A.W. Figgis and Co. (P.) Ltd. vs Commissioner of Income Tax

Shyamal Kumar Sen, J.—Pursuant to the direction of this Court u/s 256(2) of the income tax Act, 1961 (''the Act'') the following questions were referred by the Tribunal: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the applicant''s claim was not allowable u/s 28 of the income tax Act, 1961 being a deductible business loss in the year under reference?

Whether, the Tribunal was correct in not directing the ITO to allow the sum of Rs. 1,76,751 in this assessment year u/s 155(6) of the Act, as the debt became irrecoverable in this assessment year and was actually written off in the applicant''s accounts for the year and was actually written off in the applicant''s accounts for the year ended 31-3-1982?

The assessment year involved is 1980-81.

The facts, inter alia, leading to this reference are that the assessee is a private limited company carrying on business of tea brokers and auctioneers and also finances its seller clients in the usual course of business. It advanced a sum of Rs. 2 lakhs to one of its settler clients, Shri R.P. Gupta, the leasehold owner of Mullotar Tea Estate. It could realise only about Rs. 23,000 and odd and the balance sum of Rs. 1,76,751 could not be realised. It was found that Shri Gupta was not the actual lessee owner of the Mullotar Tea Estate and had fraudulently represented that he was the lessee owner. A criminal case was lodged against Shri Gupta during the accounting year relevant to the assessment year under reference when the assessee found that there was no chance of recovery of the amount due from Shri Gupta as was evidenced by the correspondence with the Solicitors. As the assessee lost all hopes of recovery of the aforesaid sum, it claimed that it should be allowed as a deductible business loss or as a bad debt, although the debt was written off as irrecoverable in the subsequent year''s account for the year ended 31-3-1982. The Assessing Officer found that the assessee could not prove that the debt became bad and, secondly, the assessee had not written it off in its books of account. He, therefore, disallowed the claim of the assessee. The Commissioner (Appeals) confirmed the disallowance made by the Assessing Officer.

The Tribunal maintained the disallowance on the following grounds:

The contention of the assessee that the debt or the advances made by it to Shri R.P. Gupta could be allowed u/s 28 cannot be accepted. Section 28 only indicates the income which can be taken as income from the business. Section 29 prescribes the method for the commutation of income from business, profession, etc. Section 29 clearly states that the income shall be computed in accordance with the provisions of sections 30 to 43A of the Act. Therefore, the deductions and/or outgoings for computing the business income are only available in sections 29 to 43A of the Act and section 28 docs not make any provision for the allowance of any deduction. [Even after considering the order of the Commissioner (Appeals) for the earlier year on pages 1 to 12 of the paper book, the claim of the assessee cannot be accepted u/s 28 of the Act.]

The case of the assessee u/s 36(1)(vii) has rightly been rejected by the Commissioner (Appeals). The bad debt can only be allowed if the debt arose in course of the business of the assessee. The debt has become bad and it has been written off in the books of account of the assessee. The assessee in course of its business has advanced loans to Shri Gupta against the crop of the tea estate. Therefore, so far as the first condition is concerned, it is duly satisfied. But the second and third conditions are not satisfied at all. The assessee could not prove that the debt became bad during the year under appeal. Shri Gupta may not be the owner of the tea estate but the assessee has not proceeded for the recovery of the debt against Shri Gupta. The assessee had not indicated the assets of Shri Gupta. Moreover, no legal action has been taken against him. The criminal action has been taken against Shri Gupta because he fraudulently represented himself as the owner of the tea estate. But this does not satisfy the second condition. As the assessee has not produced any material to prove that the debt became bad except the letter of the Solicitor, the second condition is not satisfied at all. The assessee has admitted that the third condition has not been satisfied. The assessee has not written off the debt in its books of account. The assessee lastly has urged that the direction could be given to the ITO to comply with section 156(6) of the Act. The debt has not been proved to be bad during the year under appeal or in the earlier year. If the debt would have been bad in the earlier year, some direction could have been given to the ITO to rectify the assessment u/s 155(6) of the Act. That situation did not arise in the present case. Consequently, the disallowance sustained by the Commissioner (Appeals) is maintained.

