1983 PLP (Trib (PTD)

(3) The value of machinery was to be worked out at 30 % of the depreciated book value of market value, whichever is low. (4) Collateral security was to be adopted at 100 % of the value of the individual items of market value, whichever is low.

8. The learned Departmental Representative vehemently submits that there has been a very substantial increase in the value of land, building, machinery, etc., and as such, the method by the respondent‑bank for determining the present value being 60% of the book value in the case of land and buildings and 30 % in the case of machinery was unrealistic when the prices of land and machinery have gone up very high in the past years. In view of the unrealistic basis adopted by the respondent, he submits that the Income‑tax Officer was fully justified in disallowing the respondent's claim. He not only kept in view the principles laid down for allowability or otherwise of the bad debts but even considered the specific cases to clearly prove that the present realisable value on all the cases was more than the amounts borrowed by different debtors. He also made reference to the 'Tribunal's decision in this very case in

1. T. A. Nos. 411 and 412/79‑80 dated 11th June, 1980 relating to the assessment years 1975‑

76. He submits that the Department's case was not presented properly before the Tribunal and hence the disallowances bad debts were deleted keeping in view its earlier decision and the judgment of the High Court of Sind. The learned Departmental representative further submits that although the Income‑tax Officer did not discuss the prise basis on which the present value of securities was worked out but he clearly opined that no efforts were made for effecting recovery from securities and hence the facts obtaining in the two years under‑consideration could not be considered as distinguishable from each other.

9. The learned counsel appearing on behalf of the respondent‑bank makes a reference to the two decisions of the Tribunal in this very case relating to the earlier years and submits that the facts obtaining in the two years under consideration being similar, the learned Appellate Assistant Commissioner was justified in deleting the disallowance made by the Income‑tax Officer. He explained the nature of respondent‑bank's business while submitting that substantial amount of money were advanced for promotion industries in the opimtru. The bank makes usual efforts for recovery and when, it finds that the present value of securities is less than the amount ,crowed then it rightly claims such amounts as bad and doubtful debts as cannot he recovered even by sale of securities etc. He further submits that the appellant's nature of business was different from those of commercial bank and it was justified in following the aforesaid methods for writing off bad debts. The learned counsel also relies on the ratio of decision laid down by the High Court of Sind in the case of National Bank of Pakistan. He submits that the respondent adopted the same method of accounting for creating reserve for bad and doubtful debts as was done by the National Bank of Pakistan and hence it could not be said that the decision was not applicable in this case. The learned counsel specifically refers to the assess ment year 1977-78 where the income‑tax Officer did not dispute the present value of securities as compared to the amounts outstanding against the debtors and neither did he make cut a case that there were good chances of recovery of impugned debts. To give an instance he also brought to our notice the debt outstanding against Messrs Larkana Textile Mills Limited where the respondent obtained a Court decree but the amount offered ,in open sale was much less than the securities etc. Thus according to him that the present realisable value of securities held by the bank could not be considered as sufficient or higher than the outstanding loans in most of the cases. Lastly, the learned Authorised Representative makes a reference to the EUD Circular No. 4 dated 26th July, 1976, and submits that the learned Departmental Representative has erred to concluding that the instructions contained in the Circular are followed in each and every case. In support of' this contention he makes a reference to 4 or 5 cases to suggest that the present value of the securities was not valued in accordance with the afore mentioned circular but other relevant facts were taken into consideration. In some of these cases pointed out, he submits that the value of securities as per the circular No. 4 were, in fact, more than the provision: made by the respondent bank. With these submissions he contends that the learned Appellate Assistant Commissioner was fully justified in her action of deleting disallowance in both the years.

10. We have given our earnest consideration to the facts of the case and nave also beard both the parties. We have also carefully gone through our decisions in respect of the assessment years 1972‑73 to 1974‑75 bearing I. T. As. Nos. 636 to 638/KB of 1977‑78 dated 8‑8‑1974, and our subsequent decision in this very case in

1. T. A. Nos. 411 and 412/KB of 1979‑80 dated 11‑6‑80 relating to the assessment years 1975‑76 and 1976‑

77. Besides, the method of accounting adopted for making provisions etc., for bad and doubtful debts, it was also emphasised that an amount of debts in excess of the present value of the securities could rightly be claimed by the respondent as bad and doubtful debts. For the sake of convenient reference, we reproduce hereunder the operative observations made by us in our earlier decision :‑ "We find that in view of the elaborate system of accounting maintained and the method explained as above, there is no possibility of escape ment of any recovery effected of the amounts written back through provisions of bad debts and in consequence, following the decision of the High Court, in our opinion, the appellant's claim should have beer admitted to deduction. We shall accordingly modify the direction of the Appellate Assistant Commissioner to the effect that the claims be admitted to deduction, instead of a fresh examination of the same." We may also mention that our aforesaid decision we also kept in view the decision of the High Court in the case of National Bank of Pakistan.

