I.T.AS. NOS. 192 OF 1960-61, 1688 OF 1961-62 AND 320 OF 1963-64, Versus I.T.AS. NOS. 192 OF 1960-61, 1688 OF 1961-62 AND 320 OF 1963-64,

ORDER

M.T. SIDDIQUI (MEMBER). --There are three direct appeals this case relating to the assessment years 1959-60, 1960-61 and 1961-62. The main objections raised in all the three appeals are in respect of disallowance of bonus payments as also the disallowances of certain bad debts claimed. For the years 1960-61 and 1961-62 additional ground, in respect of disallowance of legal expenses have also been raised. For the year 1960-61 the basis of computing the property income has also been assailed, whereas for the year 1961-62 another objection regarding the disallowance of an amount of Rs,18,4010 claim, as an expense in a forgery case is also contested. Since the 'acts of the case and the objections raised are almost identical in the three year we propose to dispose of all the appeals by one consolidated order.

2. The appellant is a banking concern and besides banking home also derives income from property, dividends and interest on securities. In all the years under consideration tile income v, 'as worked out on she basis of the appellant's own computations subject to certain add-backs for the bonus payments claimed as special payments made to the Bank's staff. For the three years under consideration these amounts stood at Rs.1,80,301, Rs.1,91,860 and Rs.1,98,392. Further, add-backs were made to the returned income by way of inadmissible bad debts amounting to two sums of Rs.10,48,693 and Rs.2,44,712 for the assessment year 1959-6n and the same amount with an additional sum of Rs.676 for the assessment year 1960--6i and the above three items together with yet another three items of Rs.4,00,000, Rs.576 and Rs.12,470 for the assessment year 1961-62. Similarly the Income-tax Officer disallowed a sum of Rs.2,400 and Rs.5,599 out of legal expenses for payments made as the Tribunal expenses for assessment years 1960-61 and 1961.-62. In 1960-61 while computing the net income from property the Income-tax Officer also mace a departure from the earlier years' practice of taking into account the actual rental receipts and adopted municipal valuation as the basis for working out the net taxable income from property. For the assessment year 1961-62 he also added back a sum Rs.10,400 which was claimed by the appellant as a payment made on account of a forgery claim. All the above add-backs as stated above are objected to by the appellant. We propose to dispose of the first objection regarding the disallowance of the bonus payment for all the three ears anti thereafter we shall proceed to consider the other add-backs" relating to each of the three years separately.

3. As we have stated above the appellant's bank claimed the gums of 119.1,80,301, Rs.1,91,860 and Rs.1,98,392 as special payments made to the bank's staff by way of salary. These were claimed under the provisions of section 10(2)(xvi) of the Act. The Income-tax Officer, however, held that the appellant was a non-resident company and its income was computed with reference to its income accruing in the taxable territories and as such no consideration whatsoever should he given to the income or profits earned by the appellant outside Pakistan. It was inferred that profits computed under section 10 in the taxable territories showed losses and in view of these losses there was little justification for claiming special payments of salary made to the staff. It was held that the appellant's claim under section 10(2)(xvi) was untenable in view of the fact that this allowance was nothing but payment of bonus and was, therefore, specifically covered by the provisions of section 10(2)(x) and as the conditions laid down in sub-clause (b) of section 10(2)(x) were not fulfilled the payment made could not be allowed as business expenditure. The appellant's representative on the other hand contended that the case of the appellant's bank was covered squarely by the decision of the Tribunal in I.T.A. Nos. 1609 and 1610 of 1961-62 dated 30th October, 1963. It was argued that the appellant's case was on a stronger footing inasmuch as the payments in question had to be made as a result of an award of the Industrial Tribunal and was in accord with the practice of the local banks in this connection. It was argued that whereas in the case referred to in the appeals cited, the bonus payment had varied between 10% to 15% of the employees' salaries, in the present case the payments of the bonus, if at all these are considered as bonus, were restricted to 10% only. The Departmental Representative of course maintained the arguments taken up by the assessing officer. We, however, find that the case is squarely covered by the decision cited by the appellant and for the reasons detailed therein which we need not repeat here, we hold that there was no justification for disallowing the bonus as claimed. We accordingly direct that this should be admitted to deduction during all the three years, as claimed by the appellant.