It has been submitted by Dr. Pal, the learned Advocate for the assessee, that this finding of the Tribunal is patently perverse because of the letter of the Soliciter which had pointed out that the said accused person did not possess any asset out of which the dues could be realised and, hence, Messrs Khaitan & Co. advised that even if a suit had been filed earlier, no useful purpose would have been served on the facts of the case. In view of the said categorical finding of the Solicitor, Khaitan & Co., the Tribunal''s observation that the assessee has not produced any other material to prove that the debt has become bad is patently perverse. In view of the observation of Khaitan & Co. and in view of the further fact that the debt arose in the course of the business of the assessee, the amount which had become irrecoverable can be allowed as a trading loss u/s 10(1) or u/s 28 of the Act.

The letter of Khaitan & Co. is itself the proper and cogent material and to seek for any other material and to reject the claim of the assessee on that ground is not only perverse but is not sustainable in law.

Dr. Pal, in this connection relied upon the judgment and decision in the case of Gouri Prasad Bagaria and Others Vs. Commissioner of Income Tax, West Bengal, It has also been submitted by Dr. Pal that the Tribunal itself has found that the assessee in the course of his business has advanced loans to Shri Gupta against the crop of tea estate, the advance, therefore, is incidental to and in the course of the business of the assessee, and the loss arising from such transaction is to be treated as the trading loss.

It was held that where the assessee''s statement is believed, there is obvious material on which the finding is based; and to seek for other material is tantamount to saying that a statement made by an assessee in not material on which a finding can be given. In our opinion, the Tribunal having believed the assessee''s statement, there was an end of the matter insofar as that fact was concerned, and if the finding was based upon a statement which was good material on which it could be based, no question of law really arose. However, treating the question as one of law, the answer is irresistible that there was material, viz., the statement of the assessee believed by the Tribunal, on which the finding could be given.

In support of his contention Ld. Advocate relied upon the several decisions:

(1) Badridas Daga Vs. The Commissioner of Income Tax,

(2) Commissioner of Income Tax Vs. Gillanders Arbuthnot and Co. Ltd.,

(3) Indore Malwa United Mills Ltd., Indore Vs. State of Madhya Bharat and Others,

(4) Commissioner of Income Tax U.P. Vs. Nainital Bank Ltd.,

(5) Commissioner of Income Tax Vs. Inden Biselers,

In the case of Badridas Daga (supra), the appellant carried on business as money-lender in shares and bullion and commission agent, through an agent who held a power of attorney which conferred on him large powers of management including authority to operate on bank accounts. The agent withdrew from the bank account sums aggregating to Rs. 2,30,636 and applied them in satisfaction of his personal debts incurred in speculative transactions. On being informed of the true state of affairs the appellant cancelled the power of attorney and called upon the agent to pay the amount withdrawn by him. The appellant later filed a suit against the agent for recovery of the amount but could recover only a sum of Rs. 28,000 and wrote off the balance of Rs. 2,02,442 as irrecoverable. The question was whether this amount was an admissible deduction in computing the profits of the assessee from business for the purpose of income tax.

It was held that

(i) the theory that once moneys were put into the bank they had "got home" and their subsequent withdrawal from the bank would be de hors the business was inapplicable to a business such as banking or money-lending,

(ii) as the business of the appellant consisted in lending moneys, realising them and making fresh loans, a continuous operation on the bank account by the agent was incidental to the conduct of the business,

(iii) once it was established that the agent was incharge of the business, that he had authority to operate on the bank account, and that he withdrew moneys in the purported exercise of that authority, his action was referable to his character as agent and any loss resulting from misappropriation of funds by him was a loss incidental to the carrying on of the business;

(iv) the loss sustained by the appellant as a result of misappropriation by the agent was one which was incidental to the carrying on of the business and should, therefore, be deducted in computing the profits u/s 10(1).

