ABDUL AZIZ MUHAMMAD VS COMMISSIONER OF INCOME TAX
2007 P T D 21
[Karachi High Court]
Before Muhammad Moosa K. Leghari and Muhammad Ather Saeed, JJ
ABDUL AZIZ MUHAMMAD
Versus
COMMISSIONER OF INCOME TAX
I.T.C. No.26 of 1990, decided on 03/03/2006.
Income Tax Ordinance (XXXI of 1979)---
---Ss. 23 & 136(2)---Bad debt---Disallowance of bad debt---Application for---Reference to High Court---Applicant invested 'amount in a joint venture and said joint venture had informed him that for the period ending on 31-12-1974 a profit would fall to share of applicant, but said profit was never paid by the joint venture to the applicant---Applicant for assessment year in question claimed amount as bad debts under S.23(1) of Income Tax Ordinance, 1979 as the creditor had allegedly played fraud with him and there was no hope of recovery of said amount which allegedly fell to his share---Income Tax Officer disallowed claim of applicant for the reason that amount claimed by applicant as bad debt was of capital nature---Said order of Income Tax Officer was upheld by C.I.T. (Appeals), who also upheld that alleged bad debt was capital in nature---Income Tax Appellate Tribunal dismissed appeal of applicant and refused to refer questions involved in his case because in its opinion entire exercise carried out was that of finding of facts and no question of law was involved---Applicant had approached the High Court under S.136(2) of Income Tax Ordinance, 1979 seeking the opinion on the questions which were rejected by the Tribunal---Contentions of counsel for applicant, that so far as the allowance of bad debt under S.23(1)(x) of Income Tax Ordinance, 1979 was concerned, there being no distinction between category of revenue bad debt and capital bad debt, disallowance of bad debt by Income Tax Officer and dismissal of appeal by Income Tax Appellate Tribunal on ground that applicant had not been able to prove his case, could not be sustained, "carried a lot of weight because there was no hope for recovery of alleged amount from the joint venture---Appellate Tribunal was not justified to reject reference application and dismiss appeal of applicant; it was not a question of adjustment of capital loss of joint venture business, but was writing off of the investment made by applicant in joint venture as a bad debt because such investment had become irrecoverable and was claimed as bad debt under S.23(1)(x) of Income Tax Ordinance, 1979.
(1974) 94 ITR 496; Dawji Dadabhai & Co. v. Commissioner of Income Tax 1982 PTD 210 and Commissioner of Income Tax v. Muhammad Amin Muhammad Bashir Limited 1990 PTD 151 rel.
Arshad Siraj for Petitioner.
Nasrullah Awan for Respondent.
Date of hearing: 26th January, 2006.
JUDGMENT
MUHAMMAD ATHER SAEED, J.---This Income Tax Reference Application under section 136(2) of the Income Tax Ordinance, 1979 has been filed against the order of the Tribunal dated 7-4-1988 for the assessment year 1979-80 by which the Tribunal disallowed bad debts amounting to Rs.407,719 made by the Income Tax Officer.
2. Brief facts of the case are that the applicant who are importers of Kiryana items, chemicals, powder milk etc. had filed their return for the assessment year 1979-80 in which they had claimed a bad debt of Rs.407,791. The appellant had invested a sum of Rs.400,000 in Messrs Vohra Sons a joint venture in a Seagoing Scrap Vessel and Ship Scrap business. For the period ended 31-12-1974, Messrs Vohra Sons had intimated to the appellant that a profit of Rs.100,000 would fall to their share and therefore, the accounts of Vohra Sons in the book of accounts of appellant was credited by Rs.100,000 which was also shown in the profit and loss account for the year ended on 31-12-1974 and that amount has already been assessed to tax in the assessment year 1975-76. But this amount was also never paid by the Messrs Vohra Sons. For the assessment year in question the applicant had claimed an amount of Rs.407,791 as bad debt under section 23(1) of the Income Tax Ordinance, 1979 as the creditor had allegedly played fraud with the appellant and there was no hope of recovery.
