ORDER
B.R. Mittal, J.M.
1. The Department has filed this appeal for the asst. yr. 1996-97 against the order
of learned CIT(A), dt. 25th Jan., 2000.
2. The ground No. 1 of the appeal is as under:
“That on the facts and in the circumstances of the case, the CIT(A) was not justified in deleting Rs. 98,61,884 being disallowance, made in respect of business loss.”
2.1 The relevant facts giving rise to this ground of appeal are that the assessee is a company engaged in the business, inter alia, of manufacturing and sale of alcohols and Indian made foreign liquor. The assessee filed its original return on 29th Nov., 1996, declaring income at Rs. 75,71,030. Subsequently, a revised return was filed on 20th May, 1997, increasing the total income to Rs. 1,31,67,720. The assessee filed a second revised return on 11th Sept., 1997, reducing the total income to Rs. 42,75,970.
2.2 In the revised return filed on 11th Sept., 1997, the assessee claimed deduction of Rs. 98,61,884 while were credited on account of price escalation from Madhya Pradesh Government for supply of country liquor during the financial year 1985-86 to financial year 1990-91.
2.3 The assessee-company was one of the partners in the erstwhile firm M/s Associated Distilleries. The assessee-company succeeded to the business of the said firm as a going concern w.e.f. 1st April, 1990. The erstwhile firm viz., Associated Distilleries as well as the assessee-company supplied country liquor to M.P. Government during the period 23rd Oct., 1985 to 31st March, 1991, corresponding to the asst. yrs. 1987-88 to 1991-92 and charged Rs. 5,02,82,790 by way of cost price bills. Subsequently, the assessee made claims for price escalation and raised supplementary bills in respect of Rs. 1,15,05,321 and demanded the said payment from the M.P. Government. There is no dispute that the claims for price escalation were credited by the assessee to the sale account in each of the relevant years and accordingly offered for taxation. Since the State Government of M.P. did not accept the aforesaid claim of the assessee for price escalation made through supplementary bills, the assessee filed a writ petition before the High Court of Madhya Pradesh Bench at Indore, being Misc. Petition No. 2283/1993 and the Hon’ble High Court by its order dt. 10th Jan., 1995, directed the respondent M.P. Government to take proper steps to fix the price of country liquor for the period in question in conformity with the policy within a period of one month from the date of the order and communicate the decision to the assessee-company. A copy of the said order of the Hon’ble High Court of M.P. is placed at pp. 31 to 32 of the paper book. Pursuant thereto the Government of Madhya Pradesh by its letter dt. 19th April, 1995, determined the price. It is observed that the assessee received a sum of Rs. 16,43,436.94 and as such the balance claim of the assessee for price escalation to the extent of Rs. 98,61,884.16 (say Rs. 98,61,884) was not accepted by the Government of Madhya Pradesh.
2.4 In view of the above, the assessee claimed the said amount of Rs. 98,61,884 as business loss under Section 28(i) r/w Section 29 of the Act in the assessment year under appeal.
2.5 Since the assessee had not written off the said amount of Rs. 98,61,884 as bad debts in the accounts of the previous year relevant to the assessment year under appeal, but it wrote off the debts in subsequent year i.e., in the asst. yr. 1998-99, the AO did not allow the claim of the assessee of Rs. 98,61,884 as deduction from income of the assessee. The AO did not accept the contention of the assessee that the said claim of deduction be treated as a business loss in the assessment year under appeal on the ground that Section 29 of the Act provides that income from business referred to in Section 28 should be computed in accordance with the provision of Sections 30 to 43D and stated that the loss in question is irrecoverable debt which is to be allowed under Section 36(i)(vii) provided the conditions laid down in Section 36(2) are satisfied. The assessee filed appeal before the first appellate authority. The assessee contended that the loss claimed by the assessee of Rs. 98,61,884 was a business loss under Section 28 of the Act in the assessment year under appeal arose in the course of carrying on of its business and was incidental to it and as such the provisions of Section 36(i)(vii) r/w Section 36(2) were not applicable since the sum of Rs. 98,61,884 was never acknowledged by the State Government of Madhya Pradesh at any time whatsoever. Relying on the decision of the apex Court in the case of Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC), the assessee contended that writing off a business loss in the books of account could not be a condition precedent for acceptance of a claim under Section 28(i) r/w Section 29 of the Act.
2.6 The learned CIT(A) accepted the submission of the assessee and held that the excess credit of Rs. 98,61,884 could not be classified as debt, as a bad debt presupposes the existence of a debt. The learned CIT(A) has stated that the State Government of Madhya Pradesh at no point of time had acknowledged the amount of Rs. 1,15,05,321 raised by the assessee in its supplementary bill as debt due by it. Therefore, the demand or claim which was not acknowledged by the other side but disputed by it could never by regarded as ‘debt’ proper. The learned CIT(A) relying on the decision of the Madras High Court in the case of CIT v. Vanguard insurance Co. Ltd (1974) 97 ITR 546 (Mad) held that a debt must be an admitted debt if it is to qualify for deduction as bad debt. Further, learned CIT(A) has stated that unless there is an admitted debt and it becomes irrecoverable, no question of writing it off as a bad debt would arise. The learned CIT(A) decided the issue in favour of the assessee after discussing the concept of real income to tax and we consider it relevant to reproduce para 4.3 of the order of the learned CIT(A) which is as under ;
“In the instant case, the claim for price escalation unilaterally made by the appellant did not result in any contractual debt between the State Government and the appellant. No obligation could be cast on the State Government by reason of such unilateral act. The State Government never acknowledged the value of escalation bills raised by the appellant as debt. Therefore, by no stretch of argument can the amount in question be regarded as debt. And if there is no debt the question of its deductibility under Section 36(i)(vii) does not arise. The loss arose out of the carrying on of the business of the appellant and resulted in connection with transactions between the supplier (the appellant) and the buyer (the State Government). The fixation of liquor prices in respect of liquor supplied by the appellant to the State Government during the period 23rd Oct., 1985 to 31st March, 1991, took place in April, 1995 when the Government’s order dt. 19th April, 1995 was issued. In view of the new rates intimated by the State Government through its said order, the appellant was able to realise only an aggregate sum of Rs. 16,43,437 as against its claim of Rs. 1,15,05,321. Thus, the amount of Rs. 98,61,884 became irrecoverable during the previous year under appeal and is, therefore, allowable as trading/business loss in computing its total income for the asst. yr. 1996-97 under Section 28 r/w Section 29 of the Act.”
Hence, the Department is in appeal before the Tribunal.