Reliance also placed upon by Dr. Pal, the learned Advocate for the assessee, on the decision in the case of Gillanders Arbuthnot & Co. Ltd. (supra). In the aforesaid decision the assessee-company which had diverse lines of business, had many subsidiaries to which it advanced loans from time to time. The subsidiaries were all controlled by the assessee-company and some of them had appointed the assessee-company as their managing agents. The balance sheet of one of the subsidiaries showed that there were outstanding loans due to two directors. The assessee bought up the share capital of the subsidiary and advanced unsecured loans to it. There was a running account between the assessee-company and the subsidiary on account of which there was a debit balance of Rs. 87,546 which was written off by the assessee during the relevant assessment year and was claimed as bad debt.

The ITO found that some of the office establishment charges of the subsidiary were transferred to the loan account which the assessee- company maintained after the discontinuance of the activities of the subsidiary. As the financial position of the subsidiary was not sound at the time the loans were advanced and as no interest was charged by the assessee-company to the subsidiary, the ITO inferred that the loan was connected with the assessee''s participation in the capital of the subsidiary, and held that the claim of the assessee was not allowable. The AAC held, on appeal, that the amount was not allowable u/s 36(2) of the Act, as the amount could not be said to have been advanced in the course of any money-lending business in a normal or prudent manner. On further appeal, the Tribunal found that the assessee-company was engaged in various business activities, one of which was to guide the destinies of the subsidiaries by financing them or advancing loans to them, that the loans advanced to the subsidiary were not an isolated instance but were a part of the formidable list of the advances made by the assessee-company to its subsidiaries, that the employees of the assessee-company were on the Board of directors of the subsidiary company and that the income of the subsidiary showed an upward trend after the share capital of the subsidiary was taken over by the assessee-company that though the balance sheet of the subsidiary did not inspire much confidence, yet since the subsidiary was engaged in the business of consulting engineers, by its very nature, the share capital and the assets were not formidable, that though the financial position of the subsidiary was weak, yet the assessee did its best to prop up the sagging finance of the subsidiary and bolster up its declining business, that the interests of the subsidiaries were vitally connected with the assessee''s business interests which were diverse, that the memorandum of association permitted the assessee-company to advance the loans and the fact the assessee did not charge any interest to the particular subsidiary spoke well of the business prudence of the assessee-company and did not indicate any mala fides, that it was only when the subsidiary went into liquidation and the liquidator wrote to the assessee-company that there was absolutely no chance of effecting any recovery from the subsidiary that the assessee chose to write off the debt and claim it as a deduction, and that even if the amount could not be treated as a bad debt in the sense that it was not an advance in the course of money-lending business, it could be allowed as a trading loss incurred by the assessee in the course of its business.

On a reference it was held that the finding of the Tribunal which was a finding of fact, was not unreasonable or perverse and the loss claimed by the assessee was a trading loss and not a capital loss and was an allowable deduction.

In the case of Indore Malwa United Mills Ltd. (supra), the assessee carried on the business of manufacturing cloth, pursuant to the authority under its memorandum of association to invest its funds in loans to others, resolved to invest its surplus funds with its managing agents at 6 per cent interest. The managing agents borrowed on behalf of the company large sums of money from outsiders, entered them in the company''s books of account, withdrew the sums and utilised them for then own purposes. The managing agents went into liquidation in 1933. In computing its profits for the purpose of industrial tax under the Indore Industrial Tax Rules, 1927, for the assessment year 1941, the company claimed deduction of the sums which could not be recovered from the managing agents as bad debts and trading loss. It was held that the money borrowed by the managing agents which had become irrecoverable was a trading loss deductible in computing the profits of the managed company in the assessment year; it was a loss incidental to the company''s business. The fact that the managing agents brought into the company''s till larger amounts than what the company''s business demand at a particular moment of time did not make the dealings or the lendings of money to themselves anytheless incidental to the sanctioned business operations.

The Supreme Court in the case of Nainital Bank Ltd. (supra), held that u/s 10(1) of the Indian income tax Act, 1922, the trading loss of a business is deductible in computing the profit earned by the business. But every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business is a question to be decided on the facts of each case, having regard to the nature of the operation carried on and the nature of the risk involved in carrying out. The degree of the risk or its frequency is not of much relevance but its nexus of the business is material.

