Travancore Tea Estates Co. Ltd. vs Commissioner of Income Tax

K.A. Nayar, J.—The two references arise out of the common appellate order for the assessment year 1977-78. Income Tax Reference No. 57 of 1990 is at the instance of the assessee and Income Tax Reference No. 58 of 1990 is at the instance of the Commissioner of Income Tax.

The assessee is a non-resident company engaged in the business of growing, manufacturing and selling of tea. The assessee entered into an agreement on August 15, 1973, with one Mr. A. Velliangiri for the sale of the business of the assessee. On February 5, 1974, the assessee also entered into an agreement with Mr. Velliangiri as managing director of Chennai Bottling Co. Pvt. Ltd., Madras, agreeing to sell the entire tea manufactured by the assessee to Chennai Bottling Co. Pvt. Ltd. or its nominees up to December 31, 1974. A sum of Rs. 40,81,140 was due to the assessee on account of the sale price for the tea supplied to them. This amount was written off by the assessee on August 31, 1976, and was claimed as a bad debt. For the sale of the business of the assessee, permission of the Reserve Bank of India was required and, therefore, the assessee applied to the Reserve Bank of India for permission for the sale pursuant to the agreement. But the Reserve Bank of India refused permission. By letter dated August 11, 1976, the Reserve Bank of India granted permission to Messrs. Ram Bahadur Thakur Pvt. Ltd. to purchase the entire undertaking of the assessee in India. Consequently, the Indian undertaking of the assessee was transferred to Messrs. Ram Bahadur Thakur Pvt. Ltd. (hereinafter to be called "R. B. T."), with effect from September 1, 1976. A day before the transfer of the undertaking, i.e., on August 31, 1976, the assessee wrote off the amount of Rs. 40,81,140 due from Chennai Bottling Co. Pvt. Ltd. and others for the sale of tea to them and the assessee claimed the said amount as a deduction on account of bad debt. The Income Tax Officer took the view that the debt cannot be considered to have become bad by the end of the accounting period in question and that legal proceedings for recovery of the amount were pending. Hence, the Income Tax Officer negatived the claim of the assessee for deduction. The Commissioner of Income Tax (Appeals) confirmed the action of the Income Tax Officer. The Commissioner of Income Tax (Appeals) also took the view that the assessee had not established that the debt had become bad or irrecoverable. The assessee took up the matter in second appeal before the Tribunal. The Tribunal also confirmed the disallowance of the claim of the assessee for deduction of the bad debt. The Tribunal held that there was no material to show that the debt had become bad. The Tribunal also turned down the claim of the assessee for deduction on account of business loss on the ground that the loss, if at all, was a capital loss. But the Tribunal held that the loss of Rs. 11,36,770 suffered by the assessee in respect of the sale of the current assets was an allowable deduction in the computation of the taxable income of the assessee. The assessee transferred its business for a consideration of Rs. 75,20,000. Out of this amount, it was found that a sum of Rs. 21,40,150 was towards the net current assets. The net value of the current assets of the company as on the date of the transfer, i.e., as on August 31, 1976, was Rs. 32,76,929. Since the consideration for the current assets transferred was only Rs. 21,40,150, the assessee suffered a loss of Rs. 11,36,779 on the sale of the current assets. This loss suffered by the assessee was allowed as a deduction in the computation of the taxable income of the assessee by the Tribunal as well. It is thereafter that the following questions were referred for the decision of this court at the instance of the assessee as well as the Commissioner of Income Tax.

" At the instance of the assessee :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee''s claim for deduction of Rs. 40,81,140 as an item of bad debt written off is not allowable ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee''s claim for deduction of Rs. 40,81,140 as an item of business loss is not admissible ?

At the instance of the Department :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee''s claim for deduction of Rs. 11,36,779 as a revenue loss in respect of the sale of the current assets is allowable ?"

