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Commissioner Of Wealth-Tax v. Shree Bhagpatia Food Industries.

Rajasthan High Court

Oct 8, 1993

Judgment

Subsequent
References

CaseIQ

Smart Summary (Beta)

Structured Summary of the Opinion delivered by V.K. Singhal, J.

Factual and Procedural Background

The Income-tax Appellate Tribunal referred three questions of law arising from its order dated July 5, 1980, in respect of assessment year 1974–75. The issues concern (1) allowance of a bad debt of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan (a proprietary commission-agency concern through which the assessee purchased oil seeds); (2) whether an amount collected as cess from customers on sale of oil (question initially stated as Rs. 6,257 in the Tribunal's reference) was assessable as a trading receipt; and (3) whether Rs. 17,316 should be treated as a business loss or as a speculation loss.

Procedurally: The assessee's claims were disallowed by the Income-tax Officer (ITO) and the Appellate Assistant Commissioner upheld the ITO's findings; on second appeal the Income-tax Appellate Tribunal ruled in favour of the assessee on questions (1) and (3) and held that the cess-collection was not a trading receipt (question (2)). The matter was then referred to the Court on the three legal questions.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the claim of bad debt of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan of Nadbai?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 6,257 collected by the assessee as cess from its customers on sale of oil could not be assessed as a trading receipt?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 17,316 should be treated as a business loss and not speculation loss?

Arguments of the Parties

Assessee's Arguments

On the bad-debt claim: The assessee wrote off Rs. 52,105 as irrecoverable after attempting recovery; it obtained a certificate from the chairman of the municipality about the debtor's financial position, served a registered notice dated November 5, 1973, and concluded that recovery was not possible.
On the cess-collection: The assessee maintained the amount in an "Amanath account" because the levy of cess was disputed; it treated the amount as a liability contingent on the outcome and argued it was not a trading receipt, placing reliance on decisions of the Bombay High Court (J.K. Chemicals Ltd. v. CIT and Gannon Dunkerley & Co. Ltd. v. CIT).
On the Rs. 17,316 item: The assessee contended that the payments were damages for breach of contract (non‑performance due to closure of loading or non-availability of wagons) and therefore represented business loss rather than speculation loss.

Revenue / Income-tax Officer's Arguments

On the bad-debt claim: The ITO contended the debt did not become bad in the relevant previous year because the debtor had paid Rs. 55,731 in an earlier year and, given the large outstanding amount, a prudent businessman would have taken stronger legal steps (e.g., suit or insolvency proceedings) rather than only issuing a notice. The municipality certificate was not accepted.
On the cess-collection: The ITO held the amount was received in the course of the assessee's business and, since it had not been paid to Government, it was assessable as a trading receipt.
On the Rs. 17,316 item: The ITO treated the amount as a speculation loss because delivery of goods had not taken place and contracts were often settled without actual delivery, by payment of the difference in rates.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
J.K. Chemicals Ltd. v. CIT, [1966] 62 ITR 34	Relied on by the assessee (Bombay High Court authority) in support of the contention that statutory collections held in dispute need not be treated as trading receipts.	The Court recorded that the assessee relied on this decision, but did not adopt the Tribunal's conclusion that the amounts constituted trust funds not assessable as trading receipts; the Court analysed the facts and found the collection to be a trading receipt in the circumstances.
Gannon Dunkerley & Co. Ltd. v. CIT, [1976] 102 ITR 428	Relied on by the assessee (Bombay High Court authority) regarding the characterisation of statutory collections held pending dispute.	The Court noted reliance on this authority but, on the facts, concluded that the collection remained a trading/revenue receipt and disagreed with the Tribunal's trust-characterisation.
Kedarnath Jute Manufacturing Co. Ltd. v. CIT, [1971] 82 ITR 363	Principle that where mercantile system of accounting is followed, a liability which has accrued can be claimed in that year.	The Court invoked this authority to explain that an accrued statutory liability is claimable under mercantile accounting; but found on the facts that no liability had been shown to have accrued (no assessment or return disclosing the disputed collection), and therefore the mercantile principle did not establish the collection as non-trading in this case.
CIT v. Shantilal P. Ltd., [1983] 144 ITR 57	Authority for the proposition that payments made as damages for breach of contract are not the same as "contract settled" under section 43(5) of the Income-tax Act.	The Court relied on this precedent to support the Tribunal's factual finding that the Rs. 17,316 payments were damages for non‑performance (for reasons beyond the assessee's control) and hence constituted business loss rather than speculation loss.

