Assessee partly allowed to claim irrcoverable debts

1. One M.C. Javeri was appointed secretary of the Associated Banking Corporation of India Ltd., and later appointed as a director. The bank was officially wound up and a liquidator appointed. On August 23, 1949, the liquidator submitted a return for the assessment year 1948-49 disclosing for the previous year ending June 30, 1947, business loss computed at Rs. 9,71,664 after debiting against the gross profits in the profit aud loss account an amount exceeding Rs. 12,00,000 as debts which became irrecoverable. On February 26, 1953, the liquidator informed the Income-tax Officer that in the course of investigations it was found that the bad debts of the bank including the amounts embezzled by the secretary amounted to Rs. 48,50,952.

2. The Tribunal rejected the claim for allowance of bad debts on the ground that the bad debts were not written off in the books of account of the bank as required by section 10(2)(xi) of the Income-tax Act.

3. The High Court agreed with the Tribunal that the claim for allowance of bad debts could not be sustained under section 10(2)(xi) as the debts had not been written off in the books of account of the bank.

4. On appeal, the Supreme Court held as under:There is no evidence that in the year of account Javeri, the secretary, could not have met the obligations either wholly or partially if he was called upon to refund the amounts embezzled. The embezzled amounts did not come to the knowledge of the liquidator even from the report dated April 1, 1947, of Messrs. M.N. Raiji & Co. who were appointed auditors to investigate the affairs of the bank by the Registrar of Joint Stock Companies. The embezzlements came to the knowledge of the liquidator very much later, only when the liquidator made demands from the various persons in whose names the amounts were debited in the books of account of the bank, and the demands were made upon the liquidator for preferential payment by V.R. Ranade and sons and by the Bank of Bhopal Ltd. for repayment of the amounts or in the alternative for delivery of the stock purchased by them through the bank.

The Tribunal has found in its supplementary report that the withdrawals and misapplication of funds by the secretary came to the knowledge of the liquidator after the accounting year under reference, because no one suspected that the entries posted in the books of account were false entries to cover up his dealings by the secretary. That conclusion is based on evidence and the loss must, in the circumstances of the case, be deemed to have occurred to the bank after the liquidator came to know about the embezzlements and came to know that the amounts embezzled could not be recovered. One of the prime conditions inviting the deduction of a trading loss under section 10(1) is therefore absent. We accordingly agree with the High court that the amount of Rs. 10,15,000 was not a permissible deduction under section 10(1).

The appeal will therefore be partially allowed. The answer to the first question recorded by the High Court will be discharged, and it will be recorded that the bank is entitled to claim under section 10(2)(xi) Rs. 15,00,000 as bad debts in the year of account ending June 30, 1947. On the second question, the answer will be in the negative. There will be no order as to costs in this appeal.