4. We shall now take up the bad debts issue for all the three, years. After some discussion with the appellant's representative we find that so far as the claim of bad debt for the year 1959-60 was concerned it was obviously premature and we shall, therefore, discuss it at length while discussing the appellant's claim for the year 1961-62 in this connection. The appellant's claim for bad debt for the year 1959 would thus fail. So, is the case for the year 1960-61 when besides the above claims the only other claim related to a sum of Rs.776. After some discussion it transpired that this was also properly held by the Income-tax Officer to be premature and this too would, therefore, come for consideration in a year when this is appropriately written off. For the year 1960-61 also, therefore, the appellant fails so far as the claim for bad debts is concerned. We shall now take up the appellant's claim for bad debts for the year 1961-62. Besides the above three claims which we have held to be premature and which we shall discuss hereinafter the appellant also had made three specific claims as pertaining to the assessment year 1961-62. The first of these three claims related to a bad debt of Rs.4,00,000. On scrutiny however, we consider it to be premature and so is the case with the second debt of Rs.576. Consequently we held that these two debts were properly disallowed by the Income-tax Officer as having been written off prematurely. The third specific debt related to skim of Rs.12,470. From the facts as they appear now, it transpires that this was not in fact a bad debt but a business remission. The appellant had been doing substantial business on behalf of R Electric Supply Co. Ltd. and were acting as their clearing agents in respect of certain imported goods. Certain consignments were delayed at Karachi due to the bank's staff negligence at Rawalpindi and Karachi with the result that the client, namely, Messrs R Electric Supply Co. Ltd. had to pay a demurrage which amounted to Rs.12.470 They made claim upon the appellant's bank and as the appellant found negligence on its part and did not want to lose a good client, it agreed to reimburse its client to the extent of the demurrage paid. The appellant's representative argued that in this view of the matter these were business expenses and were properly incurred wholly and solely for the purpose of carrying on of the appellant's business smoothly and efficiently. It was argued that these were paid as a matter of commercial expediency. We are in agreement with the appellant's arguments and hold that this was a remission made in the interest of the appellant's business and consequently it was properly admissible expenditure within the meaning of section 10(2)(xvi). This expense properly speaking was incurred to preserve the confidence of the customers and maintaining the goodwill of the business. It is, therefore, directly covered by a decision of the Allahabad High Court in the case cited as Nainital Bank Ltd. v. Commissioner of Income-tax, U.P. (1962) 46 I T R 540. We direct accordingly that it should be allowed as a legitimate expense.

5. We shall now take up the main contention of the appellant, namely, the debts of Rs.10,48,693 and Rs.2,44,712 which were disallowed by the Income-tax Officer initially in the year 1959-60 and then in the year 1960-61 as being premature. During the year 1961-62 the Income-tax Officer again considered the same and held that out of the above amounts sum of Rs.1,07,835, Rs.6,95,333, Rs.1,2G,000. Rs.2,31,200 and Rs.676 were not admissible in view of the fact that the appellant has transferred these debts to M/s. N & G Bank Ltd. and that the same were still not written off in the books of account at the time of the transfer but were only provisions. The other amounts of Rs.5,762, Rs.87,584, Rs.3,052 and Rs.883 were bifurcated and held as premature the year under consideration but were left over for consideration in the subsequent year. So far as the first set of the debts is concerned the appellant's representative in the first instance argued that according to the bank's practice whenever a debt becomes doubtful the same is debited to the profit and loss account and a provision for bad debt is created therefor. It was argued that the Income-tax Officer's objection that the same were not, therefore, actually written off is not correct as according to the practice of the appellant these should be deemed to have been actually, written off in the books of the appellant. Reliance in this connection was placed on a case reported as Commissioner of Income-tax and Excess Profits Tax, Central Bombay v. Fuala Prasad Tiwari (1953) 24 I T R 557. It was contended that the circumstances of case were identical with the appellant's case and, therefore, the above debts should be treated as having been actually written off. The Departmental Representative on the other hand argued that in the first instance the creation of a provision could not amount to actual writing off of a debt. He placed reliance in this connection on a case cited as Kanti Lai Chimanlai Shah v. Commissioner of Income-tax, Bombay North, Katch Saurashtra, Baroda (1954) 26 I T R 303. He particularly placed reliance on the dictum below:--

"If does not depend upon the volition of the creditor to decide when a debit becomes a bad debt. It is not open to him merely by making an entry to convert debt which might be a good debt into a bad debt, and entries in the books of account have very little bearing on the question as to whether a particular debt has become a bad debt or not. Nothing that the creditor does either by making an entry with regard to interest or by paying tax on it can have such bearing on the fact, which has got to be decided whether there was a possibility of realising the debt. That fact cannot be decided by any act performed by the creditor."

