JUDGMENT
V.K. Singhal, J.
1. The Income-tax Appellate Tribunal, Jodhpur Bench, Jodhpur, has referred the following question of law arising out of its order dated May 30, 1985, in respect of the assessment year 1980-81 under Section 256(1) of the Income-tax Act, 1961 :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the deduction of Rs. 45,634 as claimed by the assessee as a business loss for the amount charged by the principals is not allowable as loss incidental to the business of the assessee ?”
2. The brief facts of the case are that the assessee is assessed as an individual and derives income from commission. During the course of the assessment proceedings in respect of the period ending Diwali, 1979, the Income-tax Officer found that a sum of Rs. 52,758 has been claimed as a bad debt. The assessee has filed the list. The statement of the proprietor, Shri Mohandass, was recorded and he stated that he is the sole-selling agent of Messrs. Atma Ram and Sons, Jodhpur, and has earned income by way of commission for a sum of Rs. 50,990. There was an employee by the name of Kishan Chand with Atma Ram and Sons, who used to collect the amount from the debtors of Atma Ram and Sons. A sum of Rs. 55,634 was collected by him and not paid to the firm, Messrs. Atma Ram and Sons, which was considered as an embezzlement by Shri Kishan Chand. A sum of Rs. 10,000 was recovered from him on October 20, 1979, and the balance amount of Rs. 45,634 was not recovered and, therefore, was claimed as a bad debt. The assessee, on being required to produce Kishan Chand, neither produced him nor furnished his address nor was any suit filed and even an F. I. R. for alleged embezzlement was not filed. The Income-tax Officer found that Kishan Chand was not a debtor and hence the amount cannot be allowed as a bad debt.
3. In appeal, before the Appellate Assistant Commissioner, it was contended that the assessee had to make payment of this amount to Atma Ram and Sons in accordance with the terms and conditions of the agreement, and, as such, the amount is an allowable deduction. According to the submission of the assessee before the Appellate Assistant Commissioner, the assessee was entitled to fix the percentage of commission on the sales by Atma Ram and Sons. If any debt turned into a bad debt, the assessee was responsible for it. The Appellate Assistant Commissioner found that Kishan Chand was an employee of the principal and, in the normal course of business, he was authorised to collect the amounts from the persons to whom goods were supplied and deposited the sum with the principal. Accordingly, it was held that the claim of the appellant has to be allowed as it arises in the normal course of business.
4. The Revenue challenged in appeal the order of the Appellate Assistant Commissioner, where it was contended that the assessee is the agent and gets the commission at one per cent. from Atma Ram and Sons and Kishan Chand was an employee of Atma Ram and Sons. Therefore, it was not a case of bad debt at all. Alternatively, it was submitted that it was not a case of business trading loss by the assessee but, at best, it could be a trading loss in the hands of the employer, namely, Messrs. Atma Ram and Sons and the agent has nothing to do with it. The Income-tax Appellate
Tribunal found that Kishan Chand used to collect amounts on behalf of Atma Ram and Sons. The fact that neither any F. I. R. was filed nor any suit was instituted was also taken into consideration besides the fact that the assessee failed to produce Kishan Chand before the Income-tax Officer and has even failed to furnish his address. The relationship of employer-employee was between Kishan Chand and Atma Ram and Sons and, therefore, if the amount has been collected by Kishan Chand and not paid or deposited with the principal, Atma Ram and Sons, then, it is for the employer, Atma Ram and Sons, to recover it from its employee and to claim it as a trading loss on the ground of embezzlement of amount in dispute. Since there was no relationship of employer and employee between Atma Ram and Sons and Kishan Chand, the amount could not have been considered as a trading loss on account of embezzlement by Kishan Chand. The most important finding which has been recorded by the Tribunal is that there is no material available to show that Atma Ram and Sons were demanding the money from the assessee and, as such, no question arises for making a claim on the part of the assessee as trading loss in respect of the amount in dispute. The failure of the assessee to produce Kishan Chand and to give his address was taken as a fact by which a conclusion was drawn that the assessee was avoiding the true facts, of the case to come on record. The Tribunal has also taken into consideration the fact that the moment the amount was collected by Kishan Chand who was authorised to collect the money on behalf of Atma Ram and Sons, then the liability of the assessee in accordance with the agreement stands discharged. Since Atma Ram and Sons has not asked the assessee to pay the amount in dispute, it cannot be claimed as a trading loss at all. In respect of the question as to whether the assessee was entitled to claim it as a bad debt, it was found by the Tribunal that the relationship as a creditor and debtor has not been established. The assessee was not a debtor. Atma Ram and Sons was a creditor and, as such, the amount cannot be claimed by the assessee as a bad debt. The relationship between the assessee and Kishan Chand can also not be considered as a creditor and debtor and on that ground also the amount cannot be claimed as a bad debt. The various debtors from whom the collection was made by Kishan Chand were debtors of Atma Ram and Sons. Therefore, it could have been a bad debt in the hands of Atma Ram and Sons.