3. The Income Tax Officer allowed the claim of Rs.100,000 being the commission receivable, which had already been assessed and disallowed Rs.407,791 allegedly for the reason that the amount was of capital nature and being unproved as it was an amount of capital investment.
4. The order of the Income Tax Officer was upheld by the C.I.T. Appeals, who also upheld that the bad debts were capital in nature and, therefore, were not allowed.
5. Being aggrieved by the order, the appellant filed an appeal before the Income Tax Appellate Tribunal, who vide their order referred to above dismissed the appeal with the following remarks.
"The learned D.R. cited case reported as (1974) 94 ITR 496 in the case of State Trading Corporation of India v. C.I.T. The I.T.O. had given sufficient opportunity to the appellant to prove his case as is evident from the assessment order and the record of the case. The addition made was therefore, fully justified and is upheld."
6. The applicant filed a reference application under section 136(1) of the Income Tax Ordinance asking the Tribunal to refer the following questions for the opinion of this Court:---
(i) Whether on the facts and in the circumstances of the case the learned Tribunal has not misdirected itself in law to confirm the disallowance of the bad debts amounting to Rs.407,719.
(ii) Whether on the facts and in the circumstances of the case the learned Tribunal had any material of evidence to hold that the assessee failed to prove his case.
(iii) Whether on the facts and in the circumstances of the case the learned Tribunal was justified in confirming the disallowance of the bad bets of Rs.407,719 on the ground that the assessee had failed to prove his case.
7. The Tribunal vide its order in R.A. No.96/KB dated 26-1.0-1989 refused to refer the questions because in its opinion the entire exercise carried out was that of finding of facts and no question of law was involved.
8. Now, the applicant has approached this Court under section 136(2) of the Income Tax Ordinance, 1979 seeking the opinion of this Court on the same questions' which were rejected by the Tribunal.
9. Heard Mr. Arshad Siraj, Advocate for the applicant and Mr. Nasrullah Awan, Advocate for the respondent.
10. The learned counsel for the applicant drew our attention to section 23(1)(x), which reads as under:---
"23(1)(x) in respect of bad debts, such amount (not exceeding the -amount actually written off by the assessee) as may be determined by the Income Tax Officer to be irrecoverable."
He contended that bad debts allowed under this section be categorized as revenue bad debts and capital bad debts as there is no such distinction envisaged in this section. He pointed out that the only prerequisite for disallowing the claim of bad debt under this section is that the bad debt should have been actually written off and should have been determined by the Income Tax Officer to be irrecoverable. He drew our attention to the extract from the assessment order by which the Income Tax Officer had disallowed the bad debts and pointed out that the Income Tax Officer has given no finding that the bad debt claimed had not actually been written off nor had given any finding that the above amount was recoverable, which could have been they only reason for disallowing their claim of bad debt. According to the Income Tax Officer it was an item of capital nature and being unproved as it was an amount of capital investment.
11. He further stated that the Tribunal while upholding this disallowance had also mentioned that the appellant had failed to prove his case. However, neither the Income Tax Officer nor the Income Tax Tribunal have pointed out the factor which the applicant had failed to prove. He further stated that apparently the conclusion that can be drawn is that the Income Tax Officer had made the addition because in his opinion the applicant had failed to prove that the bad debt was of revenue nature and not of capital nature. He had again reiterated his arguments that there is no distinction between bad debt of capital nature and bad debt of revenue nature for allowing of bad debt under section 23(1)(x) and, therefore, there was no requirement to prove the nature of bad debt. He further stated that in the impugned order rejecting the reference application, the Tribunal had given certain findings, which were not there in the original order of rejection. He specified that these findings are as under:---
(1) That the I.T.O. is the only authority under the law to judge whether debt had become bad and irrecoverable.
