DORA B PATEL, J.-The respondent is a bank, and the loans advanced by banks have often to be written off as bad debts; therefore, in the assessment year 1961-62 to the assessment year 1965-66 the respondent claimed to have written off bad debts amounting in each of these years to many lakhs of rupees; therefore, in each of these assessment years, it claimed to set off these bad debts against its profits under section 10 (2) (xi) of the Income-tax Act, 1922 (hereinafter called the said Act). Now, apart from showing that the debts written off were, in fact, irrecoverable, the question was of the manner in which the requisite entries were maintained by the respondent in its records, and like most other banks, the respondent has maintained accounts in accordance with the directions contained in a circular issued by the Cent ral Board of Revenue on the 24th of April, 1946. However the Income-tax Officer, or, Officers were not impressed by the respondent's method of keeping account, and, for reason which I will presently consider , the respondent's claim for setting off these bad debts against its profits was rejected for the five assess. Ment years in question. Accordingly , the respondent filed appeals before the Income-tax Appellate Tribunal, which disposed of the appeals of all the five years by its order dated 9-1-1967. Relying, inter alia, on the Central Board of Revenue's circular of 24th April 1946, the Income-tax Appellate Tribunal, to which I will refer as the Tribunal, allowed all these appeals.
2. Aggrieved by this order of 9-1-1967, allowing the respondent's appeals, the Commissioner of Income-tax filed an application under section 66 of the Act for referring to this Court the following questions:- "(1) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the claim of the assessee on account of alleged Bad Debts was admissible within the meaning of section 10 (2) (xi) of the Income- tax Act, 1922, when the assessee had not actually written off the alleged Bad Debts in the books of accounts and carried forward the accumulated balances of the Provision Accounts from year to year?
(21 Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing the claim of the assessee on account of alleged Bad Debts.
When there was no finding to the ef fect that the debts were irrecoverable."
As the Tribunal declined to refer these questions, the Commissioner of Income-tax filed an application under section 66(2) of the said Act, which was allowed by this Court. Hence these references.
3. The first question turns on the method of keeping accounts, and admittedly the respondent had kept accounts in the manner prescribed by the Central Board of Revenue nearly thirty years ago. Mr. S. A. Nusrat was also compelled to concede that banks generally maintained their accounts in this matter because of that circular of the Central Board of Revenue. We therefore, pointed out that, if the method of keeping accounts thus prescribed was not proper , the Central Board of Revenue could have cancelled the circular , and we also observed that it was improper for the Government to encourage banks to follow a certain system of keeping accounts, and then penalise them for so doing. Mr. S. A. Nusrat feebly submitted that there could be no estoppel against a statute.
That is true, but learned counsel had to show that the circular was contrary to the provisions of section 10 (2) (xi) of the said Act. Therefore, in order to appreciate Mr. S. A. Nusrat's reply , I would ,point out here that, according to subsection (1) of section 10, income-tax is payable by an assessee under the head "profits and gains of business . " in respect of the profits, or, gains of any business carried on by him. Subsection (2) then re-prescribes that such profits or gains are to be computed after making the allowances prescribed in the subsection and clause (10) of the subsection, in so far as it is relevant, reads: " in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable, but not exceeding the amount actually written off as irrecoverable in the books of the assessee." Thus, the statute does not prescribe the methods of keeping accounts, therefore I am not able to understand how a direction to maintain accounts in a certain manner would be against the statute, as it is not contended that the circular of the Central Board of Revenue contains directions which would, for example, lead to the fabrication of accounts.
4. Mr. S. A. Nusrat then submitted that it was not enough for the respondent to contend that the debts for which it claimed a set off had been written off as irrecoverable, but that the respondent had also to prove that these debts were irrecoverable. That is correct, and the question is, whether tine respondent had failed to prove that the debts for which it claimed a set off against its profits had become irrecoverable. The assessment orders of the Income-tax Officer in all the five assessment years are identical. So it would be sufficient to point out here that the respondent had submitted an explanation in writing, but, as that letter is not part of the record before us, Mr. S. A. Nusrat referred us to a passage from these letters, which has been quoted by the Incom e tax Officer in his orders. The passage reads: "Regarding Bad Debts or system is to make provision for such item which are charged to Revenue.
