1988 PLP 532 (PTD)

AJMAL MIAN, J.--This is a reference under section 66(1) of the Income-tax Act, 1922, hereinafter referred to as the Act, whereby the opinion of this Court has been solicited on the following question: "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding the loss on, account of loan of Rs.8,15,000 advanced to East Pakistan Tank, Terminal Ltd. as a revenue or non-capital loss admissible under, section 10(1) of the Repealed Income-tax Act, 1922. 2(a). The brief facts leading to the filing of the above reference are that the respondents in the assessment year 1973-74 in their income-tax return claimed Rs.8,15,000 as a loss on account of the loan which was advanced by them in 1969 to M/s. East Pakistan Tank Terminal Limited. The Income-tax officer by his order, dated 26-6-1976 disallowed the above amount as inadmissible expense under subsection (1) of section 10 of the Act on the basis of Circular No. 11 of 1972 issued by the C.B.R. on 28th November, 1972 against the above order, the respondent filed an appeal before the learned Assistant Appellate Commissioner, who maintained the order of the Income-tax Officer. Against the above orders, the respondent filed second appeal before the learned Income-tax Appellate Tribunal, which by its order, dated 26-11-1979 allowed the amount. The operative portion of the order reads as follows:- "Looking to the character and circumstances and also the treatment by the two officers below we are of the view, that the treatment by them is based on the principle that an expenditure is deductible only if it is a commercial loss in trade. This view completely overlook the sublet point that section 10(2) takes care of disbursements of expenses of trade, which came out of the pocket of the trader, but a loss is something different. It is not a thing that a trader expends or disburses. The mere fact that a loss falls upon assessee an extra does not take the loss out of the taxing statute or direct from the loss being taken into account while computing income subject to tax as 'profit or gains' under section 10(1) of the Act. The Rule is simple what is to be taxed is the profit and gain of business, which cannot be arrived at without deducting the loss under section 10(1) and legitimate expense under section 10(2) of the Act. No further reasoning seems necessary to'. be appellant at that for the purpose of section 10(2) the loss which has actually been incurred must be deducted to arrive at the same figures of income for. Under the law, tax is payable only 'in respect of profits or gains of any business, profession or vacation' carried on by an assessee. To sum up, we are of the view, that the provisions of subsection (1) of section 10 are enough to accommodate the case of the assessee. We, therefore, UNDO the treatment by the two officers below and DIRECT that the claim be admitted now." 2(b). The applicant's department has filed the present reference. 3 (a) In support of the above reference Mr. Nasirullah Awan, learned counsel for the applicant has submitted that the above loan amount could not be treated as an admissible expense under section 10 of the Act as there is nothing on record to indicate that the respondent assessee was dealing in lending and borrowing. 3(b). On the other hand Mr. Rizvi, learned counsel for the respondent assessee has contended as follows:- (i) That the learned Income-tax Appellate Tribunal has recorded as a finding of fact that the above amount is an admissible expense in terms of section 10 of the Act and, therefore, the reference is misconceived as there is no legal point involved. (ii) That even otherwise this loan amount had become bad debt and, therefore, it was an admissible expense keeping in view of the fact that the respondent assessee was an investment company and was inter alia engaged in lending and borrowing.

4. Mr. Nasrullah Awan, learned counsel for the applicant, in furtherance of his above submission has urged that the case relied upon by the learned Income-tax Appellate Tribunal namely, Messrs Ramchandar Saivanarayan v. Commissioner of Income-tax, Andhra Pradesh reported in AIR 1978 SC 278 is not applicable to the facts of the present case, whereas Mr. Rizvi has urged that the principle of law enunciated therein is applicable to the present case in the above case the money lost on account of theft was allowed as an expense under section 10 of the Act. The Hon'ble Supreme Court of India quoted with approval the observations of Aiyar, J. in the case reported in 34 ITR at pages 15 and 16 as follows:- "The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether' it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied ...." "

that the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if, it has some connection with his business." Mr. Rizvi has placed reliance on a passage from Kanga and Palkhivala's Income-tax Seventh Edition, Volume 1, page 437, which reads as follows: - "Conditions of allowance. This clause grants an allowance in respect o bad debts of a business, profession or vocation and in respect of irrecoverable loss in the case of banking or money lending business. A bad debt presupposes the existence of a debt and in cases in which there never was any debt owing to the assessee, no question can arise of invoking this clause. A debit owing which arises from an illegal transaction or which is otherwise unenforceable in law is nevertheless covered by this clause. Four conditions govern the grant of an allowance under this clause:- (i) The debt loan should be in respect of a business, which is carried on by the assessee in the relevant accounting year. (ii) The debt should have been taken into account in computing the income of the assessee of the accounting year or of an earlier accounting year or should represent money lent in the ordinary course of his business of banking or money-lending. (iii) The amount of the debt or loan, or part thereof, which is claimed as a deduction, should be established to have become bad in the accounting year. (iv) The amount should be written off as irrecoverable in the accounts of the assessee for that accounting is made for the first time."

5. We are inclined to hold that the learned Income-tax Tribunal has recorded as a finding of fact that the above amount was an admissible expense keeping in view the nature of business of the respondent assessee and, therefore, no legal point in fact is involved. Even otherwise, the conclusion arrived at by the learned Income-tax B Tribunal that the loan amount, which had become a bad debt for want of recovery since 1969 was an admissible item of expense under section 10 seems to be in consonance with law. Accordingly our answer to the question is in the affirmative. However, there will be no order as to costs. M.B.A./C-39/7 Question answered in affirmative.