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Issues:
1. Allowability of bad debt deduction in the computation of income from business. 2. Validity of the claim of bad debt write-off due to debtor's liquidation. Analysis: Issue 1: The primary issue in this case revolves around the allowability of a bad debt deduction in the computation of income from business for the assessment year 1981-82. The Assessing Officer initially rejected the claim of the assessee, stating that there was no evidence that the official liquidator had rejected the claim of the assessee, despite the debt being written off as bad debt. However, the Commissioner of Income-tax (Appeals) allowed the claim, emphasizing that once a company enters liquidation proceedings, unsecured creditors face significant challenges in recovering their dues. The Commissioner opined that in such circumstances, where recovery is virtually impossible, the debt can be considered bad. The Tribunal, on the other hand, upheld the Assessing Officer's view, highlighting the lack of evidence regarding the debt being bad and premature write-off without recovery attempts. The Tribunal reversed the Commissioner's order, leading to an appeal before the High Court. Issue 2: The second issue pertains to the validity of the claim of bad debt write-off by the assessee due to the debtor's liquidation. The counsel for the assessee argued that since the debtor company had gone into liquidation and wound up, there was no possibility of recovery, justifying the decision to write off the loan. Reference was made to a previous case where a similar financial scenario led to the conclusion that unsecured creditors had no chance of recovering their dues. The High Court cited this precedent to support the assessee's claim, emphasizing that when secured creditors received the entire amount, unsecured creditors had no chance of recovery. The Court found that the Tribunal erred in denying the claim based on the lack of recovery possibilities for unsecured creditors, ultimately ruling in favor of the assessee on this issue. In conclusion, the High Court ruled against the Revenue on the first issue, affirming the allowability of the bad debt deduction. However, as there was no specific finding by the Tribunal regarding the debt becoming bad, the second issue was deemed misconceived, and the Court declined to answer it. The judgment disposed of the reference accordingly, directing all parties to act on the signed copy of the order.
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