-company came to Rs. 7,07,397-6-6. As against that, the account of the Worli company in the books of the assessee shows that the Worli company were paid a sum of Rs. 10,100. Then there was a credit given to the Worli company for the amount of Rs. 2 lakhs and a small sum of Rs. 96. Out of the amounts advanced to the Worli company we have already menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities. They are that the Worli company continued to negotiate for more and more business with several parties including foreign collaborators which would show that the assessee-company must have known that the Worli company was not in such a bad way that it could not have repaid its indebtedness. It has been found that in October, 1950, negotiations were started with the American Products Ltd., Bombay, for some sort of collaboration with an American company known as Sigma Laboratories. No doubt, these negotiations fell through some time in 1951, but soon after negotiations were commenced in December, 1952, with U. S. Vitamin Corporation, New York, through the common director, M. L. Dahanukar. These negotiations fell through some time in 1956, and thereafter further negotiations were commenced with Fomos Laboratories Inc., New York, which materialised in substantial business. As a result of this business, the Dahanukars were enabled to import several millions of tablets which were supplied by the Worli company to the Government of India for a sum of Rs. 2 1/2 lakhs which amount was to be recovered from the Government of India. The assessee-company, it is said, considered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in its own order and in the reference and as have been referred to by counsel in the argument before us. The principal contention on behalf of the assessee before us is that the tax authorities erred in relying upon events and facts subsequent to the date on which the amount was written off. For instance, it has been urged that the subsequent dealings of the assessee-company with the Worli company ought not to have been relied upon as also the fact that the Worli company continued to trade and improve its position after the date on which the amount was written off. Reference was made in this respect to the proviso to section 10(2), clause (xi), which merely says that if the amount which has been allowed as a bad debt under the parent clause (xi) of section 10(2) is ultimately recovered on any such debt or loan written off as a bad debt and that amount is greater than the difference between the whole debt or loan and the amount so allowed, " the excess shall be deemed to be a profit of the year in which it is recovered, and if less, the deficiency shall be deemed to be a business expense of that year ". Counsel pointed out that the proviso itself indicates that even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances. In fact, the words in the parent clause are " as the Income-tax Officer may estimate to be irrecoverable " and that would necessarily include his estimate that the amount is irrecoverable upon all the facts and circumstances of the case. We do not think, therefore, that the proviso alters that position or precludes the Income-tax Officer from looking to any subsequent course of business or facts and events which have transpired after the amount has been written off. The case, Devi Films Ltd. v. Commissioner of Income-tax, itself makes this clear. In that case the assessee had entered into an agreement with one Tehrani, who was producing a cinema film, whereby, first, a sum of Rs. 3,80,000 had been advanced by the assessee to Tehrani and later by a separate agreement on 31st January, 1956, a sum of Rs. 1,50,000. In all, the assessee had advanced to Tehrani a sum of Rs. 5,57,022-10-1 in pursuance of the two agreements. The picture, however, did not prove a business success, but the assessee had realised out of the amounts advanced by him from the collections from the exhibition of the picture a sum of Rs. 4,91,071-1-3. Thus there remained a balance of Rs. 65,950-13-10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inadmissible." Therefore, undoubtedly a creditor has to come to an honest judgment at the time of the writing off of the debt that it was a bad and irrecoverable debt but that does not mean that when the court is called upon to determine whether as a reasonably prudent man he could have entertained that belief the court can only look at the true circumstances upto the time he wrote off the debt and that it cannot look at the subsequent events or facts or his subsequent conduct. The Madras High Court held that these would not be irrelevant or inadmissible. The decision in Anderton and Halstead Ltd. v. Birrell was expressly referred to before the Madras High Court and particularly the passage at page 209 from the judgment of Rowlatt J., but even taking into account that passage we do not think that it has been held that the authorities or the court are precluded from looking at the subsequent conduct or the subsequent events in determining the question whether the assessee could have believed that the debt was bad. We cannot, therefore, hold that in the present case the tax authorities have in any way gone wrong in law in looking at the facts and circumstances relating to the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X
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