(2) The investment made is the joint venture had no nexus to the income earned in kiryana business.
(3) That section 23(1) is concerned with income and not with investment.
(4) Capital loss of joint venture business cannot be allowed to be deducted from income of kiryana business.
12. He argued that none of the above findings are relevant to allowability of bad debt. In support of his above contentions he relied on the following judgments of this Court.
(1) Dawji Dadabhai & Co. v. Commissioner of Income Tax 1982 PTD 210 and (2) Commissioner of Income Tax v. Muhammad Amin Muhammad Bashir Limited 1990 PTD 151.
13. Mr. Nasrullah Awan, the learned counsel for the respondent, supported the orders of the Courts below and submitted that the questions sought to be referred for adjudication by this Court are questions of facts and not question of law, which cannot be adjudicated by this Court. He further argued that the applicant had not been able to prove his case that the bad debt had become irrecoverable and, therefore, the I.T.O. had rightly held that the same was not allowable under section 23(1)(x). He further argued that the capital loss of the joint venture business cannot be allowed as an expense against the kiryana business. He was, however, not able to show us any finding of the Income Tax Officer that the debt had not become irrecoverable nor could be explain as to what the applicant had failed to prove.
14. We have carefully perused the records of the case including the orders passed by the authorities below and have examined the questions referred in the light of the arguments advanced by the counsel and the judgments relied on by them and the contents of the impugned order.
15. The arguments of the learned counsel for the applicant that so far as the allowing of bad debts under section 23(1)(x) is concerned there is no distinction between category of revenue bad debt and capital bad debt and, therefore, the disallowance of bad debt by the Income Tax Officer and the dismissal of appeal by the Income Tax Appellate Tribunal on the ground that the applicant has not been able to prove his case cannot be sustained carries a lot of weight.
16. The case-law relied on by the applicant to substantiate his arguments is the judgment of this Court in the case of Commissioner of Income Tax v. Muhammad Amin Muhammad Bashir Limited 1990 PTD 151 which has been given in a case where the facts are completely identical to the facts of the present applicant. In that case also the applicant had to make investment in other companies and after there was no hope for recovery of this investment had written off the same as bad debts and this Court had upheld the order of the Tribunal allowing the deduction of bad debts and dismissed the reference filed by the Commissioner of Income Tax.
17. In the second case of Dawji Dadabhai & Co. v. Commissioner of Income Tax (West) Karachi reported in 1982 PTD 210 this Court enunciated the following principle:---
"5. (ii): The distinction between a revenue expenditure deductible in assessing income-tax and a capital expenditure which is not so deductible is that the former is incurred in the course of business and is incidental to the business, whereas the latter is incurred in order to procure an asset of an advantage for the enduring benefit of the trade."
18. We have also not been able to understand as to what further proof was required from the applicant to establish his case. The discussion on this point made by the Tribunal in its order rejecting the reference application under section 136 seems to be irrelevant as no such reasons were stated in the appellate order dismissing the appeal. We also do not agree with the Tribunal's observation in the reference application that the entire exercise involved in arriving at the conclusion that the capital loss of the joint venture business cannot be allowed as a deduction from the income of Kiryana business was an exercise of finding of facts we would like to observe that it was not a question of adjustment of capital loss of joint venture business against income tax kiryana business, but writing off of the investment made by the applicant in the joint venture as a bad debt because such investment had become irrecoverable and was claimed as a bad debt under section 23(1)(x).
19. In the light of the above observations we would answer the question No.1 proposed to be referred in negative in favour of the applicant and hold that the Tribunal has misdirected itself in law to confirm the disallowance of bad debts amounting to Rs.407,791. As a consequence of our answer to this question the other two questions do not require to be answered by us.
20. A copy of this order is directed to be sent to the Income Tax Appellate Tribunal with the seal of the Registrar of this Court with directions to pass order conformably to the opinion of this Court.
H.B.T./A-85/KApplication allowed.