Cash is the stock-in-trade of a banking business and its loss in the course of the business under varying circumstances is deductible as a trading loss in computing the total income of the business.

The retention of moneys in the premises of a bank to meet the demands of its constituents which is a part of the operation of banking, carries with it the ordinary risk of being subject to embezzlement, theft, dacoity or destruction by fire, etc. Such risk of loss is incidental to the carrying on of the operations of banking business.

In the aforesaid decision the respondent, a public company, which carried on the business of banking, had a branch situated at Ramnagar. In the usual course of its business large amounts were kept in various safes in the premises of that branch. At about 7 P.M. on 11-6-1951, there was a dacoity and the dacoits carried away cash amounting to Rs. 1,06,000.

It was held that the loss incurred by dacoity was incidental to the carrying on of the business of banking and was deductible as a trading loss in computing the income of the respondent from banking business.

In the case of Inden Biselers (supra) it was also relied upon by the learned Advocate for the assessee. In the aforesaid decision the assessee in order to transport mineral and ores from the mines to the assessee''s place, entered into an agreement for a period of three years with a Corporation under which the said concern agreed to use all its trucks purchased under the hire-purchase scheme from a finance company exclusively for the assessee. In consideration of the Corporation agreeing to ply all its trucks exclusively for the assessee, the assessee undertook to pay a sum of Rs. 21,240.30 being the insurance premium and advance payment for the ten vehicles. Though there was sufficient transport during the years ending 31 -3-1961 and 31-3-1962, there was no transport by the Corporation during the year ending 31-3-1963. As the Corporation had defaulted in payment of the hire charge as per the hire-purchase agreement, the assessee intervened and guaranteed the payment of instalments for the release of the lorries seized for the default committed by the Corporation. The assessee also took over the rights under the agreement entered into between the Corporation and the finance company in respect of the ten lorries in consideration of its paying a sum of Rs. 67,404 to a certain person on behalf of the Corporation. There was no transfer of the vehicles in the name of the Corporation or the assessee.

The assessee, according to the agreement, paid the instalments due to the finance company from the Corporation and for the advance paid by the assessee, the freight charges due from the assessee to the Corporation for the transport of iron ore were adjusted. In the year ending 31-3-1963, a sum of Rs. 2,19,431 was outstanding from the Corporation to the assessee. The financial position of the Corporation was so bad that the assessee could not recover any amount from the Corporation and, accordingly, the amount due on 31-3-1963, became irrecoverable and the assessee claimed this amount as deduction in its assessment for the assessment year 1963-64 either as a bad debt or as business expenditure or as a loss incidental to the business. The ITO rejected the claim but the Tribunal allowed.

On a reference it was held that the transport of iron ore was absolutely necessary for the business of the assessee and in order to maintain regular supplies, the assessee had advanced monies to the Corporation. However, the liability of the Corporation to pay the assessee arose because of the default by the Corporation and the advance made by the assessee did not result in any capital asset. Accordingly, the amount claimed was on revenue account. It was a trading loss deductible as such.

It was also held that u/s 28 in computing the income chargeable to income tax a loss other than capital loss, which is merely incidental to the trade, is allowable on ordinary principle of commercial trade though it may be allowable under any of the specific clauses either u/s 36 or u/s 37 of the Act.

We do not find any infirmity in the order of the Tribunal. It cannot be disputed that the assessee did not maintain any action for recovery of his dues. Criminal proceeding instituted is not sufficient for the recovery of dues. No. Civil Suit was filed for the purpose. The finding of the Tribunal that the assessee has admitted that the third condition has not been satisfied has not been challenged. It is also a finding of fact that the assessee has not produced any material to prove that the debt became bad except the letter of the Solicitor.

Under such circumstances, there is no reason to inference with the order of the Tribunal. In our views, the Tribunal is justified in disallowing the claim.

Accordingly, both the questions are answered in the affirmative and in favour of the revenue and against the assessee. There will be no order as to costs.

Ajit K. Sengupta, J.

I agree.