The Judgment of the Court was delivered by

Ramaswami, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the following question has been referred:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 76,306 was allowable as deduction in computing the profits and gains of the business for the year 1961 relevant to the assessment year 1962-63?”

2. The assessee is a public limited company carrying on business in insurance. The accounting period adopted is the calendar year. Prior to the year 1956, the assessee was a composite insurance company carrying on business both in life and general insurance. With effect from January 19, 1956, the management of the life insurance or controlled business, on nationalisation, vested in the Government who acted through a custodian. The Life Insurance Corporation was established with effect from September 1, 1956, and all the assets and liabilities pertaining to the controlled business of all the insurers thereafter stood statutorily transferred and vested in the Corporation. The assets and liabilities relating to the life department of the assessee-company having thus vested in the Life Insurance Corporation, the assessee-company continued to carry on only the general insurance business since September 1, 1956.

3. The assessee-company in due course prepared its profit and loss account and the balance-sheet for the year ending December 31, 1955, which purported to allocate the common expenses incurred in respect of the business between the life insurance section and other parts of the business and it appears that the assessee decided to allot 5/6ths share of total expenses of the management to the life department and 1/6th share to the other section. This allocation was done subsequent to the Insurance Emergency Powers Act (Act No. 91 of 1956), which came into force on March 21, 1956, but without the consent of the Custodian. In the auditors' report dated June 29, 1956, presented to the shareholders of the assessee-company it was stated that since the control of the life insurance business was vested with the custodian the directors did not have access to the books of account and other records of the company pertaining to life insurance business, and that, therefore, the auditors were not able to incorporate the accounts of the life department in the statement of accounts. The auditors further stated, after referring to the allocation made by the board of directors, that they were also not able for the same reason to state whether all expenses of management wherever incurred whether directly or indirectly in respect of miscellaneous insurance have been fully debited in the revenue account. Similar allocation was also made in regard to common expenses for the period January 1, 1956, to January 18, 1956. The total amount so allocated to the life insurance section with reference to the assessee-company's own accounts during the period when the life insurance formed part of its activities, amounted to Rs. 2,12,560. After a process of agreed adjustments between the assessee and the Life Insurance Corporation it was claimed by the assessee-company that a sum of Rs. 76,306 was yet due by the life insurance section to the other section. This sum which represented an expenditure incurred by the assessee-company in 1955 and allocated by the directors to the life insurance business, was treated as an outstanding against the Life Insurance Corporation from the assessment year 1955-56 onwards. The assessee-company was claiming this amount from the custodian in whom the assets and liabilities of the life insurance business vested on nationalisation. The Life Insurance Corporation was disputing this claim. According to the Corparation if the accounts were properly taken the corporation would be entitled to recover from the assessee certain amounts and they would not be liable to pay the sum of Rs. 76,306.

4. The assessee then filed W.P No. 979/58 (Vanguard Insurance Co. Ltd. v. Zonal Manager, South Zone Life Insurance Corporation of India), under article 226 of the Constitution of India in this court against the Life Insurance Corporation praying for the issue of a writ of mandamus to direct the Corporation to accept the balance-sheet for the calendar year 1955 and compel the Corporation to pay the assessee a sum of Rs. 76,306.38. This petition was dismissed by this court holding that neither the Custodian nor the Corporation was a party to the allocation, that by the unilateral act of the assessee-company allocating expenses as it liked the assessee could not bind the Government or the Corporation and no liability could be cast on the Corporation by reason of such unilateral allocation. While dismissing the writ petition, the High Court, however, observed that this did not preclude the assessee from obtaining its just dues by taking appropriate proceedings and that it would be equally open to the Corporation to claim that, far from being liable to pay anything to the assessee, it is the latter that should pay what is due on account. The assessee did not further pursue the matter against the Corporation by any independent claim. However, the Corporation moved the Life Insurance Tribunal for adjudication under the Life Insurance Act for accounting and claimed that the assessee-company was liable to pay to the Corporation certain amounts. In these proceedings the Life Insurance Tribunal held that the Life Insurance Corporation was entitled to recover from the assessee a certain sum appertaining to the life department but utilised by the general department for discharging its tax liability.

5. After the dismissal of the writ petition by this court in April, 1961, in its profit and loss account for the year ended December 31, 1961, the assessee wrote off as bad debt the aforesaid sum of Rs. 76,306 and claimed it as a deduction in its assessment for the assessment year 1962-63. The Income-tax Officer disallowed the claim for three reasons: Firstly, the bad debt related to a dead business; secondly, that it was a capital loss as it did not relate to any specific advance in the course of business; and, thirdly, the claim itself represented only a fictitious asset as the assessee had no valid claim against the Life Insurance Corporation in respect of this sum as pointed out by the High Court.

6. In the appeal before the Appellate Assistant Commissioner it was held that this was not a legitimate debit against the life department in 1955, that there was no such sum due to the assessee and that the claim of bad debt had, therefore, been properly disallowed by the Income-tax Officer. He also held that it is not an expense of the year of account, and, therefore, not an allowable expenditure.

7. On a further appeal, the Appellate Tribunal was satisfied that the loss arose on account of the expenses incurred by the assessee earlier to nationalisation and to be recovered as a debt from the life insurance department for expenses attributable to it. It took the view that consequent on the Life Insurance Corporation taking over the assets and liabilities of the life business the assessee had to look to the Corporation for reimbursement of the expenses and that the result of the claim having not been entertained by the Life Insurance Corporation was a loss to the assessee. The Tribunal was also of the view that the deduction could be claimed only for the year of account 1961 when it became known that the claim would not be accepted by the Life-Insurance Corporation. The Tribunal, accordingly, held that the loss was in the nature of a trading loss correctly allowable in the year of account relevant to the assessment year 1962-63 and allowed the assessee's appeal. At the instance of the Commissioner of Income-tax the above question has been referred.

