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Issues:
Interpretation of section 36(1)(vii) of the Income-tax Act, 1961 regarding deduction of bad debts written off as irrecoverable. Analysis of the applicability of the Textile Undertakings (Taking Over of Management) Ordinance, 1983 on bad debts. Consideration of the Central Board of Direct Taxes Circular dated January 13, 1971 in relation to the Ordinance. Interpretation of Section 36(1)(vii) of the Income-tax Act, 1961: The case involved the deduction of bad debts under section 36(1)(vii) of the Income-tax Act, 1961, amounting to Rs. 32,57,894 for the assessment year 1985-86. The Tribunal's decision was challenged regarding the deduction of bad debts written off as irrecoverable in the accounts of the assessee. The Commissioner of Income-tax (Appeals) had initially allowed the deduction, but the Tribunal reversed this decision. The Tribunal permitted the assessee to proceed against Tata Mills for recovery, leaving the matter open for further action under section 36(1)(vii). Applicability of the Textile Undertakings (Taking Over of Management) Ordinance, 1983: The judgment delved into the implications of the Textile Undertakings (Taking Over of Management) Ordinance, 1983 on the bad debts in question. The Ordinance aimed to take over the management of textile mills to improve working conditions, including assets, rights, and leaseholds. Section 7 of the Ordinance clarified that liabilities incurred by a textile company before the appointed date were enforceable against the company, not the Central Government. The judgment analyzed the relationship between the Ordinance and the bad debts to determine if the debts were recoverable from Tata Mills under the Ordinance's provisions. Consideration of Central Board of Direct Taxes Circular dated January 13, 1971: The judgment examined the relevance of the Central Board of Direct Taxes Circular dated January 13, 1971 in the context of the Ordinance and the bad debts. The Circular, issued under section 119 of the Income-tax Act, 1961, dealt with undertakings of textile mills managed under the Cotton Textile Companies Act, 1976. The Circular highlighted restrictions on filing suits against undertakings without Central Government permission and the cessation of liabilities post-Act enforcement. However, the absence of similar provisions in the 1983 Ordinance indicated that the Circular's applicability to the current case was limited. The judgment emphasized that the assessee had the option to pursue recovery against Tata Mills and seek relief under section 36(1)(vii) of the Income-tax Act, 1961. Conclusion: The High Court, in disposing of the reference, affirmed the Tribunal's decision, concluding that the assessee could have taken action against Tata Mills for debt recovery and sought relief under section 36(1)(vii) of the Income-tax Act, 1961. The judgment clarified the relationship between the Ordinance, the Circular, and the deduction of bad debts, ultimately upholding the Tribunal's decision and answering the referred question in the affirmative.
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