POPULAR KURIES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Cochin Union Bank, Trichur, was a company registered under the Companies Act and was carrying on the business of banking and kuries. It stopped its banking activity, making it over to the Federal Bank Limited, on August 17, 1964, ; some selective assets and liabilities also were transferred to the Federal Bank Limited. Subsequently, the owners of the business of the Cochin Union Bank carried on business, confining themselves to kuries only under the name and style "THE Popular Kuries Limited". Before the transfer of the business of the Cochin Union Bank, one of the employees had misappropriated certain sums. Ultimately, the High Court gave a decree for Rs. 28,185 payable from out of the assets of the employee, who had, in the meantime, died. THE assessee, the Popular Kuries Limited, wrote off a sum of Rs. 20,838 as a bad debt in the course of the assessment proceedings for the assessment year 1963-64. That claim was, however, disallowed both by the Income-tax Officer and the Appellate Assistant Commissioner. For the assessment year 1971-72, the assessee filed a return disclosing an income of Rs. 34,007. In doing so, the assessee, inter alia, claimed Rs. 20,748 as bad debt, that being the amount due from the judgment-debtor in their appropriation case. THE Income-tax Officer rejected the claimb that the requirements of Section 36(2) of the Income-tax Act, 1961, were not satisfied. THE Income-tax Officer also held that the deduction claimed by the assessee could not be allowed under Section 37 of the Act. Annexure "A" is the copy of the order of the assessing authority dated June 25, 1973. True copy of the memorandum of appeal filed by the assessee before the Appellate Assistant Commissioner is annexure "B". THE Appellate Assistant Commissioner disposed of the appeal by his order, annexure "C", dated October 3, 1974. In annexure "C", the view taken by the Appellate Assistant Commissioner was that even though the assessee was not entitled to relief under Section 36(2) of the Act, it being a loss sustained by the assessee in the course of the carrying on of the business, the deduction could be allowed. Aggrieved by the decision of the Appellate Assistant Commissioner, the Revenue filed an appeal to the Income-tax Appellate Tribunal, Cochin Bench, a copy of the memorandum of appeal being annexure "D". Annexure "E" is the order of the Appellate Tribunal dated January 8, 1976, wherein, in reversal of the decision of the Appellate Assistant Commissioner in annexure "C", the Tribunal held that the loss in question had been incurred by the assessee while it was carrying on the banking business and that since the assessee had stopped such banking business long before the assessment year under consideration, such loss incurred in such business could not be claimed as a deduction in computing the profits and gains arising to the assessee from the kuri business. THE appeal was accordingly allowed.

(2.) THE following questions of law said to arise out of the order of the Tribunal, annexure "E", are referred to this court by the Income-tax Appellate Tribunal, Cochin Bench, pursuant to the direction given by this court in the judgment dated March 30, 1979, in O.P. No. 1119 of 1977 :

(3.) THERE could be no doubt that, if at all, the claim for deduction of Rs. 20,748 could have been allowed as trading loss alone. For that, conditions stipulated in Sections 36(2) and 37 should be satisfied. For that purpose, the debt or part thereof should have been taken into account in computing the income of the assessee of that previous year, or of an earlier previous year ; or it should have been written off as irrevocable in the accounts of the assessee for that previous year. Here, the assessee has no case that the debt had been taken into account in computing the income of the assessee of the previous year. As a matter of fact, the banking business itself had ceased to exist as early as in the year 1964 when it was made over to the Federal Bank Limited. For the application of Section 37, it should have been an expenditure laid out or expended wholly and exclusively for the kuri business that was being carried on by the assessee during the year material for the purpose of assessment.