8. In this reference, the learned counsel for the revenue submitted that the amount did not represent any debt or outstanding and the mere fact that the assessee treated the sum as an outstanding and showed it in the balance-sheets as an outstanding did not make any difference. He further contended that the amount did not represent any trading loss; being an expenditure it cannot be claimed as a trading loss. Even as an expenditure no allowance could be made in respect of the same in the year of account 1961 for the expenditure was incurred in the year 1955. On the other hand, the learned counsel for the assessee submitted that under regulation 9 of Part I of the Third Schedule to the Insurance Act, 1938, in the case of a composite insurance business the expenses of management charged to the life insurance revenue account must not include more than a reasonable proportion of the common expenses and under rule 17D of the Rules framed under the Insurance Act no insurer in respect of the life insurance business, shall spend as expenses of management any amount exceeding the proportion prescribed under the rule. In the case of the assessee-company the practice was to debit the expenses in the first instance to the general department and then allocate a portion of it to the life department. The learned counsel also stated that the amount so allocated was in conformity with rule 17D during the earlier year. The allocation for the account year 1955 was submitted to the Controller of Insurance and was accepted by him and, therefore, the department could not question such allocation. The learned counsel pointed out that the amount due by the Corporation had been taken into account in the balance-sheet of the prior years and had suffered assessment under the provisions of the Act and the assessee having irrevocably lost the amount it was entitled for an allowance of this sum. It was also argued that the expenses having been incurred by the assessee it was a proper claim against the income of the company and since the Corporation had repudiated the assessee's claim it had resulted in ultimate loss to the assessee which was allowable as a trading loss.

9. The learned counsel for the revenue relied on certain decisions in support of his contention which may now be considered. In National Petroleum Co., Ltd., Bombay v. Commissioner Of Income-Tax, Bombay [1945] 13 I.T.R 336 Bom.. the facts were these: The assessee-company was floated mainly with the object of acquiring petroleum business of Ishardas Ramchand of Bombay. Ishardas Ramchand had imported from Rumania, oil in two ships and they arrived at Calcutta. The port trust authorities demanded duty at certain rate. Ishardas's contention was that he was liable to pay duty at a lower rate but ultimately he paid to the port trust authorities the duty demanded by them under protest. He then made various representations to the Government. Though he got relief in respect of one shipment, in respect of the other shipments no relief was given. The business of Ishardas was taken over by the assessee and the assessee filed a suit in the High Court praying to set aside the assessment to customs duty and claiming refund of the sum of Rs. 1,34,300; that suit was dismissed. The contention of the assessee was that on the dismissal of the suit the sum of Rs. 1,34,300 which was a debt due to them by the port trust authorities became a bad debt. Considering this question the learned judges of the Bombay High Court held that a bad debt presupposes the existence of a debt and at no time there was a debt due by the port trust authorities to the assessee. It was further held that what was paid by Ishardas was a proper payment of duty and it was properly debitable to the profit and loss account as an expense in the account year 1934, and not in the account year 1941, when the suit was dismissed. The expense could not be called a debt which became bad in 1941, when the suit was dismissed and that, therefore, the assessee was not entitled to the deduction claimed. We are of the view that the ratio of this judgment is fully applicable to the facts of the present case.

10. The sum of Rs. 76,306 represented an expenditure incurred in the account year 1955. By making a wrong allocation of this expenditure towards the life insurance business and making an untenable claim from the Corporation the expenditure could not change its colour and character and become a debt owing from the Corporation. How the expenditure incurred in the year 1955, changed its character as a debt is not explained by the learned counsel for the assessee. It is true that if the expenditure had been properly incurred for the life business, on nationalisation, since the assets and liabilities stood transferred to the Corporation, it would have been a liability taken over by the Corporation. But so long as there is no admission of this expenditure as relatable to the life insurance business it cannot become a debt due and owing from the Corporation. At best, as stated in the above decision, the assessee had a claim against the Corporation. This claim was rejected by the High Court in the writ petition. In fact, as already noticed, the Life Insurance Tribunal found that some amounts were owing from the assessee to the Corporation and not vice versa. Once it is held that the amount is not due from the Corporation it means that the expenditure was incurred not with respect to the life insurance business but with respect to the general insurance business carried on by the assessee, in which case the expenditure having been incurred in the account year 1955, no relief could be claimed in respect of the same for the account year 1961.

11. The learned counsel for the assessee relied on the fact that the assessee-company treated the amount as an outstanding from the Corporation in their account books and the balance-sheets and that when the assessee found in 1961 that the amount was irrecoverable, the amount became debitable to the profit and loss account. We are unable to accept this contention of the learned counsel. As pointed out in the above decision, we are not really concerned with the method according to which the assessee kept his books of accounts or with the view he took of the particular nature of the amount. Unless there was an admitted debt and it became irrecoverable, no question of writing it off as a bad debt would arise.

12. The three other decisions referred to, namely, Commissioner of Income-tax v. R.B Rungta & Co., Associated Banking Corporation of India Ltd. v. Commissioner of Income-tax and Commissioner Of Income Tax, U.P, Lucknow v. Nainital Bank Ltd. [1966] 62 I.T.R 638 S.C. and relied on by the learned counsel for the assessee are related to cases of admitted liabilities which later on became irrecoverable and, therefore, they are of no assistance.

13. For the foregoing reasons, we answer the reference in the negative and in favour of the revenue with costs. Counsel's fee Rs. 250.

14. Reference answered in the negative.