2.7 During the course of hearing of the appeal, the learned Departmental Representative justified the order of the AO and submitted that the lose claimed by the assessee had occurred on account of the amount credited by the assessee during the asst. yrs. 1987-88 to 1991-92 and not in the asst. yr. 1996-97. Since the assessee did not write off the loss in the assessment year under appeal, the AO was justified not to allow the same in view of Section 36(1)(viii) as the condition laid down under Section 36(2) was not fulfilled. The learned Departmental Representative submitted that it was not a business loss of the assessment year under appeal and as such the same could not be allowed in any other provision of Sections 28 to 43D save and except under Section 36(1)(vii) r/w Section 36(2) of the Act. On the other hand, the learned authorised representative of the assessee justified the order of the learned CIT(A). He contended streneously that the State Government of Madhya Pradesh never acknowledged the claim of the assessee as a debt and it was a unilateral claim of the assessee for price escalation, the same did not become a contractual debt between the parties and accordingly, provision of Section 36(1)(vii) is not applicable. The learned authorised representative of the assessee submitted that the sales booked by raising the supplementary bills in the earlier years were tentative price and the final prices were determined later on resulting into a loss to the assessee of Rs. 98,61,884 which had crystalised in April, 1995, when the assessee received the letter of the State Government of Madhya Pradesh on 19th April, 1995, and referred p. 33 of the paper book to substantiate his submission. In support of his submission, the learned authorised representative of the assessee placed reliance on the decision of the apex Court in the case of Sutlej Cotton Mills Ltd. (supra). The learned authorised representative of the assessee submitted that a sum becomes debt only when there is a relationship of debtor and creditor and unless there is an admitted debt it could not allow as a bad debt when it is written off. The learned authorised representative of the assessee further submitted that the assessee had offered the tax on the aforesaid amount of Rs. 98,61,884 when in fact there was no income at all and in support of his submission placed reliance on the decision of the apex Court in the case of CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) wherein it was held by Their Lordships that if income does not result at all, there cannot be a tax even though in book-keeping an entry, is made about a hypothetical income which does not materialise. He further submitted that a similar view was taken by the apex Court in the case of Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC). The learned authorised representative of the assessee also referred the decision of the Gujarat High Court in the case of CIT v. Western Engineering Co. (1971) 81 ITR 712 (Guj) wherein it was held by Their Lordships that the credits taken into account on the basis of estimated bills which were pitched high did not represent the real income. The learned authorised representative of the assessee justified the order of the learned CIT(A).
2.8 We have carefully considered the orders of the authorities below and the submissions of the learned representatives of the parties. We have also gone through the cases relied on by the learned authorised representative of the assessee in support of his submission.
2.9 The issue involved on the facts before us is whether the assessee can claim the amount of Rs. 98,61,884 as business loss in the assessment year under appeal viz., asst. yr. 1996-97 when the said amount was credited by the assessee by raising the supplementary bills for the supplies made of country liquor to Madhya Pradesh Government during the period relevant to the asst. yrs. 1987-88 to 1991-92 when the said amount admittedly was written off by the assessee in the books of account only in asst. yr. 1998-99.
2.10 In order to decide the above issue it is necessary to consider as to what a debt is.
The Punjab & Haryana High Court in CIT v. Basumal Jagat Narain (1960) 38 ITR 447 (Puj) states as under :
“A debt proper 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 or money can be recovered in any action.
Debt denotes not only the obligation of the debtor to pay but also the right of creditor to receive and enforce payment.”
2.11 The apex Court in the case of A.V. Thomas & Co. Ltd. v. CIT (1963) 48 ITR 67 (SC) has considered debt for the purpose of Section 10(2)(xi) of the IT Act, 1922. It was stated by Their Lordships that what is meant by debt in that connection was laid down by Rewlatt Justice in Curtis v. J. & O Oldfield Ltd. (1925) 9 Tax Cases 319 as follows :
“When the rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come into swell the profits”.
Therefore, a debt in such case is an outstanding which if recovered would have swelled the profits. It means something which is related to business or results from it.
2.12 In the case before us, we observe that the said amount of Rs. 1,15,05,321 was credited by the assessee in the asst. yrs. 1987-88 to 1991-92 by raising the supplementary bills on account of claim for price escalation and demanded the said amount from Government of Madhya Pradesh. The assessee-company succeeded to the business of the erstwhile partnership firm styled Associated Distilleries w.e.f. 1st April, 1990, and took over all its assets and liabilities. Therefore, the said claim of the assessee was a trading receipt in the relevant assessment years and of the closing relevant accounting year the claim of the assessee was a trade debtors. There is no dispute that the assessee had shown the said outstanding claim as sundry debtors in its books of account. As may be observed from the decision of the Punjab & Haryana High Court in the case of Basumal Jagat Narain (supra) that a debt is that which one owes to another, a liquidated demand and it also 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. In the case before us the assessee filed a writ petition before the High Court of Madhya Pradesh, Bench at Indore, and their Lordships by order dt. 10th Jan., 1995 directed the State Government of Madhya Pradesh to take proper steps to fix the price of country liquor and accordingly, the State Government of Madhya Pradesh settled the claim of the assessee for the period 1986-87 to 1990-91 by a letter dt. 19th April, 1995, for an aggregate sum of Rs. 16,43,936.94 and thus rejecting the claim of the balance amount to the extent of Rs. 98,61,884. In the light of the above facts it could not be said that there was no valid claim of the assessee on the State Government of Madhya Pradesh on account of supply of liquor during the asst. yrs. 1987-88 to 1991-92 and pending the settlement of the claim, the Madhya Pradesh Government was the debtor of the assessee. Thus, the loss had occurred to the assessee in the assessment year under appeal in respect of its business by not recovering the trade debt due to it from the State Government of Madhya Pradesh for the supplies made in the earlier assessment years but it could not be said that the loss had occurred to the assessee in the assessment year under appeal during the course of its business. We are of the considered view that the plea of the assessee that it was a unilateral claim of the assessee and there was no actionable claim of the assessee on the Madhya Pradesh Government, we do not find any force in the said submission of the assessee for the reasons that if there had been no valid claim, no direction could be issued by the Madhya Pradesh High Court to the Government of Madhya Pradesh to settle the claim of the assessee within a specified period of one month and admitting the claim of the assessee for a sum of Rs. 16,43,436.94 against the claim of the assessee of Rs. 1,15,05,321.10. Once the assessee had posted entries in the P&L a/c, and also shown as credit sales, the outstanding at the close of the accounting year is to be carried forward in next accounting year only as trade debtor. Therefore, the balance amount of Rs. 98,61,884.16 is prima facie a trade debt which was rejected by the State Government in the assessment year under appeal. Since the assessee had not written off the amount in the assessment year under appeal as is required under Section 36(2) of the Act, we are of the considered view that the AO is justified not to allow the said claim as bad under Section 36(1)(vii) of the Act as the amount should be written off as irrevocable in the accounts of the assessee for that accounting year in which claim for deduction is made for the first time.
2.13 We agree with the learned authorised representative of the assessee that the change of debtor does not change the nature and character of the debt as held by the Calcutta High Court in the case of CIT v. Howrah Flour Mills Ltd (1999) 236 ITR 156 (Cal). However, the case of Sutlej Cotton Mills Ltd. (supra) relied on by the learned authorised representative of the assessee is not relevant to the case before us as in that case the issue was whether loss occurred to the assessee on account of devaluation of rupee by Pakistan was a business loss or a capital loss. Similarly, the case of Godhra Electricity Co. Ltd. (supra) as also the case of Shooiji Vallabhdas & Co. (supra) are also not relevant to the issue before us as in that cases the question was whether there was accrual of any income which could be taxed though in book keeping an entry was made about a hypothetical income which did not materialise in the relevant assessment year. The said decisions had been relevant if the Department had brought the said claim of the assessee raised by supplementary bills for taxation in the asst. yrs. 1987-88 to 1991-92 and the assessee would have disputed the taxability thereof in those assessment years that mere accounting entry could not be income, unless the income had actually resulted to the assessee. Since the Department has not brought any income to tax in the assessment year under appeal, we are of the considered view that the above cases (supra) relied on are not relevant to the issue before us. On the other hand, the claim of the assessee is to allow it business loss in the assessment year under appeal as it was taxed in earlier years. We are of the view that the assessee could claim the deduction of the unrealised amount from Government of Madhya Pradesh of Rs. 98,61,884 as a bad debt only under Section 36(1)(vii) of the IT Act provided the conditions as are laid down under Section 36(2) of the Act are fulfilled. Since the assessee had admittedly written off the amount as bad debt in the assessment year under appeal, we agree with the order of the AO to disallow the claim of deduction of the assessee of Rs. 98,61,884 in the asst. yr. 1996-97. Thus, the order of the learned CIT(A) is reversed and ground No. 1 of the appeal is allowed in favour of the Department.