11. Similarly, when the appeals relating to the assessment years 1974‑7 and 1975‑76 came before the Tribunal, both the Department as well as the assessee‑bank were influenced by the aforesaid decision of the Hon'able High Court and hence their submissions revolved around this decision but the facts of the case and the details regarding the present value of securities held by the assessee‑bank and the amounts written off as bad and doubtful, debts were neither discussed nor were any details made available to us a t the time of hearing. It appears that in the assessment orders as well there is no specific mention about the present realisable Value of the securities available with the assessee‑bank and the amount outstanding against such debtors. In the assessment year 1975‑76, after examining the notes furnished by the assessee bank in respect of the bad and doubtful debts claimed, the Income‑tax Officer gave the following reasons for disallowing the claim: "In almost all these cases the bank holds the mortgage on the properties of the debtors or rescheduling the payments from the debtors to the assessee‑bank. All this shows that efforts are still continuing and the bank has not lost all hopes of recovery. As such, these debts may not become bad during the year under consideration and should be claimed as and when the legal cases are decided or the amounts are adjusted after the sale of mortgaged properties of the debtors."

12. In the assessment year 1976‑77 also after examining the assessee bank's explanation regarding various bad debts, the Income‑tax Officer gave identical reasons for disallowing the assessee's claim. In fact, in this year the Income‑tax Officer discussed all the 42 cases of the debtors and gave specific reasons in each case indicating the premises for not allowing the claim. The aggregate claim of the assessee‑bank in this year amounted to Rs. 1,34,94,034 which was disallowed. The assessee‑bank disputed these disallowances before the learned Appellate Assistant Commissioner, who did not consider the specific reasons given by the Income‑tax Officer for making, the disallowances but mainly relied upon the Tribunal's decision relating to the assessment years 1972‑73 to 1974‑75 and deleted the additions made by the Income‑tax Officer by making the following observations :‑ "After scrutiny of the assessment records and keeping in view the various case laws that have been quoted, I find that the Income‑tax Officer was not justified to disallow certain amounts out of the claim for bad and doubtful debts. In view of the decision of the learned Appellate Tribunal in I. T. As. Nos. 636 to 638/KB 1977‑7E, date. 8‑8‑1978. The disallowances are accordingly deleted." It is thus evident that by putting reliance on the aforesaid decision of the Tribunal, the learned Appellate Assistant Commissioner did not consider the fact that steps were not taken to recover the debts from the present realisable value of the assets securities of the borrowers before making the claim. In fact, as has already been mentioned by us in an earlier paragraph, the Tribunal also in its earlier decision did not consider this aspect of the matter, because the same was not emphasised. The department, feeling aggrieved with the order of the learned Appellate Assistant Commissioner filed second appeal against before the Tribunal. The appeals for these two years were disposed of by the Tribunal vide its orders in I. T. As. Nos. 411 and 412/KB of 1979‑80 dated 11‑6‑1980. It is apparent from the aforesaid order of the Tribunal that the Department did not press or highlight tile error committed by the learned Appellate Assistant Commissioner in not considering the specific reasons‑for which the Income‑tax Officer disallowed the assessee's claim of bad and doubtful debts. It was precisely for this reason that the tribunal was of the opinion that the facts obtaining in these two years were similar to the earlier years and, therefore, relying on its earlier decisions in this very case, which have also been referred by us in the preceding paragraphs, confirmed the order of the learned Appellate Assistant Commis sioner and dismissed the departmental appeal. The Department not being satisfied with the Tribunal's order has made reference applications under section 66 (1), which are pending. We have perused our latter order in this case relating to the assessment years 1975‑76 and 1976‑77 and noted that while disposing of the departmental appeals besides the preceding years order, reliance was heavily placed on the decision of the Sind High Court, reported as P L D 1976 Kar. 1025. This is borne out from the following observations made by us: "The Tribunal, by its aforesaid order dated 8‑8‑1978 and also the decision of the "Sind High Court, reported as (1976) 34 Taxation 158, wherein the method of accounting for writing off debts was approved by their Lordships of the high Court and allowed the claim of bad and doubtful debts. Since the facts and circumstances of the‑case pertaining to this issue have remained unchanged this year as well . . . . . . . . . . . we would following our decision confirm the order of the learned Appellate Tribunal . . . . . . . . . . . . . . . ."

