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Bank Of Bihar, Ltd., Patna v. Commissioner Of Income Tax, Bihar And Orissa, Patna .
Factual and Procedural Background
The assessee, a public limited banking company, sought to deduct a sum of Rs 4,22,582 as a bad and doubtful debt under Section 10(2)(xi) of the Indian Income-tax Act for the assessment year 1950-51 (accounting year 1949). The amount comprised:
- Rs 2,11,089 due from M/s Nandlal Inderchand, secured only by pledged shares worth about Rs 28,000.
- Rs 1,02,325 due from B.I.G Co., Calcutta (unsecured).
- Rs 1,09,168 due from Fulchand Srinarain, Calcutta (unsecured).
On 3 December 1947 the two unsecured accounts were transferred to, and amalgamated with, the Nandlal Inderchand account.
The Income-tax Officer disallowed the entire claim, holding the debts had become irrecoverable in 1947. The Appellate Assistant Commissioner partially agreed, finding the B.I.G Co. and Fulchand Srinarain debts bad in 1947 and the Nandlal Inderchand debt bad in 1950. The Income-tax Appellate Tribunal affirmed these findings. When the Tribunal declined to refer the matter to the High Court, the High Court, acting under Section 66(2), compelled a reference limited to the B.I.G Co./Fulchand Srinarain component (Rs 2,11,493). The High Court held that the timing of a bad debt is factual and upheld the Tribunal. The assessee obtained special leave and appealed to the Supreme Court.
Legal Issues Presented
- Whether, on the facts found, the Income-tax authorities were justified in rejecting the assessee’s claim to treat Rs 2,11,493 (relating to the B.I.G Co. and Fulchand Srinarain accounts) as a bad debt in the assessment year 1950-51 under Section 10(2)(xi).
- Whether the point in time at which a debt becomes irrecoverable is a pure question of fact immune from reassessment in a reference under Section 66 of the Indian Income-tax Act.
Arguments of the Parties
Assessee’s Arguments
- The assessee was entitled to amalgamate the three accounts because the underlying debtor (Nandlal Inderchand) was interested in all three concerns.
- Once amalgamated, subsequent recoveries or the debtor’s ability to pay should determine when the consolidated debt became bad; non-recovery prior to amalgamation should not fix the bad-debt date at 1947.
- Therefore the deduction should be allowable in the year of account 1949.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-Tax v. S. M. Chitnavis | Whether a debt is a bad debt, and the year in which it becomes bad, are questions of fact for the appropriate tribunal. | The Supreme Court relied on this principle to hold that the Tribunal’s finding that the debts became bad in 1947 could not be re-opened in a reference under Section 66. |
Court's Reasoning and Analysis
The Court noted:
- The unsecured debts had not been operated since 1946, and both B.I.G Co. and Fulchand Srinarain were unable to pay by 1947.
- Nandlal Inderchand had not guaranteed those debts; the only security—shares worth less than one-seventh of the Nandlal account—was inadequate even for that account alone.
- Amalgamating an already irrecoverable debt with a still-recoverable one, solely by an internal accounting entry, could not “revive” the bad debt for purposes of Section 10(2)(xi).
- Following Chitnavis, the determination of when a debt turns bad is factual; as long as there is evidence supporting the Tribunal, the High Court (and by extension the Supreme Court) cannot re-appraise that evidence in a Section 66 reference.
On these grounds, the Court held that the Tribunal had sufficient material to conclude that the debts became bad in 1947, rendering the assessee’s 1949 write-off ineligible.
Holding and Implications
APPEAL DISMISSED WITH COSTS
The immediate consequence is that the assessee cannot deduct Rs 2,11,493 as a bad debt for the assessment year 1950-51. The judgment affirms that the timing of a bad-debt deduction under Section 10(2)(xi) is a factual issue and underscores that taxpayers cannot shift the year of allowance by unilateral bookkeeping devices. The decision sets no new legal precedent but reinforces the factual finality of Tribunal findings in income-tax matters.
Shah, J.— In the proceedings for assessment of income tax for the year 1950-51, assessees, who are a public limited company carrying on the business of banking, claimed that an amount of Rs 4,22,582 due in the account of Messrs Nandlal Inderchand, having been actually written off as irrecoverable in the year of account 1949, they were entitled in the assessment of the profits of that year to be allowed the amount as a bad and doubtful debt under Section 10(2)(xi) of the Indian Income Tax Act. The amount of Rs 4,22,582 consisted of three items as follows:
(a) Rs 2,11,089 due from the firm styled M/s Nandlal Inderchand under an account which commenced in the year 1943. In this account the debtor had pledged shares of the value of Rs 28,000 odd.
(b) Rs 1,02,325 originally due from a firm carrying on business in the name of B.I.G Co., Calcutta.
(c) Rs 1,09,168 originally due from a firm carrying on business in the name of Fulchand Srinarain, Calcutta.
For the amounts due under the accounts styled Messrs B.I.G Co. and Fulchand Srinarain, there was no security. These two accounts were transferred by the assessees on December 3, 1947 to the account of Messrs Nandlal Inderchand and amalgamated with that account.