He elaborated his arguments by further contending that the appellant had ultimately transferred these debts to M/s. N & G Bank, which clearly means that even if any entry for writing off these debts was actually made the same was reversed. It was contended that in these circumstances these debts could not be treated as bad debts so far as the appellant was concerned. We are in agreement with the arguments of the Departmental Representative and hold that by a mere entry in the books of account the appellant could 'not and did not become entitled to write off these debts as bad debts. In the first instance in view of what has subsequently transpired, namely, the transfer of these debts to M/s. N & G Bank, we are of the opinion that the Departmental Representative rightly contends that the entries, if any, were in fact reversed and that what was passed on was some reliable debts and not something which had become not existent by a write off. In the second place we find that what the provisions of section 10(2)(xi) require is that only such debts can be treated as bad debts which fulfil all the conditions laid down in section 10(2)(xii) and are ultimately estimated to be irrecoverable by the Income-tax Officer. This was the dictum in the case of Hongkong & Shanghai Banking Corporation v. Commissioner of Income-tax, West Bengal (1955) 28 I.T.R.

199. The very fact that these debts were ultimately transferred to M/s. N & G Bank, therefore, lend us to the conclusion that even in the appellant's own mind there was hesitation regarding the extinction of these debts and the chance of their recovery with the result that the appellant did not want to credit the accounts of the individual debtors or extinguish its right or that of its successor from the ultimate recovery of these debts. The appellant took us through each and every item of these debts to show that these debts could be considered for a write-off in the present assessment. After going through the facts we are of the opinion that if the same had been written off they could be claimed in the present assessment, as they were held immature in earlier years and left out to succeeding years for proper write-off. For reasons we have already discussed in detail, we are of the opinion that these debts are not bad even according to the estimate of the appellant who has passed them on to another party as tangible assets. We, therefore, hold that' the assessing officer was right in holding that these debts could not be claimed as bad or doubtful within the meaning of section 10(2)(xi) of the Act.

We shall now deal with the other set of debts two of which for reasons recorded herein were properly written off during the year under consideration and we accordingly direct that the same should be admitted to deduction:

(1) Debt of Rs.3,052 against U Corporation. This debt was a business debt and the date of the last transaction in this account was June, 1957. It appears that necessary steps to recover the debt from the party were also taken up by auctioning their stocks which were left after a theft had been place The matter was settled with the party in July 1958 and since the debt has actually been written off in the books of account of the appellant, there is no reason why the same should be treated as premature even in the present assessment. It should, therefore, be allowed as a deduction.

(2) Debt of Rs.883 against P. This party had an overdraft with the appellant's bank with whom he had an account, and the last date of transaction was April 1958. The debtor expired sometimes afterwards and efforts were made to effect the recovery through the deceased's wife in U.K. but after recovery of 20 % further recoveries became impossible. In these circumstances the appellant was justified in claiming it as a bad debt and since this has also actually been written off there is no justification to treat as premature. This too, therefore, should be allowed.

The only remaining debts of this category to be considered now are Rs.5,762 against M/s. A and Rs.87,584 against M/s C Ltd. So far as the first debt is concerned the date of the last transaction appears to be 31st October, 1955 and the debt was claimed to have been written off through a provision account in June 1957. On our enquiry the appellant's representative admitted that the accounts of the party had not yet been written off. We, therefore, hold that this debt should be considered when the account of the party is written off and hold it to be premature so far as the year under consideration is concerned. The position in respect of the other debt is that the company was finally dissolved in March 1960 and the debt should have normally come up for consideration during the year under consideration but according to the information furnished to us the customer's account was credited in December 1960 and is, therefore, beyond the present accounting year of the appellant. We, therefore, hold that this debt should come up for consideration in the next following assessment.

