ASSOCIATED BANKING CORPORATION OF INDIA LTD vs. COMMISSIONER OF INCOME-TAX, BOMBAY-1

CIVIL APPEAL No. 956/1963Supreme Court[1965] 1 S.C.R. 78822 October 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI ASSOCIATED CANKING CORPORATION OF INDIA15 pages
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What were the facts?

The assessee, Associated Banking Corporation of India Ltd., was a bank in liquidation. For the assessment year 1948-49, the official liquidator claimed deductions for bad debts under Section 10(2)(xi) and amounts embezzled by an officer under Section 10(2)(xv). The income-tax authorities and the Appellate Tribunal rejected the bad debt claim because the debts were not written off in the bank's books. The embezzlement claim was rejected as not relating to business and not being a loss suffered in the accounting year. The High Court, after receiving a report from the Tribunal, upheld the rejection of bad debts due to non-writing off and the embezzlement loss as occurring after the accounting year. The assessee appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the bank was entitled to claim Rs. 15,00,000 as bad debts in the year of account. The Court clarified that Section 10(2)(xi) does not mandate that bad debts must be written off in the books of account to be allowed. While the section states that the allowance shall not exceed the amount written off, the absence of a write-off entry is not a ground for denying jurisdiction to estimate irrecoverable debts, provided there is a reasonable explanation for the absence. The officer's power is restricted only in that the estimated amount cannot exceed the written-off amount. The Court approved the decision in Brgg Dunlop and Co. Ltd. v. Commissioner of Excess Profits Tax, West Bengal. Regarding the embezzlement, the Court held that the bank was not entitled to claim the embezzled amount as a business loss or deduction. Although the embezzlements occurred in 1946, they were unknown to the bank at the time. The Court ruled that a trading loss does not occur as soon as embezzlement takes place; it occurs when it becomes certain and there is no reasonable prospect of recovery. Since the defalcations became known to the liquidator only after the accounting year and it was not established that recovery was impossible in that year, the loss was not deductible under Section 10(2)(xv).

What were the issues?

1. Whether the assessee is entitled to claim bad debts amounting to Rs. 38,35,654 or any lesser sum as a deduction under Section 10(2)(xi) of the Indian Income-tax Act, 1922, despite the debts not being written off in the bank's books. 2. Whether the assessee is entitled to claim Rs. 10,15,000 and Rs. 98,892 as a business loss or deduction under Section 10(2)(xv) of the Act, arising from embezzlement by an officer. Assessee's arguments: - For bad debts, the assessee contended that Section 10(2)(xi) does not mandate writing off debts as a prerequisite for allowance, but rather limits the allowance to the amount written off if such an entry exists. The absence of an entry should not preclude a claim if the debt is demonstrably irrecoverable. - For embezzlement, the assessee argued it was a trading loss suffered in the course of business. Revenue's arguments: - For bad debts, the revenue argued that the absence of a write-off entry in the books was fatal to the claim under Section 10(2)(xi). - For embezzlement, the revenue argued that the loss did not relate to the business and, crucially, was not ascertained or suffered within the relevant accounting year.

Which sections of the Income-tax Act were involved?

Section 10(1),Section 10(2)(xi),Section 10(2)(xv)

AI-generated summary — verify with the full judgment below

788 ASSOCIATED CANKING CORPORATION OF INDIA Lm. A v. COllMISSIO:"iER OF INCOME-TAX, BOMBAY-1. October 22, 1964 (K. SUBBA RAO, J.C. SHAH A1'D S. M. S!KRI JJ.) lneome Tax Act (11 of 1922), ss. 10(1) and 10(2) (xi) and (xv)- Scope ,,f-Bad debts-If should be written off before claim is al/owed- Bank-1~·,nbczzlement by officer-I/ trad,ing loss-T;nie of occurrence.

The :tsscsscc was a Bank in liquidation.

The official Jiquidator sub- mitted ;1 return for the assessment year 194849 and claimed ao;; deductions : (i) under s. 10(2)(xi) of the Indian Income-tax Act, 1922, debts due to B the Bank which had become irrecoverable. and (ii) under s. I0(2)(x•'), C certain arnounts embezzled by one of its otliccrs and v.·hich the bank had to pay to its constitucnLs. ·rhc income-tax authorities and the Appellate Tribun:U rejected the claim for aUowance of. bad debts on tho cround that the b::id debts h:id not been v.·rittcn off in the books of account of the bank. ·rhey also rcjcc1c<l 1hc claim for allo\\'ance of the embezzled amounts on the grounds that those amour.ts did not relate to the business of the bank and that, in any event, the Joss, not having been ascertained in the y

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