We heard Sri N.R.K. Nair, counsel appearing for the assessee (sic), and Sri P.K.R. Menon, on behalf of the Department. The question posed at the instance of the assessee relates to the disallowance of deduction of Rs. 40,81,140 claimed as a bad debt. The Income Tax Officer found that the assessee sold tea to five concerns in terms of the contracts entered into with them in 1974. The entire proceeds of the sales made to each one of them were credited in different sales accounts and were considered and taxed as the assessee''s income in the year of sale. But those concerns disputed a portion of the amount which came to a total of Rs. 40,81,140. It is an admitted fact that the assessee did proceed against each of the said concerns. The assessee''s successor in business, viz., R. B. T., pursued the attempt to recover the amount. The plea taken before the Income Tax Officer by the assessee that, as far as the assessee was concerned, the amount had become a bad debt was not accepted by the Income Tax Officer. Several legal proceedings were on and there was no reason to treat the amount as a bad debt. The assessee''s successor in business was hopefully pursuing the case. The argument was that, as against the assessee, the amount had become bad though it may be treated as good as far as the purchaser, viz., R. B. T., is concerned. The Income Tax Officer found that the assessee had failed in its effort to establish that the debt had become bad. It is in that view of the matter, that the claim of the assessee was negatived by the Income Tax Officer.

The first appellate authority found that R. B. T. purchased the estate of the assessee, their Indian business. The purchasers of tea from the assessee had not denied their liability to pay the price. They had only raised certain counter claims. If the assessee decided to settle their claims, it was not open to them to claim the same as a deduction claiming to be a bad debt. The assessee has not succeeded in showing that the persons from whom the debt is due had no capacity to pay it or that the debt had become bad and it became virtually impossible to receiver. The first appellate authority also found that the debt had not become bad during the previous year.

In the second appeal before the Tribunal, the assessee mainly contended that the amount should have been allowed as a business loss. Nevertheless, the Tribunal considered the matter from the aspect of bad debt also. The amount, admittedly, represented the price of tea supplied up to December 31, 1974. On October 31, 1975, the assessee moved the civil court under the Arbitration Act according to the provisions contained in the agreement. It was during the pendency of those proceedings that the assessee transferred the assets and liabilities of the company in India to R. B. T. on September 1, 1976. In that context, the Tribunal found that there was absolutely no material to show that the debt had become bad. Proceedings for realising the amount were pending in the court. There were claims and counter claims against the assessee also by the purchasers of tea. It was also not shown by the assessee that the amount had become impossible of recovery. If the amount was adjusted towards any of the counter claims, it will not be a case of the debt becoming bad. The Tribunal found that the assessee had totally failed to make out a case in justification of the writing off of the amount as a bad debt. Thus, the definite finding of the Income Tax Officer, the Commissioner of Income Tax (Appeals) and the Tribunal is that there is no material to show that the debt had become bad in the accounting year in question.

With respect to the claim based on business loss, the Tribunal found that, by writing off the amount on the day previous to the sale, the assessee only reduced the total loss arising out of the sale. The loss, therefore, was not a business loss. It was only a capital loss. Since it was a capital loss, the claim of the assessee for deduction of the amount as a business loss was rejected. These findings of fact, viz., that there is no material to show that the debt had become bad and that the loss was a capital loss, have not been challenged before us by raising specific questions. Therefore, both the questions raised at the instance of the assessee have to be answered in the affirmative, against the assessee and in favour of the Revenue.

The question referred at the instance of the Revenue relates to the allowance of deduction of Rs. 11,36,779 as a revenue loss in respect of the current assets. The Income Tax Officer disallowed the claim of the assessee. The Commissioner of Income Tax (Appeals) found that the amount of Rs. 11,36,779 represented the loss on the sale of consumable stores and unsold produce and, therefore, is allowable as a revenue loss, in determining the total income. The net value of the current assets as on August 31, 1976, admittedly, was Rs. 32,76,929. But the assessee realised only an amount of Rs. 21,40,150 on account of the sale of the current assets. Therefore, the assessee suffered a loss of Rs. 11,36,779 on the sale of the current assets. The Income Tax Officer disallowed the claim of the assessee for the deduction only on the ground that the loss was consequent on the closure of the assessee''s business and not on carrying on the business. The Commissioner of Income Tax (Appeals) held that the loss on the sale of consumable stores and unsold produce is allowable as a revenue loss. It was not a case of allowing expenditure and, therefore, Section 37(1) requiring the incurring of the expenditure wholly and exclusively for the purpose of business is not applicable. The departmental representative also did not dispute the principle enunciated by the Commissioner of Income Tax (Appeals) before the Tribunal. The allocation of the sale proceeds between consumable stores or stock-in-trade and plant and machinery was furnished before the Income Tax Officer and the same had been accepted by him. Therefore, the amount of Rs. 11,36,779 being a loss incurred on the sale of current assets is an ascertained figure and accepted by the Department. In that view of the matter, the Tribunal rightly allowed the assessee''s claim for deduction of Rs. 11,36,779 as a revenue loss in respect of the sale of the current assets. Our answer to the question referred at the instance of the Revenue is in the affirmative, against the Revenue and in favour of the assessee.