5. We have considered the matter. In the present case, the sales are
being effected by Atma Ram and Sons and the assessee is the agent getting
commission at one per cent. of the sales so affected. In case the amount
could not be recovered from any purchaser of goods, the assessee is said
to be responsible for it. Under the terms of the contract, therefore, the failure on the part of the purchaser to make the payment could be a ground for claiming it as a trading loss by the assessee. The purchasers have already made the payment to an employee of the principal, namely, Atma Ram and Sons. The employee, Kishan Chand, was not authorised by the assessee to make the collection nor was he in the employment of the assessee; and, as such, if any amount has been collected by such an employee, then Messrs. Atma Ram and Sons could have claimed it as a trading loss on the ground of embezzlement by an employee in the normal course of business. In order to prove that it was a bad debt, the assessee had to establish that the relationship of creditor and debtor existed. Admittedly, in the present case, the creditor was Atma Ram and Sons, who has effected sales and the debtors were the various purchasers to whom the, sales were effected. Thus, debtors (purchasers) have already made the payment and, therefore, it cannot be considered to be a bad debt. So far as the relationship of the assessee and Kishan Chand is concerned, neither the assessee was a creditor at any point of time nor Kishan Chand was a debtor, and, as such, the first necessary element for claiming the amount as a bad debt is not existing besides the other requirements of law. The assessee was given the opportunity to produce Kishan Chand or to furnish his address. There was complete failure on the part of the assessee to produce Shri Kishan Chand and, therefore, the correct facts which could have come otherwise have not come on record. The assessee has also failed to produce any evidence by which it could have been proved that even Messrs. Atma Ram and Sons have made a claim for the said amount from the assessee, and, therefore, there was no justification at all for claiming the deduction. In these circumstances, we are of the view that the Income-tax Appellate Tribunal was right in holding that the deduction of Rs. 45,654 as claimed by the assessee as a business loss is not allowable as loss incidental to the business of the assessee.
6. Accordingly, the reference is answered in favour of the Revenue and against the assessee. Before parting we would like to observe that the Income-tax Appellate Tribunal should not have framed the question without examining the real dispute existing between the parties. In the present case, it has been mentioned in the question that the deduction of Rs. 45,634 claimed by the assessee as a business loss “for the amount charged by the principal”. The words “for the amounts charged by the principal” are contrary to the finding which has been recorded by the Tribunal in paragraph 6, where it is mentioned, “furthermore there is no material on record to show that Messrs. Atma Rani and Sons are demanding money
from the assessee in dispute”. When the finding of fact is recorded, then framing the question in a language contrary to the finding is improper. The Income-tax Appellate Tribunal, while making the reference under Section 250(1), should keep in mind the observations made above. Mentioning the language in the question referred under Section 256(1) should not be contrary to the finding recorded unless it is urged that such a finding is perverse.