Commissioner of Income-tax Vs. Williamson Magor and Co. Ltd. (Now Known as Macniel and Magor) - Court Judgment

Dipak Kumar Sen, J.

1. This reference arises out of the income-tax assessment of Messrs. Williamson Magor & Co. Ltd. in the assessment year 1964-65, the relevant previous year having ended on the 31st December, 1963. The assessee, inter alia, acts as managing agents, secretaries and/or treasurers of other limited companies and at the material time had been appointed as the secretary of one Tukvar & Co. Ltd. under an agreement dated the 26th July, 1954, which, inter alia, provided as follows :

(a) The assessee was appointed as secretary on and from the 1st July, 1954, to continue in such employment for a period of 10 years certain from the said date.

(b) The assessee would provide suitable office and establishment for Tukvar & Co. Ltd., Calcutta.

(c) Subject to the provisions of the Companies Act the assessee would in addition to their duties under this agreement perform other duties and work for Tukvar & Co. Ltd. which the directors of the latter may decide and would receive reasonable and proper remuneration therefor as would from time to time be agreed between the parties.

(d) The general management of the affairs of Tukvar & Co. Ltd., viz., business transactions, property etc., would be entrusted to the assessee, who would be under the control and direction of the directors of Tukvar & Co. Ltd.

(e) In addition to the power or authority expressly conferred by the agreement the assessee would be entitled to exercise powers of the directors of Tukvar & Co. Ltd. as may from time to time be lawfully delegated to them provided that the assessee would not exercise power to borrow moneys except within limits previously fixed by the directors at a board meeting.

(f) The assessee would be at liberty at any time to resign its office as secretary upon leaving at the registered office of the Tukvar & Co. Ltd. three weeks' notice in writing of their intention to do so.

2. The assessee acted as the secretary of Tukvar & Co. Ltd. till November, 1957. In 1955, Tukvar & Co. Ltd. was in need of funds. On a guarantee furnished by the assessee, Tukvar & Co. Ltd. was allowed overdraft facilities from a bank. In November, 1957, the assessee resigned voluntarily from Tukvar & Co. Ltd., who however, did not repay the bank the money due on overdraft and the assessee as the guarantor had to pay a sum of Rs. 1,68,292 to the bank being the amount due on the said overdraft account on account of principal and interest.

3. On or about the 15th September, I960, Tukvar & Co. Ltd. filed a suit for the recovery of a sum of Rs. 22,80,554 against the assessee alleging misappropriation, breach of trust and detention of its movables by the assessee. On the 18th November, I960, the assessee filed a suit against the said Tukvar & Co. Ltd. claiming Rs. 2,08,611.68 on account of the money paid to the bank on account of the overdraft of Tukvar & Co. Ltd. The disputes between the parties were ultimately settled out of court in the relevant assessment year. The assessee. and the said Tukvar & Co. Ltd. withdrew their respective suits.

4. In its income-tax assessment for the relevant assessment year, the assessee claimed deduction of the said sum of Rs. 1,68,292 as a bad debt. The ITO disallowed the claim, inter alia, on the ground that the assessee was under no obligation to arrange funds for Tukvar & Co. Ltd. and that the assessee did not carry on the business of lending money. The ITO held that the liability of the assessee to pay the bank's dues did not arise in the course of its business. The ITO also held that the assessee voluntarily waived its right of recovery of the debt which was due from Tukvar & Co. Ltd., a solvent party, and it could not, therefore, be said that the debt was irrecoverable. The claim of the assessee was disallowed.

5. On appeal, the AAC, inter alia, found that, (a) the assessee had decided voluntarily to waive its right to recover the said debt for an extra-business consideration, (b) the assessee was under no obligation to arrange funds for Tukvar & Co. Ltd., (c) that the business of the assessee was not money-lending ; (d) the debt had never been taken into account in computing the income of the assessee of any earlier year. He held that the debt had not become irrecoverable and that a debt written off voluntarily could not be stated to be a bad debt. The assessee could not utilise the counter-claim of Tukvar & Co. Ltd. as a shield and claim that the amount which was due to it from Tukvar & Co. Ltd. had become a bad debt. The AAC confirmed the order of the ITO.

6. There was a further appeal by the assessee before the Tribunal, where it was contended that the assessee as managing agent of other companies had to carry on the business of the managed companies to the best of its capacity and that the bank guarantee had been furnished by the assessee for such business consideration. Whatever be the reason for the withdrawal of the suits by the parties, the fact remained that the assessee did forgo its claim against Tukvar Co. Ltd. and could not realise anything from the latter.

