Commissioner of Income Tax vs Karnani Finance Enterprises Ltd.

Banerjee, J.—Pursuant to the direction given by this Court u/s 256(2) of the income tax Act, 1961, the following questions of law have been forwarded by the Tribunal:

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in treating the amount of Rs. 85,510 due from H.V. Law & Co. Ltd. as bad debt allowable as deduction ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the amount of Rs. 8,552 being the unrealisable rent against the rent due as deductible against the business income treating the name as business debt ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in treating the law charges of Rs. 20,670 as business expenditure and in that view allowing deduction against business income?

Shortly stated the facts are that the assessee Karnani Finance Enterprises Ltd. for the assessment year 1983-84 corresponding to the accounting year ended on 31-3-1983 claimed bad debts of Rs. 85,510 in respect of M.V. Law & Co. (P.) Ltd. and Rs. 6,552 on account of unrealisable rent from Someswar & Co. In respect of bad debts of Rs. 85,510, the assessee submitted that it stood as ''guarantor'' to H.V. Law & Co. (P.) Ltd. in respect of the Money Execution Case No. 2/72 (H. V. Law & Co. (P.) Ltd. v. State of West Bengal) in the District Court, Howrah and the State of West Bengal challenged the order of the District Court before the High Court, which was pending. Pending that suit the assessee agreed to pay lump sum amount of Rs. 40,000 against outstanding sum of Rs. 1,25,510 on a settlement with H.V. Law & Co. (P.) Ltd. and further agreed to pay Rs. 2,500 per year till the disposal of the case by the High Court. The Board of Directors of the assessee-company passed a resolution on 15-6-1982. The assessee claimed that the bad debt of Rs. 85,510 (Rs. 1,25,510 -Rs. 40,000) was caused by business consideration and as a practical business it has settled the matter. So the same should be allowed as a business bad debt. The ITO did not allow the assessee''s claim on the ground that the assessee had voluntarily surrendered its income already accrued to it without any cogent reason and, therefore, it was not a real and genuine bad debt. As regard the bad debt claim of Rs. 8,552 was the rent due from Someswar & Co., the assessee claimed that the tenant did not pay the rent for the Asansol property and it filed suit for realisation of the due. In the meantime, the property in question had been sold to a third party and as a result the rent could not be realised and it was, therefore, a bad debt. The ITO, however, did not allow the assessee''s claim on the ground that the amount of Rs. 8,552 related to rental income from property at Asansol, which was sold and the amount represented unrealised rent against the rental income, which could not be regarded as a bad debt deductible against the business income or even property income. Against these two disallowances, the assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals) held that the amount of Rs. 85,510 represented a bad debt forgone by the assessee for valid business consideration and it should be allowed as a business loss. As regards the disallowance of Rs. 8,552, the Commissioner (Appeals) held that the assessee had satisfied the conditions laid down in rule 4 of the income tax Rules and the amount should be allowed as a deduction.

Against the order of the Commissioner (Appeals) deleting the addition of Rs. 94,092 (Rs. 85,510 + Rs. 8,552) the department filed appeal before the Tribunal. The Tribunal did not interfere with the Commissioner (Appeals) ''s order and upheld the same.

The assessee also claimed law charges of Rs. 20,670 relating to the property income against business income. The ITO disallowed the assessee''s claim on the ground that the law charges were relating to property income. On appeal, the Commissioner (Appeals) held that the law charges were related to property held by the assessee as stock-in-trade and hence it should be allowed as a business deduction. The Tribunal on appeal by the department upheld the order of the Commissioner (Appeals) on this point also.

The learned counsel appearing on behalf of the revenue submitted that the Tribunal was wrong in allowing a sum of Rs. 85,510 as the said settlement would not have been arrived at by a prudent businessman and accordingly, the said amount should have been disallowed by the Com missioner (Appeals). Secondly, it was submitted that the unrealisable rent from the tenant should not have been treated as bad debt in view of the fact that the property was sold and the sale price should be deemed to include the arrear of rent from the tenant.

So far as the legal expenses are concerned that was allowed by the Commissioner (Appeals) and the Tribunal in the assessee''s own case for the assessment years 1970-71 and 1971-72 and that it is stated by Mr. Poddar, the learned counsel appearing on behalf of the assessee that no reference has been taken against the allowance of the legal charges in respect of those years.

Mr. Poddar, the learned counsel appearing for the assessee contended that the department cannot insist on demonstrative proof of the fact which must satisfy the test of infallibility. All that is required is an honest judgment on the part of the assessee at the time when he makes write-off. In the instant case, it was submitted that the assessee in exercise in its prudence thought it fit that such settlement was for the benefit of the company and accordingly the matter was settled. Such settlement in the facts and circumstances of the case could not be said to be mala fide or with an intention to evade tax. Secondly, it was submitted by Mr. Poddar that so far as unrealised rent is concerned provisions of rule 4 were fully complied with. The Commissioner (Appeals) in his order has clearly held that the five conditions laid down in rule 4 have been fulfilled in the facts and circumstances of the case. The said conditions are as follows :

(a) The tenancy is bona fide;

(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;

(c) the defaulting tenant is not in occupation of any other property of the assessee;

(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfied the (Assessing Officer) that legal proceedings would be useless; and

(e) the annual value of the property to which the unpaid rent relates has been included in the assessed income of the previous year during which that rent was due and tax has been duly paid on such assessed income.

It is also submitted that when the Commissioner (Appeals) has found after assigning evidence that all the five conditions as laid down in rule 4 have been fulfilled, there is no question of taking a contrary view and the Commissioner (Appeals) as well as the Tribunal could not hold to the contrary.

So far as the legal expenses are concerned in the earlier years such question arose but no reference has been taken out. So far as the first point is concerned reference was made to the decision of the Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas Vs. Commissioner of Income Tax, Bombay City-II, wherein the Bombay High Court held that department cannot insist on demonstrative proof of the fact which must satisfy the test of infallibility. All that is required is an honest judgment on the part of the assessee at the time when he makes the write off. A debt cannot be written off as bad and irrecoverable if on the material available it could be shown that there was a possibility of recovering the same. In the instant case, we do not find that the Commissioner (Appeals) as well as the Tribunal has erred in law in accepting the contention of the assessee and granted relief to that extent.

So far as the second question is concerned in view of the findings made by the Commissioner (Appeals) which is upheld by the Tribunal that all the five conditions laid down in rule 4 have been fully complied with, the question of bad debt could not be challenged and the revenue could not urge that the same should have been disallowed contrary to the provisions of rule 4. So far as the legal expenses are concerned, the same benefit was given to the earlier years but that was not given this year. In the facts and circumstances of the case, we do not find that the Commissioner (Appeals) and the Tribunal has committed any error in granting any relief. In the instant case, we do not find any merit in the submissions made by the revenue.

Accordingly, the question No. 1 is answered in the affirmative and in favour of the assessee. Question No. 2 is answered in the affirmative and in favour of the assessee. Question No. 3 is also answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

Surya Kumar Tiwari, J. - I agree.