Court's Reasoning and Analysis

The Court addressed each referred question by applying statutory provisions and examining the factual findings recorded by the Tribunal and earlier authorities.

Question 1 — Bad Debt (Rs. 52,105)

Legal provision referenced: section 36(1)(vii) (subject to sub‑section (2)) allowing deduction for bad debts "established to have become a bad debt in the previous year".
The Court observed that it was undisputed the debt related to the assessee's business and had been written off in the accounts for the relevant accounting year; the sole dispute was whether it had become bad.
The Tribunal had found the amount to be irrecoverable based on the assessee's enquiries, the municipality chairman's certificate, service of a registered notice, and the debtor's conduct; the Court noted that the burden lay on the assessee and that the assessee had discharged that burden by producing those documents and evidence of conduct.
The Court emphasized that insolvency proceedings or a legal suit are not necessary preconditions for a debt to be regarded as bad; if the debt is subsequently realized it will be includible under section 41.
Conclusion: The factual finding of the Tribunal that the debt had become bad was not shown to be erroneous, and therefore the Tribunal was justified in allowing the deduction.

Question 2 — Cess Collected from Customers (stated in the reference as Rs. 6,257; discussed elsewhere in the opinion as Rs. 6,157)

Facts: The assessee collected an amount described as "cess" on sale of oil, credited it to an "Amanath account", and did not deposit it with Government because the levy was disputed. The Tribunal concluded the amount was held in trust (for customer or Government) and not a trading receipt.
The ITO had treated the collection as assessable trading receipt because it was received in the course of business and not paid to Government.
The Court considered the characterization: it acknowledged that if mercantile accounting is followed and a liability has accrued, the liability may be claimable (citing Kedarnath Jute). However, on the facts the Court found no evidence that any cess assessment or ascertainment had occurred or any returns disclosed the collection as disputed; the tribunal's finding of trust was primarily based on the one-sided book entry.
The Court held that the initial collection was made as part of trading activity and remained a revenue/trading receipt. The unilateral accounting entry could not alter the character of the original collection in the absence of evidence that a liability had actually accrued or been assessed.
Conclusion: The Tribunal was not justified in holding that the amount collected as cess was not a trading receipt; the Court answered this question in favour of the Revenue.

Question 3 — Rs. 17,316: Business Loss or Speculation Loss

Facts: The ITO found Rs. 17,316 debited as payment on settlement to various parties and treated it as speculation loss because deliveries were not made. The Tribunal found the payments were damages for breach of contract (non‑performance due to railway closure or non‑availability of wagons) and thus business losses.
Legal provision: section 43(5) (referred to by the parties) contemplates contracts settled otherwise than by actual delivery; however, payments made as damages for breach of contract are not payments to "settle" contracts within s.43(5).
The Court relied on established law (including CIT v. Shantilal P. Ltd.) that payments by way of damages for non‑performance are distinguishable from contract settlements under s.43(5). If payment is by way of damages, the question of actual delivery is irrelevant; the decisive factor is the nature of the payment (damages) and the surrounding circumstances.
On the facts, the Tribunal's finding that the payments were damages caused by non‑performance for reasons beyond the assessee's control (and supported by documents) was accepted by the Court.
Conclusion: The Court agreed with the Tribunal that Rs. 17,316 is to be treated as a business loss and not as a speculation loss.

Holding and Implications

Final Disposition of the Reference:

Point No. 1 (Bad debt Rs. 52,105): Answered in favour of the assessee. The Tribunal was justified in allowing the bad-debt claim.
Point No. 2 (Cess collected from customers): Answered in favour of the Revenue. The Court held the collection to be a trading/revenue receipt in the circumstances of this case, and the Tribunal's trust-characterisation was not sustained.
Point No. 3 (Rs. 17,316): Answered in favour of the assessee. The Tribunal was justified in treating the amount as a business loss (damages for breach) and not a speculation loss.

Implications: As to direct consequences, the bad-debt deduction of Rs. 52,105 is upheld for the relevant year, and the Rs. 17,316 is to be treated as a business loss (not a speculation loss)—both outcomes favour the assessee. The Court's decision on point No.2 results in the cess-collection being assessable as trading income for the year under consideration—an outcome favourable to the Revenue. The opinion does not indicate that a broader new legal principle was established beyond applying existing statutory provisions and precedents to the facts of the case.

Reference answered: in favour of the Revenue on point No. 2; in favour of the assessee on points Nos. 1 and 3.

Show all summary ...