7. It was contended on behalf of the revenue, inter alia, that under the agreement the assessee was under no obligation to provide finance to Tukvar & Co. Ltd. and, therefore, the guarantee was not given for any business purpose. Consequently, the loss arising could not be said to have been incurred during the course of the assessee's business. Alternatively, it was contended that the assessee withdrew its suit against Tukvar & Co. Ltd. not because of the latter's inability to pay the debt or that the assessee would not be able to realise the amount but because Tukvar & Co. Ltd. had themselves filed a suit against the assessee for recovery of a larger amount. It was further submitted that, in any event, the debt had not become bad during the previous year.

8. The Tribunal found, inter alia, as follows:

(a) Strictly, the assessee had no obligation under the agreement to provide finance to Tukvar & Co. Ltd. but for all practical purposes the assessee was supposed to manage Tukvar & Co. Ltd. to the best of its capacity.

(b) The guarantee was furnished on business consideration and was incidental to the assessee's business though the assessee's furnishing of such guarantee may be termed as imprudent.

(c) There was no suggestion that the assessee acted with any ulterior motive.

9. The Tribunal also found that the compromise between the assessee and Tukvar & Co. Ltd., as a result of which the assessee did not receive anything was sufficient for the purpose of coming to the conclusion that the debt had become bad during the previous year. The Tribunal rejected the contention of the revenue that the amount included in the debt was realised indirectly as a result of the compromise inasmuch as the assessee might have had to pay some money to Tukvar & Co. Ltd. in the latter's suit. The Tribunal accepted the contentions of the assessee and held that the debt was allowable as a bad debt.

10. On an application by the CIT, West Bengal-I, under Section 256(1) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and has referred the following questions as questions of law arising from its order for the opinion of this court :

'1(a) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 1,68,292 standing to the debit of M/s. Tukvar Company Ltd. was a debt aring in the course of the assessee's business and had become bad during the previous year so that it was an allowable deduction ?

1(b) Whether, on the facts and in circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 8,737 paid as fees to M/s. Orr Dignam & Company in connection with the matters relating toM/s. Tukvar & Company Ltd. was an allowable deduction in computing the assessee's business profits ?'

11. At the hearing, learned counsel for the revenue contended before us that it was apparent from the agreement between the parties that the assessee had been under no obligation thereunder to lend money to Tukvar & Co. Ltd. and, therefore, it could not be said that the assessee had furnished the guarantee in favour of Tukvar & Co. Ltd. out of business consideration. It was contended further that the main consideration of the assessee in withdrawing its claim against Tukvar & Co. Ltd. was the withdrawal of the latter's claim against the assessee. There was a compromise as a result of which the debt became extinguished. The consideration for the extinguishment of this debt was forgoing of the counter-claim of Tukvar & Co. Ltd. against the assessee. Learned counsel submitted that, on such facts, it could not be held that the debt had become bad. On the contrary, the debt had been discharged and ceased to be a debt.

12. In support of the above contentions, learned counsel drew our attention to a decision of the Privy Council in CIT v. S.M. Chitnavis where it was held that a debt which had become bad within a period which did not fall within the year in question, it could not be treated as a bad debt for that year. Another decision of the Privy Council in F. E. Dinshaw v. CIT [1934] 2 ITR 319 was also cited. A decision of the Supreme Court in Essen Pvt. Ltd. v. CIT : [1967]65ITR625(SC) was cited next. The facts in this case were that the assessee carried on business as managing agents of several concerns. The assessee advanced large sums of money to a managed company from time to time and also guaranteed a bank loan of the said managed company. Subsequently, the managed company ceased to carry on its business and the assessee as guarantors had to pay the dues of the bank. Money due from the managed company could not be recovered and large amounts were written off by the assessee. The Tribunal found that the advances made to the managed company and the guarantee furnished to the bank were within the objects of the assessee and had been made in the course of the assessee's business and allowed the claim. On a reference, it was held by the High Court that the loss being a capital loss was not allowable. On a further appeal, the Supreme Court held that there was proper material before the Tribunal to support the finding that the guarantee was furnished by the assessee in the course of its business so that the claim of a bad debt was allowable under Section 10(2)(xi) of the Indian I.T. Act, 1922, and the High Court could not lawfully interfere with the facts found by the Appellate Tribunal. Another decision of the Supreme Court in CIT v. Birla Bros. P. Ltd. : [1970]77ITR751(SC) was cited last. The facts in this case were that the assessee, a private limited company, carried on business of banking.financing and managing agency. One of the companies managed by the assessee had a sole selling agent. The assessee stood guarantee for a loan obtained by the said sole selling agent, who failed to repay the loan and ultimately the assessee paid the loan. The managed company could not reimburse the loan and went into liquidation. The assessee could not recover anything in the liquidation proceedings. The loss incurred thereby was claimed as a deduction in the assessment and was rejected by the revenue authorities. The Tribunal, however, allowed the claim of the assessee holding that the loss was incidental to the assessee's business. On a reference, the High Court upheld the decision of the Tribunal. On further appeal, the Supreme Court found that there was no material to show either that the assessee was in any way obliged to guarantee a loan given to the sole selling agent of its managed company or that the managing company itself was under any legal obligation to finance the sole selling agent or to stand guarantee for loans obtained by such agent. The guarantee furnished was not found to have facilitated the carrying on of the assessee's business even indirectly or to be in the larger business interests of the assessee. The sum claimed was held not allowable as a bad debt under Section 10(2)(xi) of the Indian I.T. Act, 1922.