2. The Income Tax Officer disallowed the claim of the assessees holding that the entire amount of Rs 4,22,582 had become irrecoverable in 1947 and not in the year of account 1949. The Appellate Assistant Commissioner held that the amount of Rs 2,11,089 originally due in the account of Messrs Nandlal Inderchand had not become irrrecoverable in 1949 but had become irrecoverable in the year of account 1950, and that the amount due in the other two accounts — B.I.G Co., and Fulchand Srinarain — had become irrecoverable in the year 1947, and the assessees were not entitled to treat the entire amount of Rs 4,22,582 as a bad debt in the year of account 1949. The Income Tax Appellate Tribunal accepted the findings of the Appellate Assistant Commissioner that the amounts due from the B.I.G Co. and Messrs Fulchand Srinarain had become irrecoverable in the year of account 1947 and could not be allowed as bad or doubtful debts in the assessment of profits for the year of account 1949. The findings of the Appellate Assistant Commissioner about the amount due from Messrs Nandlal Inderchand was not challenged before the Tribunal and in this appeal we are not concerned with the disallowance of that amount.
3. The Tribunal declined to refer to the High Court under Section 66(1) of the Income Tax Act a statement of the case about the amounts due in the two accounts of B.I.G Co. and Fulchand Srinarain, but the High Court, by order dated July 31, 1957, directed the Tribunal to state a case under Section 66(2) on the following question:
“Whether in the circumstances of the case the Income Tax Department was legally justified in rejecting the claim of the assessee under Section 10(2)(xi) of the Income Tax Act with regard to the amount of Rs 2,11,493 claimed as bad debt for the Assessment Year 1950-51.”
The High Court at the hearing of the reference held that the conclusion whether a debt had become irrecoverable and was to be treated as a bad debt in 1947 was one of fact and not liable to be re-opened in a reference under Section 66 of the Income Tax Act, for there was evidence on which the conclusions of the Appellate Assistant Commissioner and the Tribunal could be founded. With special leave the assessees have appealed to this Court.
4. Undoubtedly, on December 3, 1947 the amounts due in the accounts of B.I.G Co. and Fulchand Srinarain were transferred to the account of Messrs Nandlal Inderchand and the accounts were amalgamated. It also appears that Messrs Nandlal Inderchand were interested in the two businesses B.I.G Co. and Fulchand Srinarain. But the Tribunal found that Messrs Nandlal Inderchand did not guarantee the loans advanced to B.I.G Co. and to Fulchand Srinarain. The two accounts had not been operated since the year 1946 and it appeared that in the year 1947 these two firms were not in a position to pay the amounts due by them. The tribunal in this state of affairs held that the debts had become bad in the year 1947 and could not be allowed under Section 10(2)(xi) in the year of account 1949.
5. Mr Vishwanatha Sastri for the assessees contends that it was open to the assessees to amalgamate the three accounts of the same debtor and if the debtor was in a position to pay and did pay some amounts towards the consolidated account, it could not be said that because nothing was recovered in the years prior to amalgamation, the debts must be deemed to have become bad in those previous years. But there is no evidence to show that Messrs Nandlal Inderchand were the exclusive owners of the business carried on in the name of B.I.G Co. and Fulchand Srinarain. The finding of the Income Tax Authorities was that they were interested in those businesses. Again, apart from the pledge of shares of a small value there is no evidence of any assets of Messrs Nandlal Inderchand which could be resorted to for satisfying the liability for debts due by the two firms — B.I.G Co. and Fulchand Srinarain. If those two debts had become irrecoverable in 1947, by merely amalgamating them with the debt due from Messrs Nandlal Inderchand — which was not then irrecoverable — those debts could not be revived so as to enable the assessees to write them off in a later year. In the account of Messrs Nandlal Inderchand, an amount exceeding Rs two lakhs was due and the value of the shares pledged was less than 1/7th of the total amount due in that account. The security was therefore wholly insufficient to satisfy even the debt for which it was given.
6. The question whether a debt is a bad debt is one of fact and if there is some evidence to justify the conclusion it is not open to the High Court in a reference under Section 66 of the Indian Income Tax Act to reappreciate the evidence. As observed by their Lordships of the Privy Council in CIT v. S.M Chitnavis in interpreting Section 24 of the Indian Income Tax Act, 1922,
“Whether a debt is a bad debt, and, if so, at what point of time it became a bad debt, are questions which in their Lordships' view are questions of fact, to be decided in the event of dispute by the appropriate tribunal, and not by the ipse dixit of anyone else. The assessee has no option of declaring a debt as bad.... In every case it is a question of fact, to be determined after consideration of all relevant circumstances.”
It is true that at the material time when this case was decided the Act contained no provision such as Section 10(2)(xi) authorising deductions of bad debts of business, but it was held that such a deduction was necessarily allowable: to refuse to do so would result in a statement of profits and gains of the year which was not true.
7. In this case before the Tribunal there was evidence on which it could hold that the debt had become bad in the year 1947. If the debt had become bad in the year 1947, by its mere subsequent amalgamation unilaterally made by the creditor with a debt which was recoverable, it did not cease to be bad. The appeal therefore fails and is dismissed with costs.
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