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Binjraj Hukumchand, In Re
Judgment Summary — Rankin, C.J. (with C.C. Ghose, J. and Buckland, J.)
Factual and Procedural Background
The assessees, a registered firm, claimed a deduction of Rs. 60,999-1-0 as a bad debt in computing profits for the Ramnavami year 1984 (1927–1928). The debt was said to be owing from one Tarachand son of Kissenchand. The Commissioner of Income-tax disallowed the deduction on the ground that the assessees had not produced satisfactory evidence (1) of the nature and character of the debts, (2) that they were really and justly due to the firm, and (3) that they became bad in the year of account. The Commissioner referred the question, framed as “whether the income-tax officer was right in disallowing set off,” under s.66 of the Income-tax Act.
The documentary background reported in the opinion includes a mortgage-bond dated 28 June 1927 describing three debts: (a) an account originally secured by a mortgage executed in 1902 with Rs. 2,431-0-3 outstanding in 1927; (b) an account of Rs. 6,909-2-6 for “miscellaneous expenses”; and (c) a large account of Rs. 81,685-14-3 described as “for profits and losses arising out of the purchase and sale of jute.” The assessees explained that the large item arose from a jute partnership (closed in 1920) where Tarachand allegedly failed to pay his share of losses.
The mortgage-bond indicated that the amounts had been “settled and adjusted” in 1924 and that a total of Rs. 90,999-1-0 was described as due for principal and interest; the firm purported to receive Rs. 30,000 from Mohanlal (one partner), who took a mortgage for Rs. 30,000 on Tarachand's interest in property. The assessees produced books for 1923–1927 which showed carry-forwards but no payments and no entries for interest; in 1927 cross-entries were made crediting Tarachand with Rs. 30,000 and writing off Rs. 60,999-1-0 as no longer recoverable.
Legal Issues Presented
- Whether the Income-tax Officer (Commissioner) was right in disallowing the claimed set-off (i.e., the deduction of Rs. 60,999-1-0) for the year 1927–1928.
- Whether, on the evidence before the tax authorities, the Commissioner was obliged in law to allow the deduction, or whether he misapplied or departed from the legal principles governing such deductions (in particular, the burden of proof on the assessee).
Arguments of the Parties
Assessees' Arguments
- The assessees contended that their business included money-lending; therefore the debts to Tarachand should be treated as loans made in the course of their money-lending business and deductible as bad debts.
- They asserted that Tarachand had always acknowledged the liability, so nothing further needed to be inquired into.
- Before this Court, they sought to place in evidence copies of account extracts from books not produced to the income-tax authorities and argued they had inadequate opportunity or warning to produce origin documents regarding the debts.
Revenue / Income-tax Authorities' Position
- The Commissioner proceeded on the footing that the assessees bore the burden of producing satisfactory evidence about the nature of the debts, that they were due to the firm, and that they became bad in the year of account; upon the evidence produced, he held the assessees had failed to do so and disallowed the deduction.
- The Commissioner treated the mortgage-bond and the books shown to him as insufficient to establish that the debts were loans made in the course of the firm's money-lending business or that they became irrecoverable in the relevant year.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Rountree & Co. v. Curtis [1924] 8 T.C. 678 | Authority for the principle that a claim to allowances under sub-s.2, s.10 of the Act is a claim which the assessee must prove. | The Court relied on this authority to support the proposition that the burden of proof lies on the assessee to establish the right to the claimed deduction. |
| Nopechand's case [1925] 2 I.T.C. 146 | Reinforces the principle that the assessee must prove claims to allowances. | Used alongside Rountree & Co. to show consistent authorities placing the burden on the assessee. |
| Puran Mull's case [1924] 2 I.T.C. 236 | Affirms that the same burden applies to claims to deduct bad debts. | The Court applied this to conclude that a claim to deduct a bad debt must be proved by the assessee. |
Court's Reasoning and Analysis
The Court began by noting that under s.66 of the Income-tax Act it must decide questions of law only, and therefore restated the problem as whether the Commissioner was legally obliged to allow the deduction or had erred in applying legal principles.
