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TMI Blog1958 (3) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... . Kolah, Admittedly, these debts were not written off by the liquidator in the books of the bank. Mr. Kolah says that after liquidation, the bank was not conducting its normal business as a bank and all that the liquidator was doing was collecting the debts and paying off the creditors, and, therefore it was not possible for the liquidator to write off these debts as they might have been written off by the bank if it was carrying on its ordinary normal activities. But whatever the reason may be, the fact remains that these bad debts have not been written off, and the question that we have to consider is whether, looking to the provisions of section 10(2)(xi) it is competent to the assessee to claim a bad debt which has not been actually written off in its books. Turning to the section it provides : "When the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the facts and circumstances of the case, it was not possible for the liquidator to write off these, debts, and according to Mr. Kolah it would lead to an impossible and even absurd situation if the liquidator of the bank was prevented from claiming a large amount as bad debts although he may be in position to establish that they were irrecoverable, merely because he did not or could not write them off in his books. Forecful, as the argument of the other said is, we must look to the language of the section and the scheme underlying it. The first part of the section makes it clear that it is only in the case of an assessee who maintains his account on the mercantile basis that the can claim any amount as a bad debt and as a permissible deduction. The reason for this is obvious. It is only in the mercantile system of accounting that you credit an amount although you have not actually received it and your profit and/or losses are assessed not on the basis of receipts but on the basis of the account does not come in, and there is no hope of its coming in you must debit that amount in order to arrive at a correct result of your profits and losses and what the Legislature required was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income Tax Officer other was not. If there was good reason-and there must be good reason because the section clearly says so-then there is no reason why that good reason because the section clearly says so-then there is no reason why that good reason should not extend to a case where in fact no debt has been written off by the assessee. 4. Now, this view that we have taken is in conformity with the view which this court has constantly taken for all these years in interpreting this section. We are not aware of any single case where either the Department or the assessee even contend in this court that an assessee is entitled to a certain amount as a bad debt which amount has in fact not been written off in his books of account., But apart from the settled practice, there are decisions of this court which have also proceeded on that view of the section. Mr. Kolah says that those decisions do not go to show that this question was ever argued. But the very reason why it was not argued was not argued was not both the Department and the assessee assumed that the other view was not tenable and the position which was accepted was incontrovertible . 5. Now, turning to these decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax. That was a case where not the Department but the assessee was contending that it was necessary that debt should be written off before, it could be claimed as a bad debt, because there although the debt was claimed by the assessee in a particular year and written off in a particular year, the Excess Profit Tax Officer purported to distribute this bad debt over a certain number of year taking the view that the whole debt did not become irrecoverable in a particular years, and the assessee contended that as he had written it off in one year it could only permitted in that year and in no other year. This contention was rejected by the Calcutta High Court, and the learned Chief Justice in his judgment has construed sector 10(2)(xi). What the learned Chief Justice says at page 284 is : "I am entirely unable to hold that section 10(2)(xi) of the Income Tax Act imperatively requires that in order that any amount may be allowed as irrecoverable in any particular year such amount or a larger amount, must be 'actually written off as irrecoverable in the books of the assessee'. The relevant language of the section, if I may recall its terms, is 'such sum as the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this is not a clear finding. Therefore, when the Tribunal submits a supplementary statement of the case they should give an express finding whether the debts claimed by the liquidator or any part thereof became irrecoverable in the year of account. 11. Now, turning to the second question with regard to the defalcation by the secretary, the Tribunal seems to have applied the test laid down in Curtis v. J. & G. Oldfiled Ltd. Now, the test laid down by Mr. Justice Rowlatt in that case was, to put it briefly, that if moneys reached the till of the assessee and a defalcation took place subsequently, the assessee is not entitled to claim to the loss caused by the defalcation as a business loss, because it could not be said that the defalcation was in the ordinary course of business. But if the moneys are intercepted before they reached the till by an officer of the assessee to whom authority is delegated, then the defalcation may be looked upon as a business loss. Now, this case was considered by us in Lord's Dairy Farm Ltd. v. Commissioner Of Income Tax, and we gave reasons in that case why we though, with respect, to Mr. Justice Rowlatt, that the test that he laid down would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case, the assessee is entitled to claim two sums of ₹ 10,15,000 and ₹ 98,892 as a business loss as a deduction under section 10(2)(xv) of the Indian Income Tax Act ?" 16. With regard to question No. 1 also some amendment is necessary because the amount of ₹ 48,50,689, mentioned in question No. 1 also includes the sum of ₹ 10,15,000 which is separately dealt with the question No. 2. Therefore, the figure of ₹ 38,35,689 will be substituted for ₹ 48,50,689 in question No. 1. We will answer these questions after we receive the supplementary statement of the case. 17. When the supplementary statement of the case comes back, it would be open to Mr. Joshi to contend that the principle laid down in Lord's Dairy Farm Ltd's case does not apply to the facts of this case, because Mr. Joshi says that this is a case where Secretary had full authority to do the bank's business and this is not a case where some special powers were delegated to an office of the bank. The Tribunal will also find what the power of the secretary were and submit the finding in the supplementary statement of the case. 18. No order on the notice of motion, nor or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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