Commissioner of Income Tax vs Darabji Brothers and Co.

Jeevan Reddy, J.—The question referred for our opinion u/s 256(1) of the income tax Act, 1961 (''the Act'') is : "Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,01,320 is allowable as a bad debt for the assessment year 1968-69?"

We may briefly state the facts leading to the reference. The assessee is a partnership-firm carrying on the business of money-lending. For the assessment year 1961-62, it claimed a sum of Rs. 10,31,319 as a bad debt which was the amount due from one Heerachand Poonamchand. The ITO disallowed the claim, whereupon an appeal was preferred by the assessee, but was dismissed as not pressed. This claim for bad debt was made on the basis of the entries made in the account books of the assessee on 20-10-1960. The assessee filed two suits, viz., O.S. Nos. 5 of I960 and 5 of 1964 on the file of the Chief Judge, City Civil Court, Hyderabad, against the debtor for the total amount due from him. Both the suits were decreed on 31-12-1965. O.S. No. 5 of 1960 was decreed for Rs. 5,26,888 with costs and future interest while O.S. No. 5 of 1964 was decreed for Rs. 1,98,842 with costs and interest. The debtor filed two appeals against the two decrees in this Court. Meanwhile, execution was also taken out by the assessee but which proceedings were stayed under the interim orders of this Court passed in the said appeals.

According to the assessee, on 31-5-1967, there was a settlement/compromise between the assessee and the debtor whereunder the assessee agreed to take Rs. 5,30,000 in full and final settlement of his claim comprised in both the suits/appeals, plus a sum of Rs. 20,000 towards costs. This amount of Rs. 5,50,000 was to be paid in certain specified installments. The assessee made entries in his account books in terms of the said compromise, viz., he scaled down the debt, which was shown as due from the debtor, to Rs. 5,30,000 and transferred the balance amount of Rs. 5,01,320 to bad debt account in the profit and loss account.

According to the assessee, further the compromise could not be immediately filed in the said appeals and got recorded, for certain reasons stated by it in the application filed in 1969 in this Court for recording the compromise, to which it is not necessary to refer here. Suffice it to mention that on 10-12-1969, this Court passed decrees in terms of the said compromise, in both the appeals.

For the assessment year 1968-69, the assessee claimed a sum of Rs. 5,01,320 as bad debt. The assessee relied upon the entries in its account books, as also a letter from the debtor addressed to the assessee, in support of its claim. The ITO was, however, of the opinion, on a consideration of the material placed before him that there was no effective and complete settlement between the parties on 31-5-1967 and, therefore, the assessee cannot claim the said amount as bad debt in the accounting year relevant to the assessment year 1968-69. The reasons given by the ITO are: (i) that no payment was made by the debtor as per the compromise; (ii) that the compromise was incomplete inasmuch as the penalty clauses were still under negotiation as on 31-5-1967; (iii) that the assessee had obtained decrees against the debtor and had taken out execution against the properties of the debtor, from which the amount decreed could be recovered; and (iv) that the appeals preferred by debtor were still pending disposal in the High Court. It was also observed by the ITO that the compromise was recorded only on 10-12-1969 and that payments in pursuance of the compromise decree were also made only after it was recorded by the High Court. Against the order of the ITO, the assessee filed an appeal before the AAC who dismissed the same confirming the reasoning of the ITO. On a further appeal, however, the Tribunal took a contrary view. After referring to the reasons stated by the assessee in its petition filed in the High Court, explaining the delay in getting the compromise memo recorded by the Court, the Tribunal held that the reasons given by the assessees are convincing and observed:

But the fact, however, remains that the compromise was arrived at on 31-5-1967, the genuineness of which has never been in dispute. The fact of the compromise having been entered into by the parties mutually has been brought to the notice of the income tax Officer when the return was filed for the assessment year under appeal as early as on 4-7-1968. The entries in the books of accounts maintained in the regular course of the business carried on by the assessee also lend support to the factum of compromise having been entered on 31-5-1967.

The Tribunal further observed that ''the ITO was not correct in mentioning that no part of the compromise amount was paid till now''. It found that soon after the compromise was recorded by the Court, an amount of Rs. 16,500 was paid. It was, thus, of the opinion that there was a complete and final settlement between the parties on 31-5-1967 whereunder the debt due from the debtor was scaled down from Rs. 10 lakhs and odd to Rs. 5,30,000 and, hence, the balance amount of Its. 5,01,320 ought to be allowed as a bad debt. Thereupon the department applied to the Tribunal to refer the aforesaid question for the opinion of this Court which was accordingly done.

Mr. M. Suryanarayana Murthy, learned counsel appearing for the department, contended firstly that the assessee who claimed the entire sum of Rs. 10 lakhs as bad debt in the assessment year 1961-62 and on its being disallowed, filed an appeal but chose to withdraw the same voluntarily, cannot and should not be permitted to put forward the very same debt; or part thereof, as a bad debt in the assessment year 1968-69. Secondly, he submitted that there was no full and final compromise arrived at between the parties on 31-5-1967 and that in any event it was not an effective and enforceable compromise. The learned counsel submitted that until and unless the compromise was got recorded by the Court, it was not effective or a lawful compromise and, therefore, in the accounting year relevant to the assessment year 1968-69, no compromise or settlement could be said to have taken place scaling down the debt. The mere entries in the account books, the counsel argued, do not entitle the assessee to claim the aforesaid amount as bad debt during the assessment year 1968-69. According to the learned counsel, it" at all, the assessee may claim the said amount as bad debt in the assessment year relevant to the accounting year in which the compromise was recorded by the High Court.

