COMMISSIONER OF INCOME TAX Vs. PRANLAL KESURDAS

JUDGEMENT

(1.) THE question referred to us on this reference under section 66(1) is as follows : 'Whether on the facts and circumstances of the case the assessee was entitled to claim a sum of Rs. 10,960 in the assessment year 1950 -51 and Rs. 15,060 in the assessment year 1951 -52 as a revenue deduction before arriving at the assessable profits of the years of account ?'

(2.) THE facts leading to the question briefly stated are as follows : The assessee carried on the business of Adatia and speculation. During the Samvat Year 2003 in certain forward transactions in turmeric which the assessee had put through on behalf of his constituents, there was a loss suffered by the constituents. One of these constituents was one Shantilal Jivraj, whose loss amounted to Rs. 14,960. The said Shantilal was in insolvent circumstances and not in a position to pay the loss suffered by him, and the loss fell on the assessee. In the Samvat Year 2005, on the 28th December, 1948, Shantilal Jivraj somehow managed to pay Rs. 4,000 to the assessee in full settlement of his debt, and the assessee wrote off the balance as a bad debt. Now, in the assessment year 1948 -49, for which the relevant accounting year was S. Y. 2003, the assessee had claimed an amount of Rs. 14,960 as a loss. In disallowing the said loss in that assessment year, the Appellate Assisting Commissioner held that the amount claimed had not become 'bad' in S. Y. 2003, so that it could be written off as a bad debt in that year; it was in S. Y. 2005 that the assessee after having made attempts to recover it had succeeded in recovering only Rs. 4,000 out of that amount and had written off the balance, and, therefore, the said balance could be claimed as bad debt in S. Y. 2005. This order of the Appellate Assistant Commissioner was passed on 26th September, 1950. It may be pointed out at this stage that under the Essential Supplies Temporary Powers Act, 'the Spices Forward Control Prohibition Order, 1944' had been promulgated by the Government. Whether the said order applied to turmeric was not authoritatively decided by that time though there were certain proceedings going on in courts of law relating to the application of the said order to certain commodities including turmeric. On the 13th November, 1950, this court held that the said order did not apply to turmeric and forward transactions in turmeric, therefore, were not hit by the order and were not, therefore, rendered illegal. The view of this court was reversed by the Supreme Court in 1952, and it was held that the order applied to turmeric, rendering the forward contracts in the commodity illegal. The said decision of the Supreme Court was given on 27th May, 1952. Now, in the assessment year 1950 -51, corresponding to the account year S. Y. 2005, the assessee repeated his claim for allowance of the loss. At the time when the Income -tax Officer made the assessment order, the decision of the Supreme Court referred to above was known. The Income -tax Officer took the view that since the debt had arisen out of the dealings of the assessee in forbidden wayada transactions in essential commodities, it was a debt which could not be enforced under the law, and the same, therefore, could not be considered to have become bad for income -tax purposes. He, accordingly, disallowed the assessee's claim. In the assessment year 1951 -52, the assessee had claimed bad debts to the extent of Rs. 15,060, representing an aggregate of the bad debts from three of his constituents under similar circumstances. This amount was also disallowed by the Income -tax Officer for the reasons for which he had disallowed the amount claimed in the previous year, namely, that the debts had arisen out of the dealings in forbidden wayada transactions in essential commodities. In the appeals which the assessee preferred against the assessment orders to the Appellate Assistant Commissioner, the view taken by the Income -tax Officer was confirmed by the Appellate Assistant Commissioner. The assessee then took further appeals to the Tribunal. The Tribunal held that in as much as in the assessment for the S. Y. 2003 the Appellate Assistant Commissioner had already given a finding that the debt which was prematurely written off in the S. Y. 2003 would be a lawful deduction in the S. Y. 2005, it was not right for the department to disallow it in the S. Y. 2005, by changing its stand. It also held further that although the claim of the assessee was not enforceable in law, that did not affect the admissibility of the claim either under section 10(2) (xi) or section 10(2) (xv) of the Indian Income -tax Act. Looking to the transactions from a commercial angle, the amounts claimed by the assessee were revenue deductions which were liable to be deducted before arriving at his assessable profits in the years of account. According to the Tribunal, therefore, the claims made by the assessee in the assessments for the assessment years 1950 -51 and 1951 -52 should have been allowed. It accordingly allowed the appeals of the assessee and directed that the assessments be modified accordingly. Thereafter, at the instance of the Commissioner, it drew up the statement of the case and referred to this court the question which we have already stated.

(3.) MR . Joshi's argument is that, inasmuch as losses have arisen out of transactions which were forbidden by law and rendered illegal by providing a penalty for persons entering into such transactions in breach of the prohibition order, the losses could not get the character of debts at all, and consequently, there would be no question of their becoming bad or irrecoverable at a subsequent stage. Mr. Joshi says that the liability of the constituents to the assessee was unenforceable even from its very inception and did not constitute a debt at any time. It could not, therefore, be regarded as having been bad or irrecoverable at a subsequent time so as to entitle the assessee to claim a deduction thereof under section 10(2) (xi). If it could not be claimed as a bad debt, according to Mr. Joshi, there is no other basis on which the said losses could be claimed. For one thing, if a specific head is provided under section 10(2) and an item is not allowable under that head, it could not be allowed either under the residuary head or even under section 10(1). Secondly, even if the losses in the present case were capable of being regarded as commercial losses, they obviously could not be allowed in the years of assessment because they did not pertain to those years, but to earlier years on the assessee's own case, which was that the debts became bad in the years of account. In support of his submission, that a liability in order to be a debt has to be legally enforceable, Mr. Joshi invited our attention to certain observations in Commissioner of Income -tax v. Basumal Jagat Narain, which are as follows : 'A debt is that which one owes to another; any money, goods or services that one is bound to pay another; a pecuniary due; a liquidated demand; a sum of money due by certain and express agreement. It includes any claim or demand upon which a judgment for a sum of money or directing the payment of money can be recovered in an action. Debt denotes not only the obligation of the debtor to pay but also the right of creditors to receive and enforce payment. To constitute a valid debt the money must have been advanced with reasonable belief at the time that it would be paid. Evidence of an obligation to repay is the first important factor to be singled out of the surrounding facts and circumstances. For purposes of taxation, a debt is a legally enforceable obligation for payment of money.'