3. The ground No. 2 of the appeal is as under :
“That on the facts and in the circumstances of the case, the CIT(A) was not justified in deleting Rs. 7,18,512 being disallowance made in respect of foreign travel.”
3.1 The assessee debited an amount of Rs. 7,18,511.75 on account of foreign travel in its account. The AO has stated that the assessee furnished some evidence for purchase of foreign currency but no documents/evidence were furnished for proving the purpose of such foreign tour. Therefore, the AO disallowed the claim of foreign travel expenses and added the same to the total income of the assessee. The assessee filed appeal before the first appellate authority.
3.2 The assessee contended before the learned CIT(A) that the expenses were incurred by the directors of the assessee-company for promoting assessee’s products in the overseas market. The learned CIT(A) considered the submission of the assessee and has stated that it is not in dispute that the assessee was engaged in export business. The learned CIT(A) further observed that it is a common phenomenon that not all overseas trips culminate in securing orders immediately. The export of the assessee in the following financial year witnessed a twelve-fold increase which stood at Rs. 12,36,62,547 against Rs. 98,91,000 in 1995-96. In view of the above, the learned CIT(A) allowed the claim of the assessee. Hence, the Department is in appeal before the Tribunal.
3.3 During the course of hearing of the appeal, the learned Departmental Representative justified the order of the AO. On the other hand, the learned authorised representative of the assessee submitted that the assessee incurred the aforesaid expenses of Rs. 7,18,512 by way of expenditure on foreign travel of two of its directors viz., Mr. Anand Kumar Kedia and Mr. Prasann Kumar Kedia wholly and exclusively for the purpose of exploring the possibilities of the overseas exports of the product being manufactured by the assessee-company. The learned authorised representative of the assessee submitted that the two directors visited Europe, Singapore, Australia, New Zealand, etc., and the break-up of the expenses incurred is given at p. 20 of the paper book. The learned authorised representative of the assessee submitted that the assessee-company secured substantial export orders and the details of the exports made to European and other countries including Singapore is given at p. 20 of the paper book, which is as under :
Financial year
Name of the country
Value of exports made (Rs.)
1995-96
Russia
84,38,540
Amman (UAE)
14,52,460
98,91,000
1996-97
Germany
11,99,49,768
Amman (UAE)
16,99,427
Taiwan
9,70,307
Slovaia
4,20,080
Dubai
..6,22,965
12,36,62,547
1997-98
Singapore
3,06,023
3,06,023
3.4 We have carefully considered the submissions of the learned representatives of the parties and the orders of the authorities below. We have also considered the details as are given in respect of the exports made by the assessee-company to European and other countries, the details of which are mentioned hereinabove as well. The Department has not disputed the above facts that the export of the business in the following financial year increased to Rs. 12,36,62,547 as against Rs. 98,91,000 in financial year 1995-96. The learned authorised representative has further submitted that the aforesaid expenses on foreign trips were incurred by the assessee exclusively for business purposes and nothing has been brought by the Department to controvert the above submission of the assessee. In view of the above, we do not find any reason to interfere with the order of the learned CIT(A). Accordingly, the ground No. 2 of the appeal is rejected and the order of the learned CIT(A) is confirmed.
4. In the result, the appeal filed by the Department is allowed in part.
Pramod Kumar, A.M.
1. I have carefully gone through the draft order authored by my learned colleague and I find myself in respectful disagreement with him so far as his conclusion on Revenue’s first ground of appeal is concerned. I have also discussed the matter with him at considerable length but neither the learned Brother is yielding to my point of view nor I am able to persuade myself to agree with this part of this draft order. Accordingly, to come out of this cul de sac, and with the leave and consent of my learned Brother, I proceed to write this note of dissent to express my views on the matter.
2. Let me, at the outset, clarify that the controversy in the first ground of appeal is only with respect to the assessment year in which the loss of Rs. 98,61,884 should be allowed as a deduction. While assessee contends that the deduction should be allowed in the asst. yr. 1996-97 i.e., the assessment year relating to previous year in which the loss crystallised, Revenue’s contention is that the loss can be allowed as a deduction only in the asst. yr. 1998-99 i.e., the assessment year relating to the previous year in which the loss was written off in the books of account. In case this loss can only be allowed as a bad debt under Section 36(1)(vii), as is the Revenue’s case, the deduction will be admissible in the asst. yr. 1998-99 and, in case the loss is to be treated as business loss deductible under Section 28 of the Act, as is the assessee’s case, the deduction is admissible for the asst. yr, 1996-97.
3. There is admittedly no dispute, however, regarding deductibility per se of the aforesaid amount of Rs. 98,61,884 in the computation of business income of the assessee.
4. I may first of all reproduce certain extracts from the judgment dt. 10th Jan., 1995, passed by the Hon’ble Madhya Pradesh High Court (Indore Bench) in the case of The Associated Alcohols & Breweries Ltd. v. State of M.P. and Ors. (WP No. 2283 of 1993) a copy of which is placed at pp. 31-32 of the paper book. Hon’ble High Court has observed that :
“The material facts are not in dispute. Prior to 1984, Government invited tenders for supply of country liquor. Rates used to be finalised on the fulcrum of competitive tenders. This system lasted till 31st March, 1986. During the term between 1981 and 1986, policy was formulated to do away with the process of inviting tenders and to constitute experts committee to cull out relevant data for making recommendations to the Government for price fixation for supply rate of country liquor. The apex Court (AIR 1987 SC 251) permitted continuance of policy for five years. Pending recommendation and eventual fixation, ad hoc rates for continuance of supply were fixed for the period from 1st April, 1987 to 31st March, 1991, subject to adjustment later on price fixation. The petitioners maintain that on correct fixation, they are entitled to receive substantial amount, as quantified above, from the respondents. Tortured and troubled by inordinate delay and plunged into the state of economic crises, the petitioners have filed this petition.”
After taking into account reply filed by the respondent and after hearing both the parties, Hon’ble High Court further observed that ;
“The counsel for the petitioners urged that the delay is simply intolerable and mandate contained in Article 14 seems to have been put in the cold storage. The counsel for the respondent submitted that the experts committee has put-in the report and recommendations and the decision of price fixation for the relevant period is expected soon. The matter is said to have reached the cabinet subcommittee. This was stated, as recorded in the proceedings, as back as on 22nd Sept., 1994. It seems the meaning of the word ‘soon’ has been buried under deep debris and the matter has ceased to be mobile, The question punching in the face is how long a person or unit is required to wait. Respondent No. 1 is not expected to be so slow and in the process erode the faith and become teasing illusion and promise of unreality…….. Hibernation, where speed is needed, brings no credit. Reasonableness and fairness are the insignia which should be desired and deserved.”