The Judgment of the Court was delivered by

V.K Singhal, J.:— The Income-tax Appellate Tribunal has referred the following three questions of law arising out of its order dated July 5, 1980, in respect of the assessment year 1974–75:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the claim of bad debt of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan of Nadbai?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 6,257 collected by the asses see as cess from its customers on sale of oil could not be assessed as a trading receipt?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 17,316 should be treated as a business loss and not speculation loss?”

2. The brief facts of the case are that the assessee claimed bad debts of Rs. 52,105 in the account of Messrs. Radheyshyam Ramkishan, Nadbai, which was the proprietary concern of Shri Radheyshyam. This concern was doing commission agency in food grains, etc. The assessee was purchasing oil seeds through this party. In the assessment year 1972–73, the assessee has paid advances of Rs. 9,84,431 against which goods of Rs. 9,29,102 were purchased and there was a debit balance of Rs. 55,310. In the next year also the advances were made and the debit balance was at a figure of Rs. 2,48,192 against which the goods of Rs. 1,40,356 were received and a sum of Rs. 1,07,836 was still in the debit balance. No further advances were made and the assessee started doubting the creditworthiness of this party. A sum of Rs. 55,731 was recovered and the balance amount of Rs. 52,105 was written off on the last date of the previous year. It is alleged that the assessee made the enquiries with regard to the financial position and the certificate was also obtained from the chairman of the municipality of Nadbai regarding the financial position of the debtor. A registered notice dated November 5, 1973, asking for the payment of the amount was duly served on the debtor but no payment was made. The assessee came to the conclusion that there was no possibility of recovery of the amount in question and it was written off. The Income-tax Officer was of the view that the debt in question did not become bad in the previous year and he rejected the claim of the assessee on the ground that a debtor who could pay a sum of Rs. 55,731 in one year could not be said to be unable to meet out his liabilities. The amount involved was huge and no businessman of prudence would leave the matter by issuing a legal notice only and since no suit was filed in the court, it could not be considered that the debt has become bad. The certificate of the chairman of the municipality was not relied upon. It was also observed that since no insolvency proceedings were taken by the parties, the debt could not be considered to be bad. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. In the second appeal, the Tribunal held that the debt had become bad in the accounting period relevant to the assessment year under appeal. So far as the first question is concerned, it has been provided under section 36(1)(vii) that subject to the provisions of sub-section (2) the amount of any bad debt or part thereof which is established to have become a bad debt in the previous year is to be allowed as a deduction. It is not disputed that the debt was in respect of the business which was carried on by the assessee in the relevant accounting year and the amount has been written off as irrecoverable in the accounts of the assessee in the accounting year for which the deduction is claimed. The dispute is only with regard to the fact as to whether it has become bad or not. The finding which has been recorded by the Tribunal is that the amount was not recoverable. It is for the assessee to have a reasonable belief that the debt has become bad and there could not be any direct or conclusive proof in such a matter. The facts of each case have to be examined. It is not necessary that the debtor must go in for insolvency proceedings before a debt could be said to be a bad debt or a suit must be filed. If the debt is realised in the subsequent years then the same is liable to be included under section 41 of the Act. The finding which has been recorded is one of fact and the burden which was on the assessee has been discharged by him by producing the document, namely, the certificate of the chairman of the municipality and the conduct of the debtor in not responding to the notice and not making the payment of the balance amount and, therefore, it has not been shown as to how that finding could be disturbed.

3. In this view of the matter, we are of the view that the Income-tax Appellate Tribunal was justified in coming to the conclusion that a sum of Rs. 52,105 was to be allowed as a bad debt.

4. So far as the next question is concerned, whether the amount of Rs. 6,157 collected by the assessee as cess from its customers on sale of oil could not be assessed as a trading receipt, there was a dispute with regard to levy of cess on sale of oil and the amount in question was not paid to the Government and was credited to the Amanath account. The assessee claimed that the said amount is not a trading receipt and represented the liability of the assessee which it would have to fulfil in case the dispute was decided against the assessee. Reliance was placed on the decisions of the Bombay High Court in the cases reported in J.K Chemicals Ltd. v. CIT, [1966] 62 ITR 34 and Gannon Dunkerley & Co. Ltd. v. Commissioner Of Income-Tax, Bombay., [1976] 102 ITR 428. The Income-tax Officer held that the said amount is liable to be included on the ground that the amount was received in the course of the assessee's business and was assessable since it was not payable to the Government.