The Court examined the documentary and accounting materials produced to the Commissioner:
- The mortgage-bond of 28 June 1927 described three distinct debts and characterized the largest as an account “for profits and losses arising out of the purchase and sale of jute,” which indicates a partnership account rather than a straightforward loan.
- The assessees' books (1923–1927) showed carry-forwards of the sums, no payments, and no entries for interest from 1923 onwards; only in 1927 cross-entries recorded Mohanlal receiving Rs. 30,000 and a write-off of Rs. 60,999-1-0.
- No mortgage-deed of 1902 or other documentary explanation for the origin of the debts, particulars of the “miscellaneous expenses,” or evidence of the dates and circumstances in which the firm became entitled to claim those items had been produced.
On the central legal question, the Court rejected the assessees' contention that the debts should be treated as loans in the course of a money-lending business merely because the firm carried on money-lending alongside other activities. The Court reasoned:
- The character of a particular debt is determined by the nature of the underlying transaction; the key item was expressly described as arising from a jute partnership (profits and losses), so it was prima facie not a loan made in the money-lending business.
- Even if the firm engaged in money-lending, the tax authorities could not be required to treat a partnership-capital account as part of the money-lending firm's profits without cogent evidence showing that the amounts had been treated as loans or that interest had been carried into the money-lending accounts in prior years.
- The assessees could not arbitrarily choose the year in which to write off and set off old unsecured debts—particularly where the bulk of the indebtedness dated from about 1920 and there were no entries of interest from 1923 onward.
The Court emphasised the evidential principle that when an assessee produces books and is assessed normally (s.23(3)), he cannot later have the assessment altered to a figure unsupported by the evidence previously before the tax authorities. The Court placed the burden of proof squarely on the assessee to show the nature of the debt, that it was due, and that it became bad in the year of account.
The Court also rejected the assessees' attempt to produce new extracts from books not previously shown to the Income-tax Officer and argued before this Court: it held this to be a misconception of procedure on a reference under s.66 and said the Court could not receive such evidence to overturn factual findings of the Commissioner. Finally, as to the complaint of insufficient opportunity to produce evidence, the Court observed that this question was not referred by the Commissioner, that the assessees had not raised it before him, and that the assessment note and order sheet (annexed to the case stated) showed repeated warnings to the assessees to produce proof.
Holding and Implications
Holding: The Court answered the referred question in the affirmative — the Income-tax Officer (Commissioner) was right in disallowing the claimed set-off (i.e., the deduction of Rs. 60,999-1-0 was not allowable on the evidence before the tax authorities).
Direct consequences for the parties:
- The deduction claimed by the assessees was disallowed.
- The assessees were ordered to pay the costs of the reference.
Broader implications: The Court relied on established authorities to reaffirm that claims to allowances (including deduction of bad debts) must be proved by the assessee and that this Court will not receive fresh evidence to overturn factual findings made by the Commissioner on a reference under s.66. The opinion contains no separate pronouncement that it creates any new precedent beyond applying those principles to the facts of this case.
Disposition: Question answered in the affirmative. (C.C. Ghose, J. and Buckland, J. concurred.)
Rankin, C.J:— In this case the assessees, a registered, firm claim that in computing their profits for the Ramnavami year 1984 (1927-1928) they are entitled to make a deduction of Rs. 60,999-1-0 in respect that certain debts owing to them by one Tarachand son of Kissenchand, became had to that extent in that year. The Commissioner of income-tax has proceeded on the footing that it is for the assessees to produce satisfactory evidence: (1) of the nature and character of the debts; (2) that they were really and justly due to the assessee firm and (3) that they became had in the year of account. He has held upon the evidence that the assessees have failed to do this and he has disallowed the deduction claimed. He has referred to us the question
“whether the income-tax officer was right in disallowing set off.”