It was in this backdrop that Hon’ble Madhya Pradesh High Court disposed of the petition with directions as under :
(a) The respondents shall take prompt steps to fix the price of country liquor for the period in question in conformity with the policy within a period of one month from today and communicate the decision to the petitioners.
(b) If the petitioners are found entitled to receive the amount as difference between the price fixed and ad hoc rates, the respondent shall also….. .take steps to make the payment to the petitioners within a period of one month from the date of the price fixation.
5. In this regard, it is also relevant to reproduce certain extracts from the judgment of Hon’ble Supreme Court in the case of State of M.P. v. Nandlal AIR 1987 SC 251, at p. 286 wherein Their Lordships have taken note of, and approved, the method of deciding the price at which the Madhya Pradesh Government purchased country liquor from distilleries. Their Lordships of Hon’ble Supreme Court observed that :
“……..The State Government also changed the mode of rate fixation. Originally, the rates for supply of liquor to the retail vendors were fixed on the basis of tenders every five years with the result that the rates accepted by the excise authorities on the basis of tenders continued to prevail for a period of five years. Now it is a fallacy to assume that the lowest rates quoted by the tenderers would necessarily be the cheapest and the best. If the tenderers form a syndicate they can push up the rates for supply of liquor and in fact it is obvious from the rates which were accepted by the excise authorities for the five year period, 1st April, 1981 to 31st March, 1986, that these are not the most reasonable rates.”
Their Lordships then further observed….
“…….The cabinet sub committee, therefore, felt that the system of rate fixation prevalent in West Bengal was the most beneficial to the State Government because it provided for the rate fixation by an expert committee which would take into account the escalation or de-escalation in the price of raw materials, varying labour cost and fluctuating market condition every year and arrive at a reasonable rate, fair both to the licensee and to the State Government.”
6. It was in this background that the experts committee appointed by the State Government was to fix the price of liquor and consider assessee’s claim for enhancement in rates over and above the ad hoc rates on which supplies were being made by the assessee. In the present case, the State Government had agreed to an ad hoc rate, subject to such adjustment as the rates fixed by the experts committee would have resulted in, but, in anticipation of experts committee’s approval to certain degree of enhancement in rates at which supplies were to be made, the assessee raised ‘supplementary bills’ and booked the amounts of such enhanced claimed as sales revenue of the assessee. As evident from observations of Hon’ble M.P. High Court, the assessee, being aggrieved of inordinate delay in appointment of experts committee and fixation of, what the assessee perceived as, correct rests which would have covered the enhanced claim of the assessee, the matter regarding price fixation was carried in dispute before the Hon’ble M.P. High Court. Pursuant to the above directions of the Hon’ble High Court, Government of Madhya Pradesh fixed the rates at which the claim for enhancement of liquor supply rests, which was admittedly unilaterally made by the assessee, was to be settled. As against assessee’s unilateral claim of Rs. 1,15,05,321, the enhancement permitted by the State Government resulted in acceptance of this claim only to the extent of Rs. 16,43,436.94. The assessee’s remaining claim of Rs. 98,61,884, on account of demand for increase in rates, was thus unequivocally repudiated by the Madhya Pradesh Government.
7. The controversy in appeal before us pertains to the treatment of this repudiation of claim by the Madhya Pradesh Government. In more specific terms, the issue before us is whether or not this repudiation of claim for enhancement amounts to a bad debt in the hands of the assessee. If it does constitute ‘bad debt’, as is the Revenue’s case approved by the learned Brother, the amount in question is certainly not allowable in the present assessment year since the same has not been written off in the previous year relevant to this assessment year. Except for this objection regarding compliance with the provisions of Section 36(1)(vii), Revenue has no grievance against allowability per se of the deduction of Rs. 98,61,884 which was duly accounted for as income of the earlier years and which, beyond dispute, was not an income at all.
8. Brother JM, on these facts and after taking into account judgements of Hon’ble Punjab High Court in CIT v. Basumal Jagat Narain (1960) 38 ITR 447 (Puj) and of Hon’ble Supreme Court in the case of A.V. Thomas & Co. Ltd. v. CIT (1963) 48 ITR 67 (SC) has observed that “therefore, a debt in such a case is an outstanding which, if recovered, would have swelled profits” and went on to add that “it means something which is related to business or results from it”. It has also been observed that “it could not be said that there was no valid claim of the assessee on the State Government of Madhya Pradesh on account of supply of liquor during the asst. yrs. 1987-88 to 1991-92 and, pending settlement of claim by the Madhya Pradesh Government, it (Government of M.P.) was debtor of the assessee” and that “the plea of the assessee that it was a unilateral claim of the assessee and that there was no actionable claim of the assessee on the Madhya Pradesh Government, we do not find any force in the submission of the assessee for the reason that if there had been no valid claim, no directions could have been issued by the Madhya Pradesh High Court to the Government of Madhya Pradesh to settle the claim of the assessee within a specified period of one month, and, therefore, admitting the claim of the assessee for a sum of Rs. 16,43,436.94 against the claim of the assessee of Rs. 1,15,05,321.10”. Learned Brother has then concluded as follows :
“Once the assessee had posted entries in P&L a/c, and also shown as credit sales, the outstanding at the close of the accounting year is to be carried forward in next accounting year only as a trade debtor. Therefore, the balance amount of Rs. 98,61,884.16 is prima facie a trade debt which was rejected by the State Government in the assessment year under appeal. Since the assessee had not written off the amount in the assessment year under appeal as is required under Section 36(2) of the Act, we are of the considered view that the AO is justified not to allow the said claim as bad debt under Section 36(1)(vii) of the Act, as the amount should be written off as irrevocable in the accounts of that accounting year in which claim for deduction is made for the first time.”
Unable to subscribe to the findings of, and conclusions arrived at, by my learned Brother, I proceed to humbly place on record my views on the matter.
9. As observed by Hon’ble High Court the uncontroverted stand of the assessee was that “on correct fixation (of rates), they are entitled to receive substantial amount, as quantified above, from the respondents”. It implies that at that point of time, the assessee did not have any exiting right or entitlement to receive the money over and above the billing as per ad hoc rates. It was in this background that Hon’ble High Court was pleased to, inter alia, direct the State Government that the State Government shall “take prompt steps to fix the price of country liquor for the period in question in conformity with the policy within a period of one month from today (the date of the judgment), and communicate the decision to the petitioners.” Hon’ble High Court further added that “If (as a result of such price fixation by the State Government) the petitioners are found entitled to receive the amount as difference between the price fixed and ad hoc rates, the respondent shall also……….take steps to make the payment to the petitioners within a period of one month from the date of the price fixation.” These observations by the Hon’ble High Court do not leave any ambiguity over the position that, as at that point of time, the assessee did not have any existing right to receive any portion of the claim, of the assessee, as reflected by the supplementary bills on account of claim of enhancement in rates. If at all the assessee had any right, the right was only to seek fixation of rates by the State Government and in the light of recommendations of the experts committee, and it was this right which he sought to enforce through the writ petition.