5. On appeal to the Appellate Assistant Commissioner, the decision of the Income-tax Officer was upheld. In the second appeal, the Tribunal held that the amount collected from the customers and the collections were credited to the “Amanath Account for cess”. Since the levy was in dispute with the Government, the assessee had not paid these amounts to the Government treasury. No expenditure was also claimed by the assessee on the ground of accrual of the liability for the expenditure under the mercantile system of accounting. It was held that the said amount was held in trust either for the customer or for the Government, and, therefore, it could. not be considered as a trading receipt. It was a statutory collection, which the assessee has to pay to the Government in the event of a decision in favour of the levy of the cess. A finding was given that it would be obligatory on the part of the assessee to refund the amount to the customers from whom it was recovered or to the Government, and, accordingly, the amount was held as not assessable as a trading receipt.

6. The amount which has been received by the assessee as cess from its customers is for sale of oil and has to be construed as a trading receipt, there could be a liability for payment of cess and if the accounts are maintained on mercantile basis, the liability being statutory, could be allowed. If the accounts are maintained on cash basis, then the same could be claimed in the year when actual payment is made. The amount was received by the assessee in the course of his business and is in the nature of a revenue receipt. From the facts of this case, it is found that the amount was not deposited with the Government and a dispute was being raised about this payment. It was held by the apex court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT, [1971] 82 ITR 363 that where the assessee follows the mercantile system of Accounting, the liability which has accrued can be claimed. The liability which has been claimed in the present case cannot be said to be a contingent liability, there must be a liability which should be ascertained either by the assessee or the authorities under the statute and after ascertainment, if it is disputed then it will not be contingent. In the present case it has not been found that any assessment of “cess” was made or how this liability could be said to have accrued. No returns were found to have been submitted disclosing the amount as having been collected or disputed. How there was any dispute has not been considered. The entry in the books is a unilateral action and will not change the character of the initial collection which was made as part of the trading activity. The Tribunal has proceeded mainly on the ground that the amount was held in trust and is not a trading receipt. Since we are of the opinion that the amount collected is a trading receipt and is not an accrued liability during the year under consideration, we are of the opinion that the Income-tax Appellate Tribunal was not justified in holding that the amount collected from the customers on sale of oil by way of cess is not a trading receipt.

7. The facts relating to the third question are that the Income-tax Officer found a sum of Rs. 17,316 debited to the oil and khal account as payment made on settlement to various parties. It was claimed as a business loss having been incurred in the normal course of trading in oil and khal. The Income-tax Officer treated the same as speculation loss as in these cases delivery of the goods had not taken place. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. In the second appeal, the Tribunal held that the payment in question represents damages for breach of contract which did not fall within the purview of section 43(5) of the Income-tax Act and the said section is applicable only in case of settlement of the contract where the payment is made without delivery of the goods. The Tribunal held that in the present case there was nonperformance of the contract either because of the closure of loading by the railway authorities or on account of non-availability of wagons and, therefore, the breach of the contract took place for which the assessee had to pay damages.

8. The ground on which the Income-tax Officer has considered the figure of Rs. 17,316 as speculation loss was that no delivery of goods were effected. The assessee is a dealer in mustard oil and has entered into a contract for supply of goods through a dalal. The contracts were invariably settled without delivery of goods and payment of difference in the rate. It is well settled that in accordance with the provisions of section 43(5) of the Income-tax Act, if the payment has been made as damages for breach of contract, then it could not be considered to be a “contract settled”. The provisions of section 435) contemplate such transaction in which a contract for the purchase or sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. The case of the assessee was that because of closure of the loading by the railway authorities and/or due to non-availability of the wagons, the goods could not be despatched on or before the agreed date and in such a case it was a breach of contract for which damages had to be paid to the parties concerned. It was not a case of contract settled which is covered by section 43(5). Section 43(5) contemplates a transaction in which a contract for purchase or sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. It is not only actual non-delivery of the goods, but it must be coupled with settlement of contract in a transaction for which the payment is made. If the payment is by way of damages and not by way of settlement of a contract, then the question of actual delivery or transfer of the goods would be irrelevant. The law on this point is well-settled by the judgment of the apex court in the case of CIT v. Shantilal P. Ltd., [1983] 144 ITR 57 and in view of the finding recorded by the Tribunal that the payments have been made by way of damages for non-performance of the contract and that non-performance of the contract was for reasons beyond the control of the assessee on account of closure of loading by the railway authorities or on account of non-availability of wagons and for which relevant documents were produced before the Income-tax Officer as well as the Appellate Assistant Commissioner, we are of the view that the Income-tax Appellate Tribunal was justified in coming to the conclusion that the amount of Rs. 17,316 is to be treated as a business loss and not as a speculation loss.

9. The reference is, therefore, answered in favour of the Revenue on point No. 2 and on points Nos. 1 and 3 in favour of the assessee and against the Revenue.