13. Learned counsel for the assessee contended on the other hand that whether a debt is bad or not is a question of fact in every case. He submitted that it had been found by the Tribunal in the instant case that the debt had become bad in the previous year and the revenue did not challenge this finding. The matter, therefore, stood concluded. In support of his contentions, learned counsel relied on the observation on behalf of the Privy Council in the case of Chitnavis , cited on behalf of the revenue (p. 471):

'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 any one else. The mere fact that a debt was incurred at a date beyond the period of limitation will not of itself make the debt a bad debt ; still less will it fix the 'date at which it became a bad debt. A statute-barred debt is not necessarily bad ; neither is a debt which is not statute-barred necessarily good. The age of the debt is no doubt a relevant matter to take into consideration. In every case it is a question of fact, to be determined after consideration of all relevant circumstances.'

14. F. E. Dinshaw [1934] 2 ITR 319 was also relied for the following reiteration of the law by the Judicial Committee (p. 322) :

'Whether, a debt is wholly or partly and to what extent bad or irrecoverable is in every case (and whether the debtor is a human being or a joint stock company or other entity) a question of fact to be decided by the appropriate Tribunal upon a consideration of the relevant facts of that case.'

15. Learned counsel cited a decision of the Supreme Court in Bank of Bihar Ltd. v. C1T : [1962]45ITR427(SC) . The Supreme Court quoted with approval the observations of the Judicial Committee in the case of Chitnavis and observed (p. 429) :

'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.'

16. A subsequent decision of the Supreme Court in Amarchand Sobhachand v. CIT : [1971]82ITR591(SC) was also cited for the proposition that the finding of fact by the Tribunal supported by evidence on record would be normally binding on the courts to whom the matter may be referred.

17. Another decision of the Supreme Court in the case of CIT v. Pandit Lakshmi Kant Jha : [1972]84ITR481(SC) was cited last for the following observations (p. 485) :

'Findings arrived at by the Tribunal are findings of fact. Those, findings are based on evidence. Hence, neither the High Court could have interfered with those findings, nor can we interfere with the same.'

18. The finding of the Tribunal in the instant case is also that the debt became bad during the previous year. It is also a matter of record that the suit of the assessee against the managed company was withdrawn during the previous year. The Tribunal has also found that the assessee furnishing guarantee for the debt of the managed company was incidental to the carrying on of the assessee's business. Such findings have not been challenged by the revenue and which, in view of the settled law, stand concluded.

19. Learned counsel for the revenue drew our attention to the agreement between the assessee and the said Tukvar & Co. Ltd. and invited us to hold that it was no part of the assessee's business to lend money to its employees. This may be a possible conclusion. But there was sufficient material before the Tribunal to arrive at a different conclusion.

20. For the reasons given above, we are not inclined to interfere with the finding of the Tribunal. That question 1(b) is ancillary to question 1(a) was not seriously disputed. In that view of the matter, we answer both the questions in the affirmative and in favour of the assessee.

21. Our notice has been drawn to several documents which have been incorporated in the paper book filed in this reference. The documents are not mentioned in the index of the boob, nor have they been incorporated by the Tribunal in the statement. We directed the revenue earlier to file an affidavit stating the facts and circumstances under which the said documents came to be incorporated in the paper book. In spite of repeated extensions of time the affidavit has not been filed until today. We direct the revenue to file the affidavit within a week after, the reopening of the court. There will be no order as to costs.

Bimal Chandra Basak, J.

22. I agree.