10. At this stage, it is also necessary to appreciate that the sales revenue booked by the assessee had two components-one, reflected by the ad hoc prices about which there was no dispute; and-two-reflected by the supplementary bills which, as claimed by the assessee, was on account of the enhancement in prices, over and above the ad hoc prices, which the State Government was to permit on fixation of correct prices. It is the second component of sales billing which is in dispute before the Tribunal, and it was this component on account of which the assessee carried the matter before the Hon’ble M.P. High Court, in writ petition, but then, as noted above, the assessee’s case was not for realisation of dues on account of second component of sales billing, but rather a prayer for expediting process of price fixation which, in assessee’s perception, would have resulted in crystallization of State Government’s liability, on account of this component, to the assessee. In this situation, to my mind, it could not be said that the amount of Rs. 1,15,05,321.10, on account of supplementary bills, reflected ‘debt’ or liability payable by the State Government’ to the assessee. As far as the State Government was concerned, this amount was at best a ‘contingent liability’ or ‘claim not acknowledged as debt’. As far as assessee was concerned, this amount represented at best an anticipated income and then as is the very basic accounting principle that “in view of the uncertainty attached to future events, profits are not anticipated but recognized only when realized though not necessarily in cash.” (Accounting Standard 1, para. 17(a) Prudence), or an anticipated accretion to debtors which did not accrue either in law or in fact.
11. Sharing my Brother’s feeling that in order to decide the above issue, it is necessary to consider what a debt is and picking up from where he left, while reproducing extracts from Hon’ble Punjab High Court’s judgement in Basumal Jagat Narain’s case (supra), I may mention that in the same paragraph from which Brother has extracted the observations in his draft, Their Lordships had also observed,
“For the purpose of taxation, a debt is a legally enforceable obligation for payment of money……..These debts were legally recoverable. It is impossible, therefore, to hold that no valid debt was in existence. In the present case, there was an unconditional obligation on the part of the debtor to pay a certain amount of money to the assessee. The debt had an actual existence both in law and in fact.”
It is not in dispute, and as clearly emerging from the judgment of Hon’ble Madhya Pradesh High Court (referred to in para 4 above) as well, that in the present case there was no legally enforceable obligation for payment of money. The Revenue’s case fails on this elementary test. To put a question to ourselves could it be said that, on the facts of the present case, M.P. State Government’s liability to pay the impugned sum to the assessee was “in actual existence” either “in law or in fact”. The answer is emphatically in negative since, as I have discussed above, the assessee’s right at best extended to the right of getting the prices fixed and the question of sum payable by the State Government was to arise only when the prices so fixed were over and above the ad hoc rates, and if yes, only to such an extent. Therefore, in my considered view, Revenue derives no help from Basumal’s case, particularly, as to apply the test applied by Their Lordships, it did not have any actual existence either in law or in fact. The existence in law could have been if the assessee had a right to sue for “recovery” of the impugned sum, and the existence could have been in fact if the assessee had a said sum accepted to be a debt by the State Government. In my view, therefore, Revenue’s reliance on Basumal’s case (supra) is misplaced.
12. The Revenue’s plea, which has found favour in Brother’s draft order, is that the amount in question represented “a trade debt which was rejected by the State Government in the assessment year under appeal” but then it is difficult to comprehend as to how can a debt be ‘rejected’, though, of course, a claim can be rejected or, to put in more appropriate words, repudiated. It is also an admitted position that in the present case, the amount of billing over and above the ad hoc rates, termed as ‘supplementary bills’, was only an assessee’s claim on the State Government which was, pursuant to the directions of the Hon’ble M.P. High Court, examined by the experts committee and partially accepted by the State Government in the light of the recommendations of the experts committee. In this situation, the portion of claim which was rejected by the M.P. State Government cannot be said to be in the nature of ‘rejection of debt’, and, in any event, the expression ‘trade debt which was rejected by the State Government (i.e., the debtor)’ is inherently contradictory because only claims can be rejected not the debts.
13. Let me now turn to Revenue’s reliance on A.V. Thomas & Co.’s case (supra), which has been approved by my learned Brother.
14. The assessee, in this case, had advanced a sum of Rs. 6,00,000 for purchase of shares in a newly promoted company by the name of Rodier Textiles Mills Ltd. (in formation) and another sum of Rs. 5,072 was shown as advance to the promoters of Rodier Textiles Ltd. This amount was advanced to one Southern Agencies Ltd., who had taken up promotion of this company, but the whole project failed and the assessee only received a part refund of Rs. 2,00,000. The balance amount of Rs. 4,05,072 had to be written off. It was in respect of this write off of Rs. 4,05,072 that the assessee claimed a deduction as bad debt, or, in the alternative, as business expenditure. On these facts, the conclusions arrived at by the Hon’ble Supreme Court have been summed up as follows in the ITR headnotes (p. 68 of Vol. 48) :
Held, (i) That the assessee-company, in making large payments, intended to acquire a capital asset for itself. In any event, the amounts were spent in 1948 and not in the year ending 31st Dec, 1951. They could not, therefore, be allowed as business expenditure……
(ii) That the assessee-company was neither a banker nor a money-lender, the advances paid by the assessee-company to the private company to purchase the shares could not be said to be incidental to the trading activities of the assessee. A debt, for the purpose of Section 10(2)(xi), was something more than an advance which was related^ to business or resulted from it. It was an outstanding which, if recovered, could have swelled the profits and not merely money handed over to someone for purchasing a thing which that person failed to return even though no purchases were made. The amount due from the private company could not, therefore, be described as a debt for the purpose of Section 10(2)(xi) and the assessee was not entitled to claim allowance of the balance of the advances as bad debt written off under Section 10(2)(xi).
15. Justice Rowlatt’s observations, which have been referred to by Brother colleague in para 2.11 of his draft, have been referred to in the above judgment of Hon’ble Supreme Court and elaborated by following observation immediately after quoting the extracts :
“A debt in such cases is an outstanding which, if recovered, would have swelled profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the section, debt means something more than a mere advance. It means something related to business or results from it, To be claimable as bad or doubtful debt, it must be shown as a proper debt”.
16. Hon’ble Supreme Court itself, in the case of CIT v. Abdullabhai Abdulkadar (1961) 41 ITR 545 (SC) referred to, with approval, in the above case, explain the context of Justice Rowlatt’s observations, by observing as follows :
“Reference may also be made to an English decision in Curtis v. J & G Oilfiled Ltd. (1925) 9 Tax Cases 319. In that case manager director of a company of wine and spirit merchants embezzled monies of the company and that was claimed as a bad debt and it was held that it was not a trading loss and was, therefore, not an admissible deduction. In that case the contention of the Crown (the Revenue) was that the sum was not an ordinary trading loss and, therefore, could not be a bad debt and that the loss was not connected with and did not arise out of the trade.”
It is, therefore, not in dispute that the question before Justice Rowlat was, strictly speaking, not on the definition of debt but rather on the nature of debt, which on becoming ‘bad’, would qualify for deduction as ‘bad debt’. In more specific terms, the issue for consideration was whether the debt was incurred in the course of trading or not, because only such debts, which accrue in the course of trading, were to be covered by bad debts. It would thus seem that the concern of Justice Rowlatt was not the definition of debt per se but the definition of the kind of debts which will be covered by the scope of bad debts eligible for deduction.
17. I may also refer to the following observations of Hon’ble Supreme Court in the case of Madhav Rao Jiyaji Rao Bahadur v. Union of India AIR 1971 SC 530 :
“It is not proper to regard a word, a clause or a sentence occurring in a judgment of Supreme Court, divorced from, its context, as containing a full exposition of law on a question when the question did not even fall to be answered in that judgment.”