Though the questions referred to us are prefaced with the usual wording "whether, on the facts and in the circumstances of the case, the Tribunal was right...", counsel for the assessee, in his usual enthusiasm, referred to several decisions to show that the finding of the Tribunal that there is no material to show that the debt had become bad is erroneous. He referred to the decisions in Lord''s Dairy Farm Ltd. Vs. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, Baroda, , SARANGPUR COTTON MANUFACTURING CO. LTD. Vs. COMMISSIONER OF Income Tax, GUJARAT-I., , Jethabhai Hirji and Jethabhai Ramdas Vs. Commissioner of Income Tax, Bombay City-II, , R.K. Kamakshi Chettiar Vs. Commissioner of Income Tax, Madras, and Bank of Bihar Ltd., Patna Vs. Commissioner of Income Tax, Bhiar and Orissa, .

But it is well-settled that all questions of fact are for the Tribunal to decide and this court cannot go behind the Tribunal''s findings on facts. This court cannot go behind or question the statement of facts made by the Tribunal unless there is no evidence to support them or the Tribunal has misdirected itself in law. Further, the court cannot disturb the finding of fact given by the Tribunal even if there is no evidence to support it unless the assessee challenges the findings of fact by raising specific questions on that issue. (See India Cements Ltd. Vs. Commissioner of Income Tax, Madras, , Hazarat Pirmahomed Shah Saheb Roza Committee Vs. Commissioner of Income Tax, Gujarat, , The Commissioner of Income Tax, Madras Vs. Sri Meenakshi Mills Ltd., Ors., , Commissioner of Income Tax, Bombay City I Vs. Greaves Cotton and Co. Ltd., , Commissioner of Income Tax, Uttar Pradesh Vs. Madan Gopal Radhey Lal, and Aluminium Corporation of India Ltd. Vs. Commissioner of Income Tax, West Bengal, .

Whether a debt is bad and in which year the debt has become bad are all questions of fact and the findings of the Tribunal on those issues will be disturbed by the court only if there is no evidence to support them or if the Tribunal has misdirected itself in law and if specific questions have been raised in that regard. There is no specific question raised in this case and there was no evidence to show that the amount had become irrecoverable and a bad debt during the year in question. The evidence is that there were claims and counter claims by the petitioner and the debtors. There is also a suggestion that the writing off may be to compensate for the premature termination of the contract. Therefore, the decisions referred to by counsel in this case relating to bad debts have no merit.

Counsel for the assessee reminded us that we have the power to reframe the question. That is true. But the question referred with the preface "on the facts and in the circumstances of the case . . ." would not entitle the court to deal with the question of law in respect of which there has been no application for reference. This is now well-settled by the decisions in Karnani Properties Ltd. Vs. The Commissioner of Income Tax, West Bengal, and The Commissioner of Income Tax, Bihar and Orissa, Patna Vs. S.P. Jain, .

In order to rank a debt as a bad debt, it should have found its place in the balance-sheet as a trading debt to swell the profits of the business. The debt should be proved to be bad in the previous year and it should have been written off by the assessee in the relevant previous year. The debt may become bad when it is proved to be irrecoverable on account of the fact that the debtor is in a bad financial position or that it has become irrecoverable. So long as there is a ray of hope to recover the debt, however dim it may be, and so long as the debt is in the process of realisation, it cannot be said that it has become irrecoverable. The burden of proof that there is a debt owing to the assessee, that it has been taxed in the earlier years, that the debt arose in the course of business of the assessee and, finally, that it has become bad in the year of account are all on the assessee. The question whether it has become bad during the year of account is a question of fact. If the finding of the Tribunal is based on admissible evidence, the finding will not be disturbed. The assessee has no option to treat a debt as bad when he chooses to do so. This has to be ascertained having regard to the circumstances of the debtor and the difficulty or impossibility of recovery of the same. Therefore, the question whether the debt has become bad will have to be determined by the fact-finding authority. Of course, it has been held that a trading loss has a wider connotation than a bad debt. A bad debt which cannot be written off may be allowed as a trading loss, provided the loss is incurred wholly and exclusively for the purpose of the business of the assessee.

