Commissioner of Income Tax vs Algemene Bank Netharland

Ajit K. Sengupta, J.—In this reference u/s 256(2) of the income tax Act, 1961 (''the Act'') for the assessment year 1979-80, the following questions of law have been referred to this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the loans of Rs. 40,262 and Rs. 6,122 for the Associated Industrial Products Company and Mining and Equipments Manufacturers, respectively, have become recoverable in the relevant year and in that view in allowing the assessee''s claim of bad debts for the above sums?

Whether, there was any material for the Tribunal to hold that the assessee could have entertained a bona fide belief that the loans of Rs. 40,262 and Rs. 6,122 from Associated Industrial Products Company and Mining and Equipment Manufacturers, respectively, became recoverable and whether such finding and order of the Tribunal is otherwise unreasonable and perverse?

Shortly stated, the facts are that the assessee, Algemene Bank Netharland, N.V., is a non-resident company doing banking business in India. The assessment year involved in this reference is 1979-80.

The assessee claimed the following two items as bad debts while computing the income from business:

Rs.

(1 ) Associated Industrial Products Co.

40,262

(2 ) Mining & Equipment Manufacturers

6,122

Regarding the first item, the said party was given overdraft facility on the pledge of goods. The party did not repay the loan. The pledged goods were sold during the previous year under consideration and a sum of Rs. 503 was realised. After getting the report dated 8-2-1978 of a private investigator who reported that there was no chance of any recovery, the balance of Rs. 40,261 due from that party was written off as bad debt. By an order of the Court the partners of the aforesaid debtor-firm were declared insolvent. The ITO rejected the claim of the assessee on the ground that the assessee obtained a decree in its favour and so there was still a chance of realisation of the debt. On appeal, the Commissioner (Appeals) confirmed the action of the ITO.

Regarding the second item of Rs. 6,122, the assessee had obtained a decree against the said party and so the ITO disallowed the same on the only ground that there was a chance of recovery. On appeal, the Commissioner (Appeals) confirmed the action of the ITO.

The assessee appealed to the Tribunal and contended that the loans were given in the ordinary course of the banking business carried on by the assessee. In the calendar year 1978 which is the relevant previous year, the assessee came to the clear conclusion on the basis of the investigation made by it that these loans had become irrecoverable notwithstanding the fact that decrees had been obtained against the parties. Relying on the decision in the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 (Bom.), it was urged that the claim of the assessee should have been allowed as the assessee bonafidely believed that the loans had indeed become irrecoverable and so wrote off the same from its books of account. On the other hand, it was urged on behalf of the department that there was still hope of recovery because of the decrees obtained by the assessee even though the investigation of the assessee showed that there were no assets of the debtors to satisfy the decrees.

The Tribunal considered the contentions of both the parties as well as the facts on record. They found that the only ground for disallowing the two amounts under consideration as given by the revenue authorities was that there was still a chance of recovery. The Tribunal found that if the assessee was bonafidely convinced that a debt had become bad, then the same could be written off and claimed as deduction even though some legal proceedings were pending for recovery of the said debt. This was the ratio of the decision in the case of Jethabhai Hirji and Jethabhai Ramdas (supra). The Tribunal went through the report of the Investigating Officer received by the assessee in the calendar year 1978 and was satisfied that the assessee could have entertained a bona fide belief that the two loans under consideration had become irrecoverable. Hence, the Tribunal allowed the claim of the assessee in respect of the two items under consideration.

No one appeared for the assessee. Accordingly, Mr. J.P. Khaitan, Advocate, was appointed amicus curiae and he has ably assisted the Court. He has submitted that the second question allowed by the Court which challenges the finding of fact being perverse was not raised by the Commissioner. There is no doubt substance in this contention but the matter can be decided on the facts found and/or admitted by the Tribunal. The only question which falls for consideration is whether the debt had become bad during the previous year under consideration. The bank obtained a report dated 8-2-1978 of a private investigator. This report states that one of the debtors, Mining and Equipment Manufacturer did not have any asset in order to repay the debt and no legal proceeding for realisation of the dues would be justified. Similarly, in the case of the other debtor, i.e., Associated Industrial Products Co., a private investigator was engaged to enquire into the financial position of the said debtor and on 2-1-1978, the investigator reported that there were no assets out of which the assessee could hope to recover the amount due to it by the said concern and both the partners of the said concern had been declared insolvent by the Court. The only ground on which the aforesaid amounts were disallowed is that there was still chance of recovery at the end of the previous year because the assessee obtained decrees against the debtor and the Court proceeding had not yet come to an end. It is no doubt true that the suits were filed and decrees were obtained but merely because the suits were decreed cannot lead to the conclusion that there is still hope for a possibility of recovering the debts or the debts are realisable. As a matter of fact the partners of one of the debtors (Associated Industrial Products) were declared insolvent. The question is not whether a decree has been obtained or the firm is in existence or the partners are traceable. The question is whether having regard to the facts and circumstances of the case, the assessee could have entertained a bona fide belief that the aforesaid two amounts of debt became irrecoverable and whether it would be unwise as a prudent businessman to proceed with the execution of the decrees or to institute proceedings against the partners who might have been traceable.

Whether a debt has become bad or not is essentially a question of fact and must be considered in the context and setting of facts of a particular case. It is no doubt true that a debt becomes bad not when the creditor (assessee) is minded to treat it so at a particular time but at and from the particular point of time it was no longer possible to recover, as the debtor had no means or assets to repay and the circumstances made it plain that recovery would not be possible. In this case, no one has challenged the reports of the private investigator. The bank, as a prudent business concern, may, on the facts of a particular case, bonafidely decide that there is no ray of hope of recovery of any part of the debt. In view of the involved circumstances of the debtor, continuance of the proceedings for recovery may be found to be utterly meaningless as the only result of such pursuit is that good money would be spent without any hope of return. If the debtors have no assets, decree will remain unexecutable and will be mere paper decree.

In our view, on the facts and in the circumstances of this case, the assessee could reasonably hold the belief that the debt cannot be reasonably expected to be realised. The assessee, a non-Indian banking company, on the strength of the reports of the investigators, which have not been challenged by the revenue, felt honestly convinced that the financial position of the debtors was so precarious and shaky that it would be impossible to collect any money from them. This is a case of honest judgment on the part of the assessee at the time when the debts were written off in the light of the events up to that stage and not in the light of later happenings. The later happenings only justify the belief which was formed at the time of writing off of the debts. The fact that the debtors have no assets and even the partners of the firm were declared insolvent was a sufficient indication that the debt could not be realised any further. The decrees are merely paper decrees which does not establish that there was still a chance of realisation of the debts.

For the reasons aforesaid, the first question is answered in the affirmative and in favour of the assessee; the first part of the second question is also answered in the affirmative and the second part in the negative, both in favour of the assessee. There will be no order as to costs.

Chowdhury, J.

I agree.