2. As under the Income-tax Act, (S. 66) this Court has to decide questions of law only, the form of the question is open to exception. I propose to inquire whether the Income-tax Commissioner was upon the evidence obliged in law to allow the deduction and whether if not he has in arriving at his decision departed from or misapplied the principles which in law govern the matter. The debts alleged to be due from Tarachand are described in a mortgage-bond dated 28th June 1927 as three in number. The oldest appears to be an account in the name of Kissenchand Tarachand Singh in respect of which a mortgage was executed in 1902 for Rs. 14,000 and upon which in 1927 only Rs. 2,431-0-3 was outstanding. How this debt came to be incurred and what has happened to the mortgage of 1902 are questions upon which no evidence was produced. The mortgage-deed is not produced. It appears from the assessee's books of 1924 (R. 1,981) that a sum of Rs. 1,472-13-0 was brought to Taraohand's credit in this account in that year. The second debt is given as an account in the name of Tarachand Singh for Rs. 6,909-2-6 for “miscellaneous expenses.” The dates and particulars of these alleged expenses and the circumstances in which the assessee firm came to be entitled to claim these expenses are not to be found in any books of account or other document produced. The third debt is by far the largest. It is given as Rs. 81,685-14-3 and is described in the mortgage-bond as being
“for profits and losses arising out of the purchase and sale of jute”
and the account is said to stand in the name of Tarachand Prithiraj Singh. To the income-tax authorities an explanation has been given to the effect that the assessees were formerly partners in a jute business with Tarachand and another, the assessees having a four annas share; that this business was closed down in 1920 (Bamnavami 1977) owing to losses, that Tarachand did not pay his share of the losses which were met by the assessees and that the sum of Rs. 81,685 was due from him to the assessees accordingly.
3. The mortgage bond states that the amounts therein mentioned, viz., Rs. 6,909-2-6 + Rs. 2,431-0-3 + Rs. 81,658-14-3 + Rs. 90,999-1-0, were settled and adjusted with Tarachand in 1924 (R. 1981) who gave handnotes for each debt. It describes the sum of Rs. 90,999-1-0 as being due for principal and interest. It then goes on to effect a “settlement” as follows: The assessee firm gives up all save Rs. 30,000; it is to receive this sum of Rs. 30,000 from Mohanlal one of the two partners in the assessee firm; Mohanlal takes a mortgage for Rs. 30,000 at six per cent upon Tarachand's interest in certain property in Bikanir.
4. The assessee firm produced their books for the years 1923-1927 (R. 1981-1984). The sums claimed are entered as carried forward from the previous year. No payment is recorded. No charge for interest is entered. In 1984 cross-entries are made debiting an account Hukumohand Baid Ratangarh (in effect debiting Mohanlal's capital account) crediting Tarachand with Rs. 30,000 and writing off Rs. 60,999-1-0 as no longer recoverable.
5. Before the Commissioner of Income tax and before us it was contended that as the business of the assessee firm, like many Marwari businesses, includes money-lending the income-tax authorities ought to treat these debts as loans made by them to Tarachand in the coursej of their money lending business, that as Tarachand (who is said to have died about six months after making the mortgage of 1927) had always acknowledged liability there was nothing further to be inquired into. I cannot accept this argument. The mortgage bond of 1927 speaks of three debts and the main one is described not as a loan but as an account
“for the profits and losses arising out of the purchase and sale of jute.”
6. This means an account between partners and the income-tax authorities have to ask themselves whether if in 1927 the assessee firm make a profit of a certain amount in their money-lending business they can be allowed to say that because in another business a jute business with at least four partners-Tarachand since 1920 hag owed them money on capital account this debt can be deducted from the profit of the assessee firm in 1927 assuming that in 1927 it became a bad debt. To put the matter in another way suppose that in 1924 Tarachand had paid up his share of losses in the old jute firm with interest at six per cent could the income-tax authorities merely on the materials now disclosed have insisted on reckoning this as part of the profits of this registered firm's-money lending business? I do not think they could. Of course if the assessee firm had got out annual balance sheets of their money lending business and it appeared that in previous years the sum spent on Tarachand's account had been brought into the account so that interest thereon, although unpaid had been treated as an outstanding and gone to swell the profits on which income-tax was payable, the case would have been different. But nothing of the sort is shown. From 1923 onwards no interest was charged even in the assessees' books and if it be true that it was charged in earlier years this is no sufficient evidence of a loan made to Tarachand by the assessee firm in the course of its money-lending business.