18. In a later judgment of Hon’ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC), the same principle was set out in little more elaborate manner in the words of Justice Dr. A.S. Anand (as he then was) ;
“It is neither desirable nor permissible to pick up a word or sentence from the context of question under consideration and treat it to be complete “law” declared by this Court. The judgment must be read as a whole and the observations from the judgment should be considered in the light of the questions which were before the Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision in a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not pick out words of sentences from the judgment, divorced from the context of questions under consideration by this Court, to support their reasoning.”
In the cases relied upon by the Revenue, i.e., in the case of A V. Thomas & Co. (supra) or in the case of Besumal Jagat Narain (supra), the question that came up for consideration was not the definition of a debt per se but the question was on the kind of debts which can be covered by the bad debts allowable as deduction, whereas in the present case the connotation of ‘debt’ per se is the basic issue. The observations were made, as elaborated above, in different contexts. I am, therefore, not inclined to approve Revenue’s reliance on these judgments, so far as the issue in this appeal is concerned. In any event, none of the observations, support the case of the Revenue either.
19. It is not in dispute that pursuant to the direction of the Hon’ble High Court, the assessee’s claim was settled vide order dt. 19th April, 1995, passed by the Excise Commissioner and a copy of which is placed at pp. 33-34 of the paper book. It was as a result of this exercise, which was admittedly completed in the relevant previous year, that assessee’s unilateral claim to the extent of Rs. 98,61,884 was formally repudiated. Since this amount was already included in revenues of earlier years and duly offered for taxation, the assessee was quite justified in reversing those income entries and claiming deduction in respect of income offered for taxation in earlier years which never in fact accrued. In any event, there is no dispute about the loss having actually occurred but the sole objection to allowability of the same is the requirement of Section 36(1)(vii) r/w Section 36(2). In this regard, I may quote following observations of the AO appearing at p. 3 of the assessment order :
“The assessee has also filed another written application dt. 17th March, 1999, on its own claiming that the so-called loss is a loss incidental to the business. In this regard, the assessee has stated that its claim to M.P. Government for price escalation in earlier years has been rejected in the previous year by the M.P. Government, through its letter dt. 19th April, 1995, and in pursuance of judgment and order dt. 19th Jan., 1995, of M.P. High Court. The loss in question should therefore, be treated as business loss under Section 28(i) r/w Section 29 of the IT Act and in support of such contention, cited some Court decisions.
Section 29 of the IT Act provides that income from business, referred to in Section 28 shall be computed in accordance with the provisions of Sections 30 to 43D. In the present case, the loss in question is an irrevocable debt which is to be allowed under Section 36(1)(vii) provided the conditions laid down in Section 36(2) are satisfied. As there is specific provision in the statute for allowing this kind of loss, compliance with that provision is a must. Since the assessee has not fulfilled the conditions specified in Section 36(2), I am not inclined to allow the sum of Rs. 98,61,884 as deduction from income of the assessee.”
On these facts, it is not necessary for me to comment upon merits of allowability of deduction but suffice to mention that, in my considered view and for the detailed reasons set out above, Section 36(1)(vii) and Section 36(2) have no application in the matter, Accordingly, Revenue’s objection, in my considered view, is devoid of any substance.
20. For the reasons as aforesaid, I am in respectful disagreement with the views expressed by learned Brother and I am of the view that this ground of appeal should also be dismissed.
21. Let the matter be placed before the learned JM, who is the senior member on this Bench, for initiation of further proceedings under Section 255(4) of the IT Act.
REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961
THE BENCH
1. Since there is a difference of opinion between the Members of the Bench, we
state following point of difference and refer the same to the Hon’ble President
of the Tribunal in accordance with the provisions of Sub-section (4) of Section 255 of the IT
Act, 1961. The point of difference is as under :
“Whether, on the facts and in the circumstances of the case, the assessee’s claim of deduction of Rs. 98,61,884 constitutes a ‘bad debt’ or not and whether, therefore, the claim of deduction can be declined on the ground that conditions laid down under Section 36(1)(vii) r/w Section 36(2) were not fulfilled in the asst. yr. 1996-97 (i.e., the year under appeal) ?”
G. Chowdhury, J.M. (As Third Member)
1. The appeal of the Revenue for the asst. yr. 1996-97 was heard by “A” Bench of the Tribunal. As a result of difference of opinion amongst the Members, the Hon’ble President has nominated me as Third Member under Section 255(4) of the IT Act, 1961, in respect of the following point of difference :
“Whether, on the facts and in the circumstances of the case, the assessee’s claim of deduction of Rs. 98,61,884 constitutes a ‘bad debt’ or not and whether, therefore, the claim of deduction can be declined on the ground that conditions laid down under Section 36(1)(vii) r/w Section 36(2) were not fulfilled in the asst. yr. 1996-97 (i.e., the year under appeal) ?”
2. Relevant facts relating to this issue have been described in the order proposed by the learned JM. However, for the sake of convenience in giving my views, I narrate those facts in brief here in this order. The assessee-company succeeded to the business of M/s Associated Distilleries, in which it was one of the partners, as a going concern w.e.f. 1st April, 1990, This assessee-company engaged in the business of manufacture and sale of country liquor. The erstwhile company and the assessee-company supplied country liquor to M.P. Government during the period 23rd Oct., 1985 to 31st March, 1991, corresponding to asst. yrs. 1987-88 to 1991-92 and raised bill for Rs. 5,02,82,790. It filed its original return of income for the year under reference on 29th Nov., 1996, enclosing therewith audited accounts, tax audit report, etc. declaring income of Rs. 75,71,030, The assessee thereafter on 20th May, 1997, filed a revised return raising the total income to Rs. 1,31,67,720. Subsequently, the assessee made claims for price escalation for the goods supplied between asst. yrs. 1987-88 to 1991-92 and raised supplementary bills for Rs. 1,15,05,321 on the Government of M.P. The demand made was subject to price fixation by the State Government. The M.P. Government, however, did not accept the claim for price escalation made by the assessee unilaterally through raising of supplementary bills. The assessee-company filed a writ petition before the Madhya Pradesh High Court at Indore and the High Court vide order dt. 10th Jan., 1995, directed the M.P. Government to fix the price of country liquor in conformity with the policy and on the basis of which the M.P. Government ultimately vide its letter dt. 19th April, 1995, determined the price. As a consequence of this, the assessee company received a sum of Rs. 16,43,436.94 and the balance claim for price escalation to the extent of Rs. 98,61,884 was not accepted by the M.P. Government. In the mean time, the assessee had already taken extra credit aggregating to Rs. 98,61,884 in the books of account during the asst. yrs. 1987-88, 1988-89, 1990-91 and 1991-92. The irrecoverable sum of Rs. 98,61,884 was written off by the appellant in its P&L a/c drawn for the year ended 31st March, 1998, corresponding to the asst. yr, 1998-99. Subsequently, the assessee realized that since by order of the State Government excess claim of the assessee of Rs. 98,61,884 had been rejected in April, 1995, therefore, it claimed the said sum as business loss under Section 28(i) r/w Section 29 of the Act by filing a second revised return on 11th Sept., 1997, for the year under appeal reducing the total income to Rs. 42,75,970, inasmuch as, according to the assessee, the deduction should be allowed in the asst. yr. 1996-97, i.e., the assessment year relating to previous year in which the loss crystallised.
