SHYAMAL KUMAR SEN,J - (1.) PURSUANT to the direction of this Court under s. 256 (2) of the IT Act, 1961 ('the Act') the following questions were referred by the Tribunal :-- "1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the applicant's claim was not allowable under s. 28 of the IT Act, 1961 being a deductible business loss in the year under reference ? 2. Whether, the Tribunal was correct in not directing the ITO to allow the sum of Rs. 1,76,751 in this assessment year under s. 155 (6) of the Act, as the debt became irrecoverable in this assessment year and was actually written off in the applicant's accounts for the year and was actually written off in the applicant's accounts for the year ended 31st March, 1982?"
(2.) THE assessment year involved is 1980-81 The facts, inter alia, leading to this reference are that the assessee is a private limited company carrying on business of tea brokers and auctioneers and also finances its seller clients in the usual course of business. It advanced a sum of Rs. 2 lakhs to one of its settler clients, Shri R.P. Gupta, the leasehold owner of Mullotar Tea Estate. It could realise only about Rs. 23,000 and odd and the balance sum of Rs. 1,76,751 could not be realised. It was found that Shri Gupta was not the actual lessee owner of the Mullotar Tea Estate and had fraudulently represented that he was the lessee owner. A criminal case was lodged against Shri Gupta during the accounting year relevant to the assessment year under reference when the assessee found that there was no chance of recovery of the amount due from Shri Gupta as was evidenced by the correspondence with the Solicitors. As the assessee lost all hopes of recovery of the aforesaid sum, it claimed that it should be allowed as a deductible business loss or as a bad debt, although the debt was written off as irrecoverable in the subsequent year's account for the year ended 31st March, 1982. The AO found that the assessee could not prove that the debt became bad and, secondly, the assessee had not written it off in its books of account. He, therefore, disallowed the claim of the assessee. The CIT (A) confirmed the disallowance made by the AO. The Tribunal maintained the disallowance on the following grounds:-- "The contention of the assessee that the debt or the advances made by it to Shri R.P. Gupta could be allowed under s. 28 cannot be accepted. Sec. 28 only indicates the income which can be taken as income from the business. Sec. 29 prescribes the method for the commutation of income from business, profession, etc. Sec. 29 clearly states that the income shall be computed in accordance with the provisions of ss. 30 to 43A of the Act. Therefore, the deductions and/or out goings for computing the business income are only available in ss. 29 to 43A of the Act and s. 28 does not make any provision for the allowance for any deduction. (Even after considering the order of the CIT (A) for the earlier year on pp. 1 to 12 of the paper book, the claim of the assessee cannot be accepted under s. 28 of the Act.) The case of the assessee under s. 36 (1) (vii) has rightly been rejected by the CIT (A) . The bad debt can only be allowed if the debt arose in course of the business of the assessee. The debt has become bad and it has been written off in the books of account of the assessee. The assessee in course of its business has advanced loans to Shri Gupta against the crop of the tea estate. Therefore, so far as the first condition is concerned, it is duly satisfied. But the second and third conditions are not satisfied at all. The assessee could not prove that the debt became bad during the year under appeal. Shri Gupta may not be the owner of the tea estate but the assessee has not proceeded for the recovery of the debt against Shri Gupta. The assessee had not indicated the assets of Shri Gupta. Moreover, no legal action has been taken against him. The criminal action has been taken against shri Gupta because he fraudulently represented himself as the owner of the tea estate. But his does not satisfy the second condition. As the assessee has not produced any material to prove that the debt became bad except the letter of the Solicitor, the second condition is not satisfied at all. The assessee had admitted that the third condition has not been satisfied. The assessee ahs not written off the debt in its books of account. The assessee lastly has urged that the direction could be given to the ITO to comply with s. 156 (6) of the Act. The debt has not been proved to be bad during the year under appeal in the earlier year. If the debt would have been bad in the earlier year, some direction could have been given to the ITO to rectify the assessment under s. 155 (6) of the Act. That situation did not arise in the present case. Consequently, the disallowance sustained by the CIT (A) is maintained."
(3.) IT has been submitted by Dr. Pal, the learned Advocate for the assessee, that this finding of the Tribunal is patently perverse because of the letter of the Soliciter which had pointed out that the said accused person did not possess any asset out of which the dues could be realised and, hence, Khaitan & Co. advised that even if a suit had been filed earlier, no useful purpose would have been served on the facts of the case. In view of the said categorical finding of the Solicitor, Khaitan & Co., the Tribunal's observation that the assessee has not produced any other material to prove that the debt has become bad is patently perverse. In view of the observation of Khaitan & Co. and in view of the further fact that the debt arose in the course of the business of the assessee, the amount which had become irrecoverable can be allowed as a trading loss under s. 10 (1) or under s. 28 of the Act. The letter of Khaitan & Co. is itself the proper and cogent material and to seek for any other material and to reject the claim of the assessee on that ground is not only perverse but is not sustainable in law.;