Each years, the amount of provision for Bad Debts is credited to a ledger account called provision for Bad Debts.
Any recoveries made against Bad Debts are debited to Bad Debt Provision Account and credited to Income Account, which will be evident from the statement of Analysis of Income. The same applies to Assessment year 61/62 also as the facts are common." Now, according to Mr. S. A Nusrat, the respondent's explanation was by itself sufficient to show that, in the opinion of the respondent, the debts had not become irrecoverable. This was also the view of the Income-tax Officer in his assessment orders. There, the Income-tax Officer observed : "The entries pertaining to bad debts made in the acco unts clearly showed that debts have been written off in the accounts as bad debts. The Income-tax Officer then further observed: "For the purpose of such final writing off of the debt, the account of the debtor is to be credited, with corresponding debit either to bad debts written off accounts or directly to the Income and Expenditure account or to the Profit & Loss account as the case may be. Since the debts have been finally written off as irrecoverable and assessee has merely made a provision for bad and doubtful debts in the accounts, the claim for deduction is not admissible in terms of the Income-tax Act and is disallowed." As observed by the Tribunal in its appellate order , the assessment order of the Income -tax Officer erred on the side of brevity , but Mr. S. A. Nusrat explained to us that the reason why the Incom e-tax Officer had rejected the respondent's claim was as follows. Accor ding to the respondent's explanalion quoted earlier , even though the bad debts were shown in the account called "provision for Bad Debts," recoveries made against such bad debts were debited to the Bad Debts Provision Account and credited to the income account; therefore according to Mr. S. A.
Nusrat, the books of the respondent supported the inference drawn by the Income-tax Officer that the debts written off were not really irrecoverable. I am unable to accept the submission, but I agree with Mr. S. A. Nusrat that the burden of proving that a debt had becom e irrecoverable was on the respondent. Mr. S. A. Nusrat then submitted that a debt was recovred able as long as there was a ray of hope for recovering it, and in support of this proposition, he referred us to the Judgment of a Full Bench of the Lahore High Court reported in Messrs B. C. G. A.
(Punjab) Ltd. v. Commissioner of Incom e-tax, Punjab, N.-W . F. And Delhi Provinces (0. As I agree with the proposition advanced, it is not necessary to examine the case cit ed. But when can it be said that there is no ray of hope for recovering a debt? Mr. S. A. Nusrat said that the question always was of the facts and circumstance of the case. But, in my opinion, it would be more accurate to say that the question will always he of the estimate of the facts and circumstances of a case, and because human estimates are necessarily fallible, the respondent's claim and/or its books of account cannot be rejected, merely because it maintains a system of accounts, which permits it, in the event of windfall from the debtor , so to say , to reverse the earlier entries writing of f a debt as irrecoverable.
5. Mr. S. A. Nusrat then said that a debt was not irrecoverable, because it was time-barred. I wcud agree with this proposition only to the extent that a debt would not be irrecoverable merely because it was time-barred. This is for the obvious reason that there are honest people in the world, and it is also in the interest of habitual borrowers not to take shelter in technical defences like limitations. However , when we invited Mr. S. A. Nusrat to give an example of when a debt would be irrecoverable, he would not do so; so I would take the extreme case of a bank which has not been able to recover the loan advance d by it even though it has exhausted all its legal remedies and obtained a bankruptcy order against the debtor . Obviously in such a case the bank would have proved, beyond any doubt, that the debt was irrecoverable. But even in such a case the debt might be re-paid, if the debtor obtains an order of discharge and is able to succeed in his business or trade. Or take the hypothetical case of a debtor receiving a legacy , or a debtor whose relations pay off the debt for the sake of the honour of the family . Such cases do occur , but because the debt had been believed to be irrecoverable, the bank would nece ssarily have entered it in its Bad Debt Provision Account. Then, on the unexpected realisation of the debt, the bark would have to reverse its earlier entry in the Bad Debt Provision Account and make an entry in its income account for the amount unexpec tedly received by it. But, merely because of this reversal of entries, it cannot possibly be said that the earlier entry in the Bad Debt provision Account was a provisional entry . However , that is what the Income-tax Officer held, and this finding was reversed by the Tribunal.
