1934 (6) TMI 28 - HC - Income Tax

Whether the debt, being a debt due from a limited company, can in law be treated as a bad debt so long as the limited company is not actually wound up or has not ceased to be a going concern? Held that - The order of the High Court should be discharged and in lieu thereof an order should be made answering in the negative the question which the Commissioner was directed to raise and which is set out above. As a result the appellant s assessment and his claim to the deduction, will have to be reconsidered by the appropriate authority in the light of all relevant evidence. Appeal allowed

Summary

Issues:
- Whether a debt due from a limited company can be treated as a bad debt for income tax purposes while the company is still operational.

Analysis:
The appellant, a member of a firm acting as an agent for a limited company operating a cotton mill, was assessed for income tax based on the firm's income for the preceding year. The firm had paid large sums to lenders on behalf of the limited company, resulting in the limited company owing a significant amount to the firm, including the appellant. The appellant claimed this amount as a deduction in his income tax assessment, arguing that it was irrecoverable from the limited company, thus constituting a bad debt. The dispute centered on whether a debt due from a limited company could be considered a bad debt while the company was still operational.

The Assistant Commissioner initially denied the deduction, stating that as long as the mill was operational, the debt could not be considered bad. The Commissioner upheld this decision, leading to the case being referred to the High Court of Bombay. The High Court ruled that for a debt from a joint stock company to be considered a bad debt or a business loss, the company must have ceased to be a going concern. The High Court's decision was based on the premise that as long as the company was operational, its debts could not be deemed irrecoverable.

However, the Privy Council disagreed with the High Court's reasoning, stating that the recoverability of a debt, whether from an individual or a company, is a factual determination based on the circumstances of each case. The Privy Council emphasized that there is no legal basis for categorically excluding debts from limited companies that are still operational from being classified as bad debts. The Privy Council held that the High Court's decision should be overturned, and the appellant's claim for deduction should be reconsidered based on all relevant evidence.

In conclusion, the Privy Council allowed the appeal, directing that the High Court's decision be set aside, and the appellant's claim for deduction be reassessed. The Privy Council also ordered the respondent to pay the appellant's costs.