1981-VIL-617-MP-DT
Equivalent Citation: [1983] 141 ITR 297, 6 TAXMANN 348
MADHYA PRADESH HIGH COURT
Date: 25.02.1981
COMMISSIONER OF INCOME-TAX, MP -I
Vs
MATHURALAL KAPOORCHAND AND CO.
BENCH
Judge(s) : C. P. SINGH., U. N. BACHAWAT
JUDGMENT
The judgment of the court was delivered by
U. N. BHACHAWAT J.-This is a reference under s. 256(1) of the I.T. Act, 1961 (for short hereinafter referred to as " the Act ") at the instance of the Department.
The material facts giving rise to the present reference are these:
The relevant assessment year is 1973-74. The assessee is a registered firm and derives income from the adhatiya business. It had claimed messing expenses at Rs. 16,460 as an allowable expense. The claim was disallowed by the ITO on two grounds (i) that the expenditure was not proved ; and
(ii) that the expenditure was in the nature of entertainment expenditure which could not be allowed in view of s. 37(2B) of the Act.
The assessee had also claimed bad debts amounting to Rs. 27,000. This deduction regarding the bad debts was claimed on the ground that the debtor, who owed the above sum to the assessee, had filed insolvency petition and was adjudicated as insolvent. The claim was disallowed by the ITO on the ground that no dividend was yet declared, the petition had not been finally decided and, therefore, the debt could not be treated as bad debt.
The assessee filed an appeal before the AAC. The AAC allowed the claim of expenses but reduced it from Rs. 16,400 to Rs. 2,600. The AAC also allowed the claim for the bad debt to the tune of Rs. 13,500 as against the amount of Rs. 27,000 claimed by the assessee.
The Department as well as the assessee filed appeals against the order of the AAC. The Department claimed that messing expenses could not be allowed in view of the embargo of s. 37(2B) of the Act. It also challenged the allowance of Rs. 13,500 as bad debt out of the claim of Rs. 27,000. The assessee in its appeal claimed allowance of the full amount of Rs. 27,000, claimed as a bad debt. The Tribunal held that assessee being an adhatiya was entitled to claim messing expenses as per the practice prevailing amongst adhatiyas and the AAC properly allowed the messing expenses. As regards the claim for bad debt the Tribunal dismissed the Department's appeal and allowed the assessee's claim as a bad debt, but restricted its disallowance to 10% on the concession made by the assessee himself. The relevant part of the Tribunal's order on this account is extracted hereinbelow :
" In our view since the statement of assets and liabilities was filed by the debtor and on 12-10-1972, i.e., before the close of the accounting year the assessee was justified in claiming the entire bad debt though he himself conceded that 10% of the claim could be rejected as the assets levied were at Rs. 1,48,000 and the liabilities on the debtor of about Rs. 14 lakhs. In the circumstances we restrict the disallowance on account of bad debt to 10% of the total claim and as such the order of the Appellate Assistant Commissioner is modified accordingly."
In the setting of the above facts, the following questions have been referred to this court for answer:
" (1) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to deduction of bad debt to the extent of 90% of the total claim of Rs. 27,000, even though no dividend had been declared by the appropriate authorities in the insolvency proceedings ?
(2) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the expenditure claimed by the assessee for providing messing facilities to the trade clients is an admissible business expenditure and that such expenses are not in the nature of entertainment within the meaning of section 37(2B) of the Income-tax Act ? "
We shall first take question No. 1. It is an admitted position as the question itself indicates that the insolvency proceedings are yet pending and no dividend has been declared. It is only when the official assignee or receiver would declare a final dividend, then the portion of the debt which would remain outstanding after deducting the final amount of dividend payable to the assessee would become finally a bad debt; till then the debt due to the assessee is in a melting pot. Merely from the statement of assets and liabilities filed by the debtor of the assessee in insolvency proceedings, it could not be determined by the Tribunal, whether the debt was a bad debt or to what extent it was a bad debt. It is, as already said by us just above, on the declaration of final dividend by the authorities concerned, that the bad debt can be determined. The view taken by us is in line with the decision of the Punjab High Court in Nanak Chand Mamraj Mal v. CIT [1964] 52 ITR 410. The principle laid down in this case is capsulised in the head-note (at p. 410), which is set out hereinbelow:
Bad debt-Insolvency of debtor-Appointment of receiver - Whether debt can be held to have become bad until completion of winding up.
Where a debtor has been adjudicated an insolvent and his estate is in the hands of a receiver, it would not be proper to hold that the debt or any part of it had become bad until the receiver has completed his work. A debtor was adjudicated an insolvent in 1938 and the assessee received sum of Rs. 13,000 as a first dividend. No further sum was received until 1950 when, as a result of a litigation, the assessee received another sum of Rs. 2,195. In the year 1949-50 the assessee claimed a sum of Rs. 1,00,000 as a bad debt. The Tribunal held that the debt had become irrecoverable soon after the year 1941, on the ground that, subsequent to the payment of the first dividend in 1941, there was no visible asset belonging to the insolvent except a sum of Rs. 10,000 regarding which there was dispute between the Punjab National Bank Ltd. and the official receiver, and that, whichever way the dispute was settled, the assessee could never hope to receive more than Rs. 2,500 and from this concluded that the bulk of the debt had become irrecoverable soon after 1941, an , in any, case, long before the relevant accounting year 1948-49:
Held, that there was no material to justify the finding of the Tribunal, that the bulk of the debt had become irrecoverable long before 1948-49, as the receiver completed the winding up only in 1950."
We would also like to quote with advantage the following observations of Krishnaswami Ayyangar J. in Alagananda Mudaliar v. CIT [1940] 8 ITR 69, 79 (Mad) [FB], which also supports our view:
" According to the Income-tax Officer, the debt should have been written off as a bad debt in the year 1929 in which the insolvents were adjudicated. He took the view that as it was possible for the assessee from the schedule of assets and liabilities, to calculate the approximate rate of dividend, he should have written off the balance in that year. This reasoning is quite unsound and has not been pressed before us."
It was argued by the learned counsel for the assessee that whether particular debt is a bad debt or not is a question of fact and not of law ; therefore, the question No. 1 did not arise. We are unable to agree with the argument of the learned counsel. The question at hand in the facts and circumstances of this case is a question of law.
The question is whether in law during the pendency of the insolvency proceedings in the court, unless the dividend has been declared by the authority competent in law, merely on the basis of the list of assets and liabilities filed by the debtor, can it be said that a debt has become bad ? Had the, matter not been pending in court in insolvency proceedings the fact that a debt has become bad can be proved by evidence and a finding on such evidence would be a finding of fact.
In the light of the foregoing discussion, the 1st question has to be answered in the negative.
With regard to the second question, it is not necessary for us to dilate on it. It is covered by a decision of this court in Misc. Civil Case No. 15 of 1977, decided on September 12, 1980, (CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 (MP)). In view of this decision, this question has to be answered in the affirmative.
In the result, as indicated hereinabove, we answer question No. 1 in the negative, that is, in favour of the Department and against the assessee and question No. 2 in the affirmative, that is, in favour of the assessee and against the Department.
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