Ashoka Marketing Ltd. vs Commissioner of Income Tax

On an application u/s 256(2) of the Income Tax Act, 1961, this court has directed the Tribunal to refer the following question for the opinion of this court :

"Whether the finding and conclusion of the Tribunal that irrecoverable debt was a capital loss were based on any wrong principles of law or ignoring the relevant piece of evidence or otherwise perverse ?"

In compliance with this direction, the aforesaid question has been referred along with the statement of case for our opinion :

During the course of assessment, the Assessing Officer has noticed that the assessee has claimed bad debt to the tune of Rs. 2,15,751, which has been written off by the assessee-company, in the name of Thakur Paper Mills Ltd. This amount related to the interest on loan of Rs. 4 lakhs advanced by the assessee-company to Thakur Paper Mills Ltd. The assessee claimed before the Tribunal that the loan was assigned to one Sterling Investment and Trading Company for the amount of Rs. 4 lakhs. That has been paid to the assessee for full and final settlement against the loan and interest payable by Thakur Paper Mills Ltd. That claim was rejected by the Income Tax Officer. According to him, the assessee failed to establish to prove that, that has become bad in this year.

In appeal before the Commissioner of Income Tax (Appeals), the Commissioner of Income Tax (Appeals) has also confirmed the view taken by the Assessing Officer that the debt has not become bad in this year. In any case, it can be a capital loss. The Tribunal has also taken the view that at the most, it can be claimed as a capital loss.

Heard learned counsel for the parties. Dr. Pal, learned counsel for the assessee, submits that the Commissioner of Income Tax (Appeals) allowed holding that it is a capital loss and that the loan was assigned to Sterling Investment and Trading Co. They wrote a letter dated April 1, 1980, to the assessee-company that as per discussions, they are prepared to pay Rs. 4 lakhs, in case the loan advanced to Thakur Paper Mills Ltd. was assigned to Sterling Investment and Trading Co. and loan includes interest also be taken for full and final settlement.

The offer of the Sterling Investment and Trading Co. was discussed by the board of directors and they have taken the decision to assign the loan to Sterling Investment and Trading Co. for Rs. 4 lakhs in full and final settlement and finally, the company has passed the formal resolution on June 19, 1980, for accepting Rs. 4 lakhs against the loan and interest advanced to Thakur Paper Mills Ltd. for full and final settlement of the loan and interest due from Thakur Paper Mills Ltd. the amount of interest has become bad and that has been written off in this year. In these circumstances, there is no question of disallowing the claim of the assessee. He placed reliance on Kamla Cotton Company Vs. Commissioner of Income Tax, and Jethabhai Hirji and Jethabhai Ramdas Vs. Commissioner of Income Tax, Bombay City-II, .

On the other hand, Mr. Agarwal, learned counsel for the Revenue, submits that whether the debt has become bad or not is basically a question of fact. That should not be interfered with by this court. He further submits that when the loan can be recovered by Sterling Investment and Trading Co., why that part of the interest cannot be recovered by the assessee ? Therefore, the loan has not become bad and that has been rightly disallowed. He further submits that as the loan has been assigned to Sterling Investment and Trading Co. that has taken the character of capital asset.

Heard learned counsel for the parties. It is true that whether the loan has become bad or not is basically a question of fact. But, if the finding is perverse, that can be interfered with, specially in case in hand, though the Tribunal as well as the Commissioner of Income Tax (Appeals) have accepted it as loss but held that it is a capital loss. That means, they have accepted that there is loss. Therefore, the limited question, for our consideration, is whether it is a capital loss or revenue loss ?

But even otherwise the admitted facts are that the assessee has advanced the loan to Thakur Paper Mills Ltd. and Rs. 2,15,780 as interest on Rs. 4 lakhs loan advanced by the assessee to Thakur Paper Mills Ltd. has been debited. The amount of interest for the period from April 1,1978 to March 31,1980, i.e., Rs. 1,36,186 has not been accounted for. To consider whether the interest of Rs. 2,15,780 on the loan has become bad or not we would like to refer to some observations of some courts.

In Kamla Cotton Company Vs. Commissioner of Income Tax, , the Gujarat High Court has considered the aspect in what circumstances the debt that has become bad. At page 611, the court observed as under :

"In our view, the requirement that the debt has become bad or irrecoverable did not mean that the Department can insist upon demonstrative and infallible proof that the debt had become bad. Moreover, it is not compulsory for the assessee to take legal proceedings against the debtor for recovery of the claim before writing it off as a bad debt. In our opinion, when the creditor bona fide writes off the debt as there appears no chance of its recovery in the foreseeable future or where the recovery proceedings would be so cumbersome and expensive as to outweigh any advantage of instituting any recovery proceedings, he discharges the onus and would be entitled to claim deduction under the said Clause (vii) of Section 36(1) as it stood at the relevant time."

In Jethabhai Hirji and Jethabhai Ramdas Vs. Commissioner of Income Tax, Bombay City-II, , the observations of the Madras High Court in Devi Films Ltd. Vs. Commissioner of Income Tax, Madras., , have been quoted for considering in what cases a debt has become bad. For ready reference, we requote these observations which read as under :

"The expression ''bad and doubtful debt'' is descriptive of a debt which cannot reasonably be expected to be realised. It would not do for the assessee to say that he became pessimistic about the prospects of recovery of the debt in question. He must feel honestly convinced that the financial position of the debtor was so precarious and shaky that it would be impossible to collect any money from him. There is no acid test to ascertain whether a debt has become bad and doubtful, and if so, when. A time barred debt can be assumed to be bad, but is not necessarily bad because of the bar of time. The insolvency of the debtor is not conclusive proof that the debt has become bad. Nor does the fact that the debtor has managed to keep outside bankruptcy proceedings constitute evidence of the debt being good. The question is really one of fact depending upon the congeries of facts and diverse circumstances bearing on the debtor''s pecuniary position, his commitments and obligations, and the natural apprehensions that would be caused in the minds of the creditors regarding recovery of their dues. While the onus of establishing that the write-off of the alleged bad debt is proper and permissible in the circumstances of the case is undoubtedly upon the assessee, the Department cannot insist on demonstrative proof which is quite infallible."

In the facts and circumstances of this case and the views expressed by the other High Courts as referred to above, we are of the view that the assessee was correct in claiming the interest loss as bad debt. Even otherwise in this case the Commissioner of Income Tax (Appeals) as well as the Tribunal--they have accepted that there was a loss. But they have taken the view that it is a capital loss--not a revenue loss.

The admitted facts are the assessee has advanced a loan of Rs. 4 lakhs to Thakur Paper Mills, as it was not possible to recover from Thakur Paper Mills, if the assessee assigns this loan and interest against Rs. 4 lakhs to Sterling Investment, how did the character of the loan change in the hands of the assessee. How that can it take the character of capital ? Mere assignment of the loan to a third party and receipt of some amount in full and final settlement against that loan and interest, the character of the loan remains the same. Therefore, in our view, the Tribunal has committed an error in treating the interest part, which has not been recovered as capital loss. In fact, it is a loss of revenue, not capital.

In I result, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue. Reference so made stands disposed of accordingly.

All parties arc to net on a xeroxed signed copy of this dictated order on the usual undertaking.