13. It is patent from the orders of the Income‑tax Officer which are now under consideration before us that the Department has considered the issue of bad debts more elaborately and gave definite reasons as have been mentioned by us in the preceding paragraph of this order. In fact, in the assessment year 1978‑79, the Income‑tax Officer discussed each and every claim, of bad debt, which was disallowed by him by specifically relying on the fact that the value of realisable asset: mortgaged with the assessee bank was higher than the amounts claimed on bad debts. As a matter of fact in the assessment year 1976‑77 also as was stated by the learned Departmental Representative before us, the assessee‑bank's claim was made on the bass of the Bank's circular EUD‑4, mentioned by us in an earlier paragraph and hence the facts and circumstances of both the years under appeal appeared to be identical and the disallowance was also made for similar reasons. The only difference being that in the assessment year 1978‑79 the Income‑tax Officer discussed each and every debt claimed by the assessee In his assessment order but the reason for disallowing the claim remains the same in both the years. Viz., the absence of a realistic valuation of the securities held by the assessee, in view of these facts, we are clear in our mind that the earlier decision of the Tribunal cannot help the assessee‑respondent at all in the two years under consideration. As a matter of fact, the decision of the Hon'ble High Court of Sind cannot be made applicable in the two cases under consideration because in that case the learned Judge of the High Court did not at all consider the issue regarding the existence of present realisable value of mortgaged assets and the bad debts claim etc. A passing reference made by the learned Judges in their judgment also clearly indicates this fact. This is clearly borne out from the following observations made by the Hon able High Court :‑ "I now turn to the second question, and Mr. S. A. Nusrat's submission was that even if the system of accounting maintained by the respondent was proper, it had still to prove that the debts which it had written off in the books were irrecoverable. I fully agree with the proposition, nor did Mr. Ali Athar contest it. However, Mr. Ali Athar's reply to the submission was that the respondent had given a full explanation as to why the debts in question were irrecoverable 7 and as the Income tax Officer rejected the explanation on the sole ground that the system of accounts maintained by the respondent led to the inference that the debt shed really not been written off . . . . I have read and re‑read the order of the Income‑tax Officer and I venture to think that Mr. Ali Athar's submission is correct. However, if I am wrong on the assumption that the factual explanation submitted by the respondent was not satisfactory, the Department would have resisted the respondent's appeal on the ground that apart from the question of system of accounts the respondent had, in fact, failed to produce cogent evidence to show that the debts in question were irrecoverable. As no such plea was advanced by the Department, Mr. S. A. Nusrat was compelled to concede that the idea was dropped (Underlined by us for emphasis). 14. 1t is abundantly clear that the learned Judges primarily considered the system of at‑counts followed by the bank and the issue whether or not the debts had become irrecoverable, was not discussed or considered by them. Obviously because details or discussion regarding the bad and doubtful debts were lacking the order of the Income‑tax Officer. In the instant case, the order of the Income‑tax Officer ire comprehensive and detailed and they have given very clear reasons for making the disallowances. 1n view of these facts, we have no hesitation in holding that the earlier decisions of the Tribunal or to decision of the High Court of wind are not at all applicable to the instant cases.

15. So far as the learned counsel': submission regarding the Bank Circular EUD/4 of 26th July, 1976 is concerned, we have already made a reference about its contents in the preceding paragraphs. According to this circular, tie value of land and buildings is adopted at 60% of the book value and 30;0' that of machinery etc. The fact of the matter is that most of these loans were advanced 5 to 10 years back and during this period the value of land and property has gone up manifold‑may be 5 to 6 times of the original cost recorded in the assessee bank's books, likewise, notwith standing the fact that machinery mortgaged with the banks must have become old but the fact remains that even the depreciated value of the machinery cannot be adopted at 30% of the cost, because on account of devaluation and inflation over a person of 5 years, the cost of machinery has also gone up very substantially (say about three times so) and in that view of the matter the valuation adopted by the bank for making adjustment against the debts appears to be very unrealistic rather ridiculous.