6. I cannot, therefore, agree with the view taken by the Income-tax. Officer, and Mr. Ali Athar stated that the view was contrary to the books on the methods of account-keeping. As the question is of the legal effect of the system of accounting maintained by the respondent, I would quote here a passage from Kanga in his Commentary on Income-tax (Fourth Edition). The learned author observes at page 365 : Proviso. Final Adjustment in the Year of Recovery .-The allowance under this clause is necessarily based upon a mere estimate. Ultimately at {{FOOT NOTE}}
(1) AIR 1937 Lah. 338 {{FOOT NOTE}} larger or smaller portion of the debt or loan may be recovered than was estimated to be recoverable at the time of making the allowance under this clause. In such a case the excess would be taxed as profit of the year in which it is realised, to make up for the excessive allowance in a fromer year; I agree with these observations of the learned author , and, in my humble opinion, the Income-tax Officer eared in holding that the respondent's entries abou t its bad debts "show that the debts have been written off in the accounts provisionally ." The inference drawn by the Income-tax Officer is both incorrect and contrary to long established practice, and I agree with the Tribunal's view , the more so, as it does not involve any loss to the exchequer .
8. I now turn to the questions referred to us, and at the outset, I have to point out that they have not been properly framed. The first question challenges the propriety of the Tribunal's order because "the assessee had not actually written off the alleged Bad Debts in the books of account . , whilst the second question challenges its propriety , because "there is no finding to the effect that the debts were irrecoverable. "But, whilst reversing the Income-tax Officer's order , the Tribunal had expressly held that the respondent had actually written off its Bad Debts in its books and similarly it had expressly held that the debts were irrecoverable. It would appear that the applicant is aggrieved by these finding, but, as he has allowed them to become final, I do not see how the question, as framed, can be said to arise fairly out of the Tribunal's order within the meaning of section 66 of the said Act. When we referred Mr. S. A, Nusrat to this aspect of the case, he submitted that we were entitled, in view of the judgment in Octaviuc Steel Company Ltd. v. The Commissioner of Income-tax, Dacca (1), to correct the question. I have no doubt we are entitled to reset the question, so as to bring out the real controversies between the parties, which they can legitimately raise under section 66. Accordingly , I would reset the first question to read: "whether on the facts and in the circumstances of the case the Tribunal was right in holding that the claim of the assessee on account of alleged Bad Debts was admissible within the meaning of section 10 (2) (xi) of the Income-tax Act, 1922? For the reason given earlier , I would answer this question in the af firmative.
9. 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 its books, were irrecoverable. I fully agree with this 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, and, as the Income-tax Officer had rejected the explanation' on the sole ground that the system of accounts maintained by the respondent led to the inference that the debts had really not been written off, Mr. AliAthar's further contention was that the Income-tax Officer had accepted the respondent's explanation on the facts, but rejected its claim only because of the manner in which it was keeping its accounts. On the other hand" according to Mr. S. A. Nusrat, the fact that the respondent's claim had been reject ed by the Income-tax Officer on the ground stated in his order did not mean that the Income-tax Officer had accepted the factual explanation submitted by the respondent. The answer to this controversy turns on the explanation submitted by the respondent, and whether , in that explanation {{FOOT NOTE}}
(1) PLD 1960 SC 371 {{FOOT NOTE}} the respondent had submitted what the learned counsel described as an explanation of the facts. That explanation is not before us; but in my humble opinion, the respondent should not suffer on that account, In any case, I have read and re-read the order of the Income-tax Officer, and I venture to think that Mr. All Athar's submission is correct.
However , if I am wrong, on the assump tion 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 the system of account, 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 plea was dropped, and, if it was dropped, it can only mean that the explanation of the factual position given by the respondent was accepted as satisfactory .
10. However , this question also is expressly based on the assumption that " here was no finding to the effect that the debts were irrecoverable." This assumption is not correct, because the Tribunal's finding is to the contrary; accordingly , for the reasons given earlier , I would reset and modify this question also by deleting the words: "when there was no finding to the effect that the debts were irrecoverable." And I have no hesitation in answering the question, so reset, in the af firmative.
The reference is disposed of accordingly .
M. A. RASHID, J.-I agree. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.