3. The AO while framing the assessment under Section 143(3) for the year under appeal did not allow the claim of loss of Rs. 98,61,884 as deduction from income of the assessee. According to him the assessee had not written off the said amount as bad debts in the accounts of the previous year relevant to the asst. yr. 1996-97, but written it off in the subsequent year, i.e., asst. yr. 1998-99. According to the AO, this loss can only be allowed as a bad debt under Section 36(1)(vii) of the Act provided conditions laid down in Section 36(2) are satisfied.
4. The assessee went in appeal before the learned CIT(A). The CIT(A) held that the excess credit of Rs. 98,61,884 could not be classified as debt because a bad debt presupposes the existence of a debt. According to him, the M.P. Government had not acknowledged at any point of time the additional claim raised of Rs. 1,15,05,321 for price escalation as debt due to the assessee and, therefore, the same could never be treated as ‘debt’. The CIT(A) held that a debt must be an admitted debt if it is to qualify for deduction as bad debt. The unilateral claim of the assessee which was never acknowledged by the M.P. Government cannot be treated as debt. Hence, provision of Section 36(1)(vii) cannot be applicable. He, accordingly, allowed the claim of the assessee as business loss. The CIT(A) after elaborately discussing the issue in his order decided the matter in favour of the assessee and the following portion of his finding is worth quoting :
“In the instant case, the claim for price escalation unilaterally made by the appellant did not result in any contractual debt between the State Government and the appellant. No obligation could be cast on the State Government by reason of such unilateral act. The State Government never acknowledged the value of escalation bills raised by the appellant as debt, Therefore, by no stretch of argument can the amount in question be regarded as debt. And if there is no debt the question of its deductibility under Section 36(1)(vii) does not arise. The loss arose out of the carrying on of the business of the appellant and resulted in connection with transactions between the supplier (the appellant) and the buyer (the State Government). The fixation of liquor prices in respect of liquor supplied by the appellant to the State Government during the period 23rd Oct., 1985 to 31st March 1991, took place in April, 1995, when the Government’s order dt. 19th April, 1995, was issued, In view of the new rates intimated by the State Government through its said order, the appellant was able to realize only an aggregate sum of Rs. 16,43,437 as against its claim of Rs. 1,15,05,321. Thus, the amount of Rs. 98,61,884 became irrecoverable during the previous year under appeal and is, therefore, allowable as trading/business loss in computing its total income for the asst. yr. 1996-97 under Section 28 r/w Section 29 of the Act.”
5. Being aggrieved, the Revenue came in appeal before the Tribunal. The learned JM proposed an order by virtue of which he reversed the order of the CIT(A) by holding that since the assessee had admittedly not written off the amount as bad debt in the assessment year under appeal, the AO was justified to disallow the claim of deduction of the assessee of Rs. 98,61,884 in the asst. yr. 1996-97. According to him, it was a trade debt, hence allowable under Section 36(1)(vii) of the Act. However, since it was not written off under Section 36(2) during the year, therefore, the AO rightly disallowed the same. Whereas the learned AM found no justification for the AO having disallowed the claim of deduction made by the assessee of Rs. 98,61,884 in the assessment year under appeal because, according to him, Section 36(1)(vii) and Section 36(2) of the Act have no application in the matter and it is allowable as business loss. Thus the difference of opinion.
6. Therefore, the main point in dispute is whether the claim of the assessee is to be allowed as a business loss or not. The AO and the learned JM were of the view that the claim of the assessee is to be allowed as bad debt under Section 36(1)(vii) of the Act. However, it was not written off during this year and hence it cannot be allowed in this year. Whereas the learned AM held that it is allowable as a business loss and Section 36(1)(vii) has no application. The allowability of the claim of the assessee is not in dispute. Admittedly, if the claim of the assessee is treated as dad debt, the same cannot be allowed in this year, because it has not been written off during this assessment year. However, if it is treated as a business loss, in that event there is no bar as such in allowing the same during this assessment year.
7. I have heard the learned counsel who appeared on behalf of the assessee and also the learned Departmental Representative who appeared on behalf of the Revenue. I have also perused the paper book containing the written submission filed by the learned counsel. On the above-mentioned facts I find that the assessee had supplied country liquor to the Government of M.P. and charged Rs. 5,02,82,790. Subsequently, the assessee made claim of price escalation and for that purpose it raised a supplementary bill on the Government of M.P.. The supplementary claim was made subject to the price fixation by the State Government. The State Government never accepted the claim of the assessee. Ultimately, the assessee filed a writ application before the Hon’ble High Court and the Court directed the Government to fix the price of country liquor without any further delay. Pursuant to the said direction, the State Government repudiated the claim of the assessee in April, 1995.The assessee at the time of assessment made an alternative claim that the amount of loss if not allowable under Section 36(1)(vii) of the Act may be allowed as a business loss. The AO in his order held that it is a bad debt which may be allowed under Section 36(1)(vii) provided conditions laid down in Section 36(2) are satisfied. The learned JM accepted this finding of the AO. On the other hand, the learned CIT(A) held that Section 36(1)(vii) will be applicable only if it is a debt. In this case, the State Government had not acknowledged the supplementary bill/claim raised by the assessee at any point of time. He placed reliance on the decision of Madras High Court in the case of CIT v. Varguard Insurance Co. Ltd. (1974) 97 ITR 546 (Mad) in support of the proposition that a debt must be an admitted debt if it is to qualify for deduction as dad debt. Further reliance was placed on the decision of Punjab & Haryana High Court in the case of CIT v. Basumal Jagat Narain (1960) 38 ITR 447 (P&H) at p. 453, where it has been held that a proper debt means one is bound to pay another a pecuniary due, a liquidated demand upon which a judgment for a sum of money or directing the payment or money can be recovered in an action. It is not only the obligation of the debtor to pay but also the right of creditor to receive and enforce payment. On the basis of these decisions, it was held that in this case the clam of price escalation was made unilaterally by the assessee which was not accepted by the State Government at any point of time. Therefore, it is not a debt. The loss, arose out of the carrying on the business of the assessee, resulted in connection with the transaction between the supplier and the buyer, is a business loss. The supplementary claim of the assessee was repudiated by the State Government by letter dt, 19th April, 1994. Hence, such business loss is allowable during present assessment year under Section 28 r/w Section 29 of the Act. This view has been supported by the learned AM in his order.
8. The learned JM while dealing with the issue as to what a debt is, placed reliance on the decision of the Punjab & Haryana High Court in the case of CIT v. Basumal Jagat Narain (supra) and the decision of the Supreme Court in the case of A.V. Thomas & Co. Ltd. (1963) 48 ITR 67 (SC) and came to the finding that a debt in such case is an outstanding which, if recovered, would have swelled the profits. It means something which is related to business or results from it. It was held by the learned JM that the claim of the assessee by raising supplementary bill was a trading receipt in the relevant assessment years and on the closing of the relevant accounting year, the claim of the assessee was trade debtors. It was further held that the assessee filed a writ application before the M.P, Government and pursuant to the judgment of the High Court, the State Government settled the claim of the assessee by letter dt. 19th April, 1995, and thus, rejecting the claim of the balance amount to the extent of Rs. 98,61,884. Therefore, it could not be said that there was no valid claim of the assessee on the State Government. Thus, the loss had occurred to the assessee in the assessment year under appeal in respect of its business by not recovering the trade debt due to it from the State Government. The plea of the assessee that it was a unilateral claim and not actionable claim was not accepted by the learned JM on the ground that if there had been no valid claim, no direction could be issued by the M.P. High Court to the Government of M.P, to settle the claim of the assessee within a specified period, Therefore, the claim of the assessee was a trade debt which was rejected by the State Government and it is to be allowed as bad debt under Section 36(1)(vii) of the Act.
