CHAKRAVARTTI, C.J. - (1.) IT has not been easy for us to follow the course which this matter has had, because no one seems to have known on what ground he was standing or stood long on the same ground. The assessees are the Hongkong and Shanghai Banking Corporation. In their assessment for the asst. yr. 1946-47, they claimed a deduction of Rs. 4,23,271 which was the total of two debts of Rs. 2,90,458 and Rs. 1,32,813 due to them from a customer, named M/s. C.M. Karanjia and Co. The first of the debts was due to the Calcutta branch of the assessees and the second to their Bombay branch.
(2.) THE ITO disallowed the claim on the ground that, in his view, the bank had been unable to substantiate that the debt had really become irrecoverable during the accounting period in question THE finding of the ITO was confirmed by the AAC in appeal more or less on the same ground and was upheld by the Tribunal in a further appeal to them. THE transactions in the course of which the debts had arisen have been described by the Tribunal in the statement of case originally submitted to this Court and the further statement submitted in accordance with the direction issued to them under s. 66(4) of the Act. It appears that between July and December, 1941, M/s C. M. Karanjia and Co. drew on their Hongkong office various export bills covering gunny bags, jute, wine and textiles, exported by them. Such bills amounting in all to about Rs. 5,90,000 were negotiated by the Calcutta and Bombay branches of the assessees with whom M/s C. M. Karanjia and Co. had opened a letter of credit. Some collections were made by the assessees in respect of those bills, but it appears that at the time when the Japanese came to occupy Hongkong, there was an amount of Rs. 4,23,271 still outstanding. It will be recalled that this was the sum which the assessees claimed to deduct from their profits of the accounting year relative to the asst. yr. 1946-47. After the Japanese occupation of Hongkong had ceased and Allies had resumed possession of the place, the assessees enquired from their Hongkong office on the 12th of November, 1945, whether there was any possibility of the debt being realised. On the 23rd of November following, they received a reply from Hongkong that the outstanding bills were uncollectable at that place. THEreafter, the amount outstanding was written off on the 30th of November, 1945, the last day of the relevant previous year. I might state here that the accounting year relative to the asst. yr. 1946-47 was the twelve months from the 1st December, 1944, to the 30th November, 1945. It will be remembered that the ITO disallowed the claim on the ground that the assessees had been unable to establish that the amount in question had really become irrecoverable It appears to have been argued against that view before the Tribunal that in order to qualify for the deduction provided for in cl. (xi) of s. 10(2) of the IT Act, it was not necessary that a debt should be bad or irrecoverable, but it was sufficient if the debt was a doubtful one. The Department, on the other hand, contended that whether there was a bad or a doubtful debt, was wholly irrelevant in the present case, inasmuch as the assessees were a banking company and, therefore, they could claim a deduction only if the sum concerned was a loan made in the ordinary course of their banking business and if it was proved to the satisfaction of the ITO to have become irrecoverable in the year of account. It is quite obvious that, according to the Department, the assessees, being a banking company, came not under the first part of s. 10(2)(xi), but under its second part. Having put forward that view of the legal position of the assessees, the Department proceeded to rely upon the circumstances which, according to them, justified the finding of the ITO that the amount in question had not been proved to have become irrecoverable. It is really not necessary for the purposes of this reference to set out what those circumstances were, but in order that the question referred to this Court may be better understood, I may refer to some of them. It was pointed out that between the 25th and the 30th Nov., 1945, the Bombay branch of the assessees informed their Calcutta branch that they had not even made a formal demand from the debtor and were very doubtful if the amount could be claimed as a bad debt. Reference was also made to the admission made by the learned counsel for the assessees that they had a claim against the insurance companies with whom the goods covered by the bills had been insured and that there was a question of a claim against Government as well. One other fact referred to was that subsequent to the writing off of the amount, the assessees had realised a sum of Rs. 2,00,000. It was further pointed out on behalf of the Department that the writing off of the amount had not taken place in the ordinary way, but it appeared clearly from the inter-branch correspondence of the assessees that the amount had been written off, because they were advised by their taxation experts to write it off during the year 1945, in order to get the maximum benefit out of the expected deduction in excess profits tax in the following year. The Tribunal, it appears, agreed with the contention of the Department that the assessees, being a banking company, could not claim a deduction on the basis of the debt concerned being doubtful or bad, but that they could claim a deduction only if the sum in question was a loan and if it was proved to have become irrecoverable. The reply of the assessees appears to have been that the assessees could sustain a claim of deduction also on the basis of the debt being a bad or a doubtful one and that if a debt was even a doubtful debt, although it might not have yet become a bad debt, there would be sufficient reason for the assessees to claim the deduction. It was also contended that the amount in question was not a loan, but it was a debt which had arisen out of the negotiation of certain documentary bills by which the assessees had virtually carried out a transaction of purchase.
(3.) THE Tribunal rejected the contention of the assessees that they were entitled to claim a deduction on the basis of a bad and doubtful debt, but they seem also to have tried to meet the assessees on their own ground. THEy held that it appeared to them to be clear that in November, 1945, the bank authorities had not been yet in a position to determine what part of the loan of Rs. 4,23,271 had become irrecoverable, although a substantial part of the loan did look doubtful of realisation. THE contention of the assessees, it will be remembered, was that even a doubtful debt would suffice to sustain a claim of deduction, but the Tribunal do not appear to have considered it necessary to deal with that contention specifically. In their view, the assessees being a banking company, the second part of s. 10(2)(xi) was applicable to them and, therefore, they could claim a deduction only if the sum in question was proved to have been irrecoverable to the satisfaction of the ITO. THE question as to whether a deduction could be claimed under the first part of s. 10(2) (xi) on the basis of the debt being doubtful as distinguished from bad was not, in the opinion of the Tribunal, relevant, since the first part of s. 10(2)(xi), which spoke of bad and doubtful debts, was not applicable to the assessees. It must be clear by now that the basis on which the Tribunal disposed of the assessees claim was that they were bankers, that they could claim a deduction under s. 10(2)(xi) only in respect of loans and that the question of a debt being bad or doubtful did not arise in their case, inasmuch as the first part of s. 10(2)(xi) was not applicable to them. Surprising as it might seem, the Tribunal after taking the view I have set out in detail earlier and just summarised, appear to have changed their ground or changed their mind altogether and when asked to refer the matter to this Court, referred the following question :- "Whether, in the facts and circumstances of this case, the applicant bank was entitled to claim this debt as bad and doubtful under s. 10(2)(xi) even without determining as to what part of the debt was really irrecoverable." ;