R.N.GURTU, J. - (1.) THE following question has been referred to us under section 66(1) of the Indian Income-tax Act : Whether on the facts and circumstances of this case, the Tribunal was justified in a disallowing the expenditure of Rs. 9,076 spent by the assessee in a period preceding the accounting year but written off in the account books in the accounting year relevant for the assessment year ?
(2.) THE question arises, according to the statement of the case submitted to us in the following way. It appears that the assessee had advanced a certain sum of money on the basis of a mortgage deed which he put into suit on July 16,1932, and in which he obtained a decree from the subordinate judges court. Upon appeal, the appeal was allowed and suit was dismissed on the ground that the transferors had no right to transfer the property. At that time the amount of Rs. 24,794 stood to the debit of the account of the mortgagor debtor. This was made up as follows : JUDGEMENT_446_ITR42_1961Html1.htm In the accounting year 1938-39, relevant for the assessment year 1940-41, this amount of Rs. 24,794 was written off as a bad debt and the claim of bad debt was admitted by the Department. Thus at the end of the said accounting year the mortgagor debtors account was closed down. The assessee appealed to the Privy Council and expenses totalling Rs. 9,098 were incurred in prosecuting the Privy Council appeal between 1939 and 1943 and these amounts were debited to the accounts of the said mortgagor debtor. When the appeal in the Privy Council failed, this amount of Rs. 9,098 was credited to the account of the said debtor and written off in the revenue account. The assessee claimed to deduct this amount as expenditure in the accounting year ending on May 17,1945 relevant to the assessment year 1946-47 the year under out consideration. It was found by the taxing authorities that the assessee spent only an amount of Rs. 21-6-0 on May 17, 1945, during the accounting year under assessment and the rest of the expenses were spent in the preceding years and its claim was disallowed. The assessee claims that this sum of Rs. 9,098 was a business expense of his money-lending business in the year in question according to his system of accounts and as such was admissible as a business deduction under section 10(2)(xv) of the Act in the accounting year. Hence this reference. It seems to be admitted, or at least impliedly admitted in the Tribunals judgment and in the statement of the case, that the assessee in his money-lending business kept a mixed method of accounting and that whereas he credited the interest account only upon the receipt of interest where a suit was instituted the entire accrued interest was credited with a corresponding debit to the debtors account, and that with respect to litigation expenses in general the practice was to debit litigation expenses to the debtors account and to write off so much of those expenses which remained irrecoverable only at the time when the litigation came to a finality. The Tribunal, however held that whatever might be the system of accounting adopted by the assessee he could claim an allowance in respect of expenditure only in the accounting year in which it was incurred. The assessee contended before the Appellate Tribunal, and contends here that he should be allowed all the expenditure incurred in the previous years in the accounting year in question. He says that by virtue of section 13 of the Income-tax Act the system of accounting as adopted by him entitles him to such deduction in the year in question. The contention is that even previously in regard to the litigation expenses of this very suit he was allowed to claim the expenditure incurred in the previous year in which the High Court dismissed his suit even though the expenses had been incurred earlier.
(3.) ON the other hand, it was contended before us that according to the the assessees system of accounts no debt remained outstanding after the entire made in the accounting year 1938-39 when the entire principal amount expenses and interest were written off and that therefore the expenses now sought to be deducted could not be said to be expenses incurred for the protection of the debt created by the mortgage deed and that the expenses were not connected with any business of the assessee. It is further contended that expenses could only have been allowed in the year in which they were incurred. It is true that the entire amount pertaining to this mortgage debt and including the expenses incurred up to that date was treated as a business loss in the year 1938-39 and written off and that in one view of the matter there was no further interest to protect under the mortgage deed. On the other hand the fact remains that the matter had been taken to the Privy Council and in case of reversal of the decree of the High Court the mortgage amount together with interest could be recovered and also at least such part of the costs which would have been allowed for all stages of the litigation.;