16. In holding the aforesaid view, we find support from come decision the superior Courts in India, wherein it was held that if the creditor has taken any security or has been able to recover any property from the debtor, no part of the debt can be written off as a bad debt until this security or property has been realised. This principle was laid down in a decision sported as 13 I T R

240. Similarly, it has been held by various superior courts of Indian Jurisdiction that the onus lies on the assessee to prove that debt or a portion of it has become irrecoverable in any particular accounting year This view held in the decision reported as 5 I T R 502 is being consistently followed by the Courts. It could not be proved by the assessee that the assessee‑banks debts claimed in the two years had, in fact, become bad and doubtful debts during the years under consideration. The Income‑tax officer had, in fact, made out a case that the debts claimed had not become bad or doubtful during the years under consideration. In this connection we nay also reproduce below the famous decision of the Privy Council, reported as 1932 (Comp. Cas. 464) :‑- "Whether debt is a bad debt and, if so, at what point of time it became a bad debt, are questions which in their Lordship's view are questions of fact, to be decided in by the even: of dispute by the appropriate Tribunal and bot ipse dixit of any one else. The assessee has no option of declaring a debt as bad . . . . . . . . . . In every case it is a question of fact to be determined after consideration of all relevant circumstances." Before parting with our observations on this ground, we may also reproduce the off quoted observation of another Court of Indian jurisdiction which also strengthens our findings:

"SO long as there is a ray of hope left to recover a debt, how dim it may be, and so long as a debt is in the process of realisation, it cannot be said that it has become irrecoverable [(1937) 5 I. T. R. 279)]. In view of the ratio of decisions laid down by the various superior Courts we note that however such sacrosancted the instructions contained in the circular EUD/4 of the Bank, may be for its officers but so far as the revenue is concerned, bad debts can be allowed only when all efforts have been made to make recovery from the present realisable value of the assets or securities held by the lending bank.

17. We have thus no hesitation in holding that the Income‑tax Officer was fully justified in making the disallowance for the reasons in our opinion, should equally stand good in toe assessment year 1977‑78 where also the reasons given were similar although the Income‑tax Officer did not incorporate facts regarding each loan separately and instead he gave brief reasons in the three annexures which form a part of his assessment order. At the time of hearing of these appeals also it was brought to our notice that in the assessment year 1980-81 a specific mention has been made of the Banks (circular EUD/4, presumably for the reason that prior to this year this circular may not have been brought to the notice of the Departmental Officers. For the aforesaid reasons given by us, we vacate the orders of the learned Appellate Assistant Commissioner on this issue for both the years and restore those of the Income‑tax Officer.

18. We now take up the assessee‑bank's appeals. In the year 1977‑78 there is only one ground relating to the taxability or otherwise of the assessee bank's Income. In the subsequent year also this ground has been taken. The learned counsel however submits that he does not want to press this ground and hence this ground of the assessee fails as having been withdrawn, in both the years.

19. The other objection of the Department relates to for the levy of surcharge in both the years. In the assessment year 1977‑78 the Income-tax Officer deducted from the total income some amounts which he considered retained income as detailed below :‑ (i) Provision for staff gratuity. Rs. 70,200 (ii) Employer's benevolent fund etc Rs. 1,00,000 (iii) Transfer to special and general reserve amounting to . . . . . Rs. 48,29,000 Rs. 56,31,000 He treated the balance amount of total income as liable to surcharge. It appeals that no provision was made out of the total income of the years for payment of tax etc. In the assessment year 1978‑79 the Income‑tax Officer did not allow any deduction to respect of retained income and subjected to tax the entire total income. In this year also it appears that no provision for payment of tax was made out of the total income. In appeal, the learned Appellate Assistant Commissioner has disposed of the assessee respondent's grievance by directing the Income‑tax Officer to levy surcharge in accordance with the principles as laid down by the Tribunal in the case reported as (1979) 40 Taxation 77 (Trib). We have mentioned the facts as are available before us or as mentioned at the tine of hearing of the appeals and we are not aware of any other amounts out of the total income which could be treated as retained income within the meaning of the provisions of the law. In any case since we have been consistently following our decision, referred to by the learned Appellate Assistant Commissioner, we uphold her view on the issue.

20. In the assessment year 1978‑79, the assessee's grievance concerns the imposition of tax on dividend income at the rate of 65 % treating the same as assessee's business income. The assessee's grievance is that it should have been treated at the rate of 10% being income from dividends. This issue was also taken up by the learned Appellate Assistant Commissioner, but she rejected the claim by observing that it was not pressed by the learned counsel in either the written arguments or at the time of hearing. Before us also, the learned counsel did not press this ground and hence we have no reason to interfere with the action of the departmental officers.

21. In the result, the four appeals are disposed of as indicated above. Order accordingly.