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

Citation: [1965] 1 S.C.R. 788 · Decided: 22-10-1964 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Case Partly allowed

Judgment (excerpt)

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 year of 
account w;is not suffered in that year. 
\Vhcn the matt~rs \Vere referred to 
lhc High (~ourt, rhc Court asked for a report from the ·rribUna] as to: 
(i) "hc•hcr any de!11s had ac1ually hecome irrec.overable, and (ii) the year in 
which lo~~' \va~ suffered by the ht1nk in consequence of the cmbc1zlcmcnts. 
The Tribunal reported that debls ag~regating to Rs. 15,00.000 at least, had 
l>cwmc irrecoverable in the year of aocount, and that the defalcations by 
the h:mk's ofiicer became known to the liquidator only after the ending of 
E 
the year of account. 
After the receipt of the report, the High Court 
decided against the asscsscc holding that (i) the bad debts were not admis-
iiblc deductions because they were never written off, and (ii) the loss to the 
hank on account of the dcfalcation.s occurred later than the year of account. 
The as.sc-;scc appealed to the Supreme Court. 
HELD: (i) The hank was entitled to claim Rs. 15,00,000 as bad debts 
in the yc;ir o( account. [802 F-G] 
Section 10(2) (xi) does not say that the income-tax officer cannot allow 
a bad or doubt(ul debt unless it is written off in the hooks of account; it 
merely stales that he •hall not allow any amount in excess of the amount 
actually \vrittcn off as irrecoverable. 
If .there is a reasonabJe explanation 
for the ahscnce of an entry writing off the amount of a debt, such absence 
hy its~lf is not a ground fOr denying to the officer, jurisdiction to estimate 
the an1ounrs of dehls \\rhich have become irrecoverable and to allow them as 
proper deductions in the computation of profits. 
The officer's power is 
G 
rC"Strictcd only in one direction, namely, that, when the assessee has posted 
an entry or entries in his books of account, the amount to be estimated as 
irrecoverable is not to exceed the amount actually written off by the asses.see. 
Thal dncs not mean that an assessee who chooses not to post an entry is 
in a helter position than one who has actually posted entries, because, 
h1: :ilv.:;1vs nins the risk of the inc.omc-tax officer coming to the conclusion 
that the fact thot he had not chosen to post an entry i• consistent with the 
lindin1: that no port of the debt due to him has become irre"..<>verable. (794 
ff 
E-F; 796 D-f; 797 G-H; 798 n-CJ 
Brgg Dunlop n11d c·o. Lril. v. Con1missioner oj Excess Profits Tax, West 
Brngal. ( 1954) c5 J.T.R c76, approved. 
ASSOCIATED BANKING CORP. V. C.I.T. (Shah /.) 
781 
A 
(ii) The bank was not entitled to claim as a business losa or deduction 
B 
c 
the amount embezzled by the officer. [802 G] 
Loss had been suffered by the bank as a result of the defalcations by 
ill officer, but the withdrawal and misapplication of the funds came to 
the liquidator's knowledge only after the accounting year, and &o, the 
amount would not be a permissible deduction under s. 10 (2) (xv) of the 
Act. Though the embezzlements took place in 1946, they were then 
unknown to the bank; and even after they became known to the liquida-
tor, a tra\)ing loss could not be deemed to have resulted. A trading los• 
does not occur. to a bank as soon as embezzlement takes place of its funds, 
whether or not. the bank was aware of it. 
So long as there was a realion-
able prosp~ct of recovering the amounts, trading loss, in a commercial 

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