Counsel for the assessee referred to the decision in Lord''s Dairy Farm Ltd. Vs. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, Baroda, for the proposition that when the assessee wrote off the amount, that is prima facie evidence that the amount is irrecoverable. But this decision will not help the assessee, for there is a definite finding of fact against the assessee that the assessee has not adduced any evidence to show that the debt had become irrecoverable. There was also evidence before the Tribunal to the effect that the assessee was trying to recover the amount in arbitration proceedings. The innuendo also is there to the effect that the debt has been written off to compensate the debtors in satisfaction of their claims for damages arising out of breach of contract. Hence, the decision in Lord''s Dairy Farm Ltd. Vs. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, Baroda, referred to above will not help the assessee. To the same effect are the decisions in SARANGPUR COTTON MANUFACTURING CO. LTD. Vs. COMMISSIONER OF Income Tax, GUJARAT-I., and Jethabhai Hirji and Jethabhai Ramdas Vs. Commissioner of Income Tax, Bombay City-II, (Bom). These are only authorities for the proposition that a writing off is prima facie evidence of the debt having become bad. In Bank of Bihar Ltd., Patna Vs. Commissioner of Income Tax, Bhiar and Orissa, , the Supreme Court held that the question whether the debt is bad is one of fact and, if there is some evidence to justify the conclusion of the Tribunal, it is not open to the High Court in a reference to reappreciate the evidence. The decision in R.K. Kamakshi Chettiar Vs. Commissioner of Income Tax, Madras, is a case where irrecoverability has been established and, therefore, that decision also will not help the assessee. The decision in CIT v. Woodlands Estates Ltd. [1972] ILR 2 614, was cited for the proposition that the court has power to reframe the question. But the power to reframe the question is only to bring out clearly the real issue and by refraining the question, no new question of law can be raised. The High Court''s power under the Act is only to give an opinion on the question of law referred to it for its opinion. The High Court, in calling for an additional statement, cannot frame a question of law different from that referred to the High Court. Several other decisions have been referred to by counsel for the assessee to impress upon us that the court has power to reframe the question enabling a challenge to the finding of fact by the Tribunal that the assessee has failed to make out a case in justification of the writing off of the amount as a bad debt and further finding that there is absolutely no material to show that the debt has become bad. This would amount to permitting the assessee to raise an entirely different question from what has been raised before the Tribunal u/s 256(1) of the Act.

In the decision in Patiala Biscuit Manufacturers P. Ltd. Vs. Commissioner of Income Tax, Punjab, , the Supreme Court held that normally findings of the Tribunal on the question whether a particular loss is a trading loss or not being essentially a finding on fact, the same would not be disturbed by the court unless it is shown that the Tribunal had taken into consideration irrelevant considerations or that it had failed to take into consideration relevant circumstances. In Commissioner of Income Tax, Bombay City I Vs. Greaves Cotton and Co. Ltd., , the Supreme Court held that the High Court is not a court of appeal in a reference under the Income Tax Act and it is not open to the High Court in such reference to embark upon a reappraisal of the evidence and arrive at a finding of fact contrary to the one arrived at by the Tribunal. The duty of the High Court is to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law referred to it on those facts. If the finding of fact is defective in law and if there is no evidence in support of it, the assessee has to apply for a reference of the specific question challenging such a finding of fact. Further, in India Cements Ltd. Vs. Commissioner of Income Tax, Madras, , it is laid down by the Supreme Court that, in a reference, the High Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge these findings first by an application u/s 66(1). If he has failed to file an application u/s 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or another.

In view of the above discussion, we answer both the questions referred at the instance of the assessee in the affirmative, in favour of the Revenue and against the assessee. The question referred at the instance of the Department is also answered in the affirmative, against the Revenue and in favour of the assessee.

A copy of the judgment under the seal of the High Court and the signature of the Registrar will be sent to the Income tax Appellate Tribunal, Cochin Bench.