So far as the first question is concerned, we. are of the opinion that it has no merit. While it is not necessary for us to go into the reasons given by the ITO for disallowing the claim of. bad debt in the assessment year 1961-62, the fact remains that no such bad debt was allowed in that assessment year. The appeal preferred by the assessee was also withdrawn by him, probably in view of the suits filed by him. Further, the entries in the assessee''s account books, which constituted the basis for the claim for bad debt made in 1961-62, were reversed on 31-5-1967. The entire amount of Rs. 10 lakhs and odd was shown as due from '' the debtor and then the figure was scaled down to Rs. 5,30,000 in view of the compromise/ settlement arrived at on that day. In the above circumstances, the fact of disallowance of the claim for bad debt during the assessment year 1961-62 cannot constitute a ground for precluding the assessee from making the present claim of bad debt in the assessment year 1968-69.

Now coming to the second question, we have already set out in the finding of the Tribunal (at page 51 of the material paper book) to the effect that the genuineness of the compromise arrived at on 31-5-1967, cannot be disputed. The Tribunal has arrived at the said finding on the material available on record, disagreeing with the ITO and the AAC who. were of the opinion that there was no final and complete settlement between the parties on that date. The finding of fact recorded by the Tribunal is not questioned nor is open to attack in this reference. Mr. M. Suryanarayana Murthy contended that having regard to the width of the question actually referred to this Court, he is entitled to attack the said finding of fact as being based on no evidence. Assuming that he can do so, we are of the opinion that the said finding is not open to attack either on the ground of no evidence or on the ground of being perverse. There was certainly relevant material before the Tribunal upon which it could arrive at the finding. Moreover, when the correctness of the said finding has not been directly referred to us, we see no warrant to go into the adequacy or otherwise of the material in support of the said finding. In any event, as indicated above, it cannot be said that there is no evidence in support of the Tribunal''s finding. Once we take the finding as correct, it follows that the assessee should succeed.

Under Order 21, rule 2, of the Code of Civil Procedure, 1908, as it stood at the relevant time, even an oral settlement or compromise arrived at between the parties, resulting in discharge or satisfaction of a decree could be set up in the execution proceedings. In other words, an oral settlement or compromise arrived at between the parties could operate as a valid discharge or satisfaction of a decree passed by the Court. It was not necessary that it should be in writing or that it should have been arrived at in the presence of the Court. In case the decree-holder disputed, the judgment-debtor could plead and prove such an oral settlement and if proved, it would have been a complete answer to the execution proceedings. This fact shows that the oral settlement/compromise arrived at between the parties on 31-5-1967 was an effective and enforceable compromise and that its enforceability or validity did not depend upon its being recorded by the Court. For this reason, we must hold that the ITO and the AAC were not right in observing that the settlement arrived at between the parties on 31-5-1967 was not a complete or final compromise. We also find no warrant for their holding that since the stipulations with respect to penalty clauses were yet to be negotiated, it was not a completed settlement. The compromise which has been ultimately recorded by this Court on 10-12-1969 does not contain any penalty clauses. It is indeed not clear on what basis did these authorities hold that stipulations regarding penalty were yet to be finalised as on 31-5-1967. The delay in getting the compromise recorded was not on account of any such further negotiation. The delay was caused on account of certain happenings in the family of the assessee. The compromise ultimately recorded is the same, what was arrived at on 31-5-1967. We are, therefore, of the opinion that on the basis of the settlement/ compromise arrived at on 31-5-1967 it was open to the assessee to scale down the debt due from the debtor to Rs. 5,30,000 and to claim the balance as a bad debt. (In addition to Rs. 5,30,000 a sum of Rs. 20,000 was paid by the debtor towards suit costs).

Mr. M. Suryanarayana Murthy, learned standing counsel for the department, relied upon the decision in Sidhramappa Andannappa Manvi Vs. Commissioner of Income Tax, Bombay, to show that a debt can be said to become bad only when it finally becomes irrecoverable and not at an earlier point of time of the choosing of the assessee. That was a case where the assessee filed a suit for recovery of a debt against the debtor which was dismissed by the trial court and his appeal to the High Court was dismissed on 29-9-1941. The assessee filed a petition for leave to the Privy Council but did not press it. In the assessment proceedings, the Tribunal held that the debt must be deemed to have become bad only on 29-9-1941, when the High Court dismissed the assessee''s appeal and not at any earlier point of time. There can be no dispute about the proposition. So long as the appeal was pending on the file of the High Court there was a hope of the assessee succeeding and, therefore, it cannot be said that at any point of time earlier to the decision of the High Court, the debt could be treated to have become bad. Accordingly, the assessee therein was held not entitled to claim the debt to have become a bad debt at any point of his choosing earlier to the High Court''s judgment. We are of the opinion that the said principle can have no application in the present case, for the question which is at issue was not at all considered in that case. Similarly, the decision of the Bombay High Court in Sidhramappa Andannapa Manvi''s case (supra), which refers to a decision of the Lahore High Court in (1937) 5 ITR 279 Lahore holding that so long there is a ray of hope left in the assessee to recover a debt, it cannot be considered to be a bad debt, is also of no help to the revenue. The subsequent decision in The Lord Krishna Sugar Mills Ltd., Saharanpur Vs. Income Tax Officer, Ambala and Another, .) too affirms the same principle and is of little relevance in this case.

For the above reasons, we answer the question referred to us in the affirmative, in favour of the assesses and against the department. No order as to costs.