7. Again in a case like the present the assessees cannot be allowed to pick and choose the year in which they will treat a debt as bad. We have been told that a business has been carried on in the name of Binjraj Hukumchand for very many years, that at first it was a joint family business, then a contractual partnership assessed as an unregistered firm, and that it became a registered firm in the year of assessment with which we are concerned. Doubtless if they may go back for over 20 years the assessees will be able to trace many debts that are not now recoverable. But they must have solid reason for writing them off against the profit of a particular year. They cannot arbitrarily set them off against a particular year of profit. How then does the case stand from this point of view? The debt was a large one the bulk of it being due from about 1920, and it was unsecured. Prom 1923 interest had not even been entered in the account. In 1927 nothing was paid to or by Tarachand. All that happens is that Mohanlal one of the assessees takes a mortgage of a certain property from Tarachand. The mortgage sum is Rs. 30,000. This sum is credited against the debt. Cross-entries are made in Mohanlal's account. As proof that the debt became bad in 1927 this seems to me poor and the income-tax authorities did well to be suspicious of it.
8. I cannot discern any error of law in the view taken by the Commissioner. When as in this case an assessee produces his books for the year of account and complies with any other requirements as to specific documents so that he is assessed in the ordinary way under S. 23(3) and not as being in default, the income-tax authorities cannot assess him upon any figure of profits not warranted by evidence which they have before them. But where the transactions for the year show a profit of a certain amount and the assessee wants to deduct therefrom a certain sum as a bad debt, lam of opinion that the burden of proof is upon him. If the debt which he claims to set off is an old debt still he must prove his claim to set it off. It is clear on the authorities that a claim to any of the allowances mentioned in sub-S. 2, S. 10 of the Act is a claim which the assessee must prove: Rountree & Co. v. Curtis . [1924] 8 T.C 678, Nopechand's case . [1925] 2 I.T.C 146. and the same is true of a claim to deduct a bad debt: Puran Mull's case . [1924] 2 I.T.C 236..
9. The assessees have in this case asked us to receive in evidence certain copies of accounts said to appear in books of account which were not produced to the income-tax authorities at any stage. They ask us on the basis of these extracts to revise the Commissioner's decision upon the facts and to say that we are satisfied that the claim is made out. This shows an utter misconception of the procedure applicable to a reference under S. 66 of the Act. It is not open to any assessee to ask this Court upon such a reference to examine his books of account and come to findings of fact contrary to those arrived at by the Commissioner in the case stated. Still less it is intended that this Court should be a last resort for the production of books which were not produced before any one of the three income-tax authorities which had to deal with the case.
10. The assesaeea have suggested before us that they have had insufficient opportunity to produce or insufficient warning as to the need to produce evidence as to the origin of these debts their nature and character and the fact that they become bad in 1927. The Commissioner has referred no such question to us, and I find from the assessees, petition before the Commissioner, which they have asked us to look at, that they raised no such question before him. Further the Commissioner has at the request of the assessees annexed to the case stated a copy of the assessment note and the order sheet of the Income-tax Officer. These show that the assessees have had repeated warning of the necessity for giving proof of the origin of the debts and of the date on which they became bad. In my opinion the questions propounded to us must be answered in the affirmative and against the assessees and they must pay the costs of the reference.
C.C Ghose, J.:— I agree.
Buckland, J.:— I agree.
V.B/R.K
11. Question answered in affirmative.
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