9. On the contrary, the learned AM has observed in his order as to why the assessee moved before the Hqp’ble M.P. High Court. He reproduced extracts from the judgment passed by the Hon’ble M.P. High Court. From the portion of the judgment I find that the system for price fixation of liquor was changed from April, 1986. New process was formulated after constituting experts committee for making recommendations to the Government for price fixation for supply rate of country liquor. In this background, the Hon’ble High Court directed the State Government to fix up the price without any further delay. The reason for moving the matter before the Hon’ble High Court was that the State Government was delaying the matter of fixation of price of the country liquor. The learned AM in his order has highlighted the system of sales revenue booked by the assessee. According to the learned AM, one is reflected by the ad hoc price about which there is no dispute. The other is reflected by supplementary bills which was on account of the enhancement in prices over and above the ad hoc price which the State Government was to permit on fixation of correct price. This is the second component of sales billing which is in dispute before the Tribunal. Admittedly, the second component of enhanced bill was never accepted by the M,P. Government because there was no fixation of price. The assessee went before the Hon’ble High Court with a prayer for fixation of the price and not for realization of disputed amount, because this amount related to the supplementary bills was not even crystallised and the writ application was filed as the price was not fixed by the State Government. It is a fact that in the year 1995 the claim of the assessee was repudiated by the State Government after fixation of the price. Therefore, the extra claim of the assessee can be said to be an uncertain and contingent liability. The claim of the assessee was not acknowledged by the State Government as debt. When the amount of claim was not finalized, then the assessee cannot maintain an action for recovery of that uncertain amount, It is not a legally enforceable obligation for payment of money.
10. In para. 2.11 of his order, the learned JM has referred to the decision of Hon’ble Supreme Court in the case of A.V. Thomas & Co. Ltd. (supra) and the observations of Justice Rowlatt in Curtis v. J&G Oldfield Ltd. (1925) 9 Tax Cases 319 incorporated therein has been referred to, where it has been held that bad debt means a debt which has come in the balance sheet as a trading debt. It does not really mean any bad debt Which, when it is a good debt, would not have come into swell the profits. However, the learned AM has rightly pointed out in his proposed order that the, Hon’ble Supreme Court has held something more than what was quoted by the learned judgment member. The learned JM did not quote the entire paragraph where it has been further held by the Supreme Court as follows :
“A debt in such cases is an outstanding which, if recovered, would have swelled profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the section, debt means something more than a mere advance. It means something related to business or results from it. To be claimable as bad or doubtful debt, it must be shown as a proper debt.”
11. In the case of Kesoram Industries & Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 (SC), reliance was placed on the decision of Privy Council in the case of Wallace Bros. & Co. Ltd. v. CIT (1948) 16 ITR 240 (PC), where it has been held as follows :
“To summarize ; A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in future; debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened.”
It was held by the Privy Council in that case that a debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in present or in future. But a sum payable upon a contingency does not became a debt until the said contingency has happened. In the case of CWT v. Pierce Leslie & Co. Ltd. (1963) 48 ITR 1005 (Mad) at 1016, it has been held after following the decision of Webb v. Stenton, (1983) 11 QBD 518 to the effect that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation and that contingent liability is not a debt is now well-settled.
12. In the case of Suitej Cotton Mills v. CIT (1979) 116 ITR 1 (SC), the Hon’ble Supreme Court has held that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss.
13. In this case, the income had already been assessed to tax in asst. yrs. 1988-89 to 1991-92 and in view of the Hon’ble M.P. High Court order dt. 10th Jan., 1995, this loss occasioned to the assessee vide letter dt. 19th April, 1995 of M.P. Government. Although no entry was made in the books of account for writing off, but it is now well-settled principle of law that entry in the books of account would not affect the allowability of an expenditure or a business loss in mercantile system of account which is employed by the assessee during the relevant assessment year. Admittedly, the M.P. Government has issued the letter on 19th April, 1995, when the assessee came to know that they are not going to realize the amount of Rs. 98,61,884 and, therefore, this loss which was incidental to business and directly arose from the carrying on of the business during the relevant assessment year is a business loss and the assessee is well within its right to claim the same in computing the income for the year under Section 28 of the Act and I am fortified in this regard by the decision of Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and Sutlej Cotton Mills Ltd. v. CIT (supra).
14. Considering the aforesaid decisions, I find that in the present case the supplementary claim of the assessee was never accepted by the State Government because the price was not fixed. Therefore, it cannot be said it was an ascertained claim. Hence, the finding of the learned AM is, in my view, correct that this amount of supplementary bill was at best a contingent liability which was not acknowledge by the M.P. Government. Therefore, I find that the tests laid down by the apex Court and other Hon’ble Courts are not satisfied for treating the amount of Rs. 98,61,884 as debt. The supplementary bill raised by the assessee was a unilateral claim made by the assessee. According to the learned JM, since the Hon’ble High Court has given direction to the M.P. Government to settle the claim of the assessee within a period of one month, therefore, it was a valid and actionable claim of the assessee. This reasoning of the learned JM, in my view, is not correct because the assessee moved before the High Court, as already mentioned above, for fixation of price and until and unless the price is fixed, how the liability of the State Government can be ascertained. Therefore, it was only a contingent liability, as held by the learned AM in his order which, in my opinion, is correct. Since the amount in question cannot be treated as debt, therefore, the same cannot be allowed as bad debt under Section 36(1)(vii) of the Act. The AO in his order as observed as under :
“In the present case, the loss in question is irrecoverable debt which is to be allowed under Section 36(1)(vii) provided the conditions laid down in Section 36(2) are satisfied. As there is a specific provision in the statute for allowing this kind of loss, compliance with that provision is a must. Since the assessee had not fulfilled the conditions specified in Section 36(2), I am not inclined to allow the sum of Rs. 98,61,884 as deduction from income of the assessee.”
From the above it is clear that the AO has not disputed that the assessee had, in fact, suffered a loss. However, according to him, it should be allowed as a bad debt. It view of the above discussions, I hold that in the present circumstances of the case, the claim of the assessee which was repudiated by the State Government, cannot be treated as a debt and I, therefore, concur with the finding of the learned AM that it should be allowed as business loss during the assessment year under appeal.
15. Let the matter be placed before the regular Bench for passing the consequential order in accordance with the majority view.
B.R. Mittal, J.M.
1. On a difference of opinion between the Members constituting this Division Bench, the following question was referred to a Third Member for his opinion under Section 255(4) of the IT Act, 1961 :
“Whether, on the facts and in the circumstances of the case, the assessee’s claim of deduction of Rs. 98,61,884 constitutes a “bad debt” or not and whether, therefore, the claim of deduction can be declined on the ground that conditions laid down under Section 36(1)(vii) r/w Section 36(2) were not fulfilled in the asst. yr. 1996-97 (i.e., the year under appeal) ?”
2. The Third Member has agreed with the learned AM. In conformity with the opinion of the majority of the Members who heard the case, the appeal filed by the Department is dismissed.