HONGKONG AND SHANGHAI BANKING CORPORATION Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(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.

(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.