BADRINARAYAN BALAKISHAN Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS Court had directed the Tribunal to state a case on the following question, viz. :

(2.) THE answer to this question depends on whether the sum of Rs. 26,251 has been established to represent bad debts. The assessee is a firm of three partners and the partnership was registered under S. 26A of the IT Act. For the assessment year 1955 56, for which the relevant accounting period was the year ended October 24, 1954, the assessee had written off certain items of debts owing from seven persons. These debts arose out of speculative transactions with the above seven persons in oil seeds, which were prohibited under law. The transactions entered into by the assessee resulted in profits, and since the method of accounting of the assessee was based on mercantile system, he had, on accrual basis, shown these amounts as income from speculative business, and, it is not denied, they were assessed and made liable to income tax. These facts are not in dispute, and both sides as well as the statement of the case assume them to be correct. The assessee, however, claimed these amounts as bad and doubtful debts, when they were not paid and became irrecoverable. The ITO wrote to the seven debtors enquiring whether they are intending to pay the amount; but except in the case of one person, Srikishan Narayanadas, in respect of a sum of Rs.

(3.) IN a mercantile system of accounting, as is well known, the accounts are maintained on the basis of accrual. If goods are sold but the amount is not received, it is deemed to have been received on the date when the goods were sold, and the amount entered as if received, i.e., a credit will be shown of this amount in the books of the firm or individual, while a corresponding debit will be shown in the ledger of the person to whom the goods have been sold. In other words, the buyer becomes a debtor to the company in respect of that transaction as soon as the goods are sold. It is difficult to support the assumption of the IT authorities that there were no debts and that the entries made in respect of each of the debtors in the books of the assessee are not proof of those debts.