6. We shall now take up the appellant's claim of the legal expenses for the years 1960-61 and 1961-62, for Rs.2,400 and Rs.5,5991 respectively. It appears that these expenses were incurred by the appellant during the course of some dispute before the Industrial Tribunal and issues relating therefrom to the Supreme Court of Pakistan. These are, therefore, obviously business expenses. The disallowance seems to have been made through a confusion by which these expenses perhaps considered to relate to Income-tax Tribunal. Since the factual position is otherwise, we direct that these expenses should be allowed during the two years under consideration as legitimate business expenses.

7. We shall now take up the ground regarding the assessment of the property income. The appellant's representative contended that in the case the income from property was being assessed upto the assessment year 1953-54 on the basis of municipal valuation. It was then changed over to the actual rental basis. Assessment on this basis continued till the assessment year 1959-60. The Income-tax Officer made a departure again in the year 1960-61 and took into consideration the municipal valuation to determine the annual letting value of the property. It was argued that in the following assessment 1961-62 the change over has again been made to the actual rental basis. All that we can say is that the Income-tax Officer has been very consistent with inconsistencies. The reason is very obvious. If the rents received by the appellant company were exactly the same as the annual letting value of the property as determined by the municipal valuation the assessing officer would have no interest in changing the basis from year to year. It appears that in the present assessment the entire income derived by the appellant was not yielding tax. Consequently the basis was changed to make the assessment on a higher income. We, however, find that in Gundry v. Dunkam 7 Tax Cases 12 (C.A-) 6) and in Famnadas Probludas v. Commissioner of Income-tax (1951) 29 I T R 160 the dictum laid down to assess the property is that the valuation by the municipal or other local authority may prima facie be taken to be the correct annual value, but evidence may be given to show that it is wrong. No such evidence is forthcoming in this case. The collection of the receipts from the rentals in some years goes up while in other comes down. We may with benefit quote the following observations of Lord Macmillan in a famous decision styled as Salisbury House Estate, Ltd. v. Fry. [15 Tax Cases, 266, 329 (E.L.)] to show that the revenue has no authority to take advantage of this excess recovery over and above the bona fide annual letting value which in the present case we feel is represented by the municipal annual valuation:

"If the measure is an imperfect one and when applied does not ascertain the actual income derived from the property, so much the worse for the Revenue. Discrepancies one way or the other between actual income and statutory income from tax purposes are familiar features of Income-tax Law. Theoretically, the annual value and the rental should correspond, for annual value is based on rent. If they part company one way or the other the fault lies with the imperfection of the statutory machinery for ascertaining the income from landed property, and the Inland Revenue authorities are not entitled to resort to a different measure, designed for a different source of income, if the actual rents happen to exceed the annual value."

According to the provisions of section 9(2) of the Income-tax Act the bona fide letting value is to be taken into account for income-tax purposes and if the assessment, therefore, falls short of the rent actually received the gap cannot be made up by enhancing the annual letting value. Within the framework of the present law, therefore, we feel that there is no justification in changing the basis from year to year and accordingly held that for the year under consideration, namely, 1960-61 the basis adopted as the municipal valuation was correct. The appellant must therefore fail on this issue notwithstanding the inconsistencies discussed above.

8. We are now left with the last item of Rs.18,400 which was claimed as an admissible deduction for the year 1961-62 on account of forgery. The Income-tax Officer after dealing with the facts of the case held the claim of the appellant for the year under consideration was belated as the loss in this case was ascertained in the year H 1959-60. The appellant's representative on the other hand explained that although the matter was detected much earlier still the forgery could not be established till the person who had committed the forgery was convicted. It was contended that this conviction proved and established the forgery and that the cause of action namely the sharing of the loss between the bank and the actual client etc. was finally decided during the year under consideration. Since the liability too was taken over by the bank to write off this share of loss during the year under consideration it was properly speaking a liability which arose,, pertained and was settled during the year under consideration. We agree with the appellant's assertion in this connection that there was no pre-supposition of this loss and that the liability was taken into account only after the conviction of the person who had committed the forgery. It was, therefore, correctly written off during the year under consideration. We accordingly direct that this should also be admitted to deduction for the year 1961-62.

9. In the result the three appeals succeed in the manner indicated above.

M.B.A./433/T Order accordingly.