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Issues Involved:
1. Whether the applicant bank was entitled to claim the debt as bad and doubtful under section 10(2)(xi) of the Income-tax Act without determining the irrecoverability of the debt. Issue-wise Detailed Analysis: 1. Entitlement to Claim Debt as Bad and Doubtful under Section 10(2)(xi): The applicant bank sought to deduct Rs. 4,23,271 as bad and doubtful debts written off during the assessment year 1946-47. This amount comprised two debts due from M/s. C. M. Karanjia & Co. to the applicant's branches in Calcutta and Bombay. The Income-tax Officer disallowed the claim, asserting that the bank could not substantiate the irrecoverability of the debt during the accounting period. The Tribunal found that the Bombay branch had not even made a formal demand for the loan from the debtor. Additionally, the applicant admitted to having claims against the insurance company and the government for the insured goods destroyed or misappropriated during the Japanese occupation of Hongkong. The debtor had also been promising payment. Despite these factors, the bank wrote off the debt on the advice of taxation experts to benefit from an expected reduction in excess profits tax. The Tribunal concluded that, as the applicant was "an assessee carrying on a banking or money-lending business," the second half of section 10(2)(xi) applied. This section allows claims for sums in respect of loans made in the ordinary course of business, as estimated irrecoverable by the Income-tax Officer. The Tribunal found that the amounts claimed could not be considered irrecoverable on the date they were written off. The question of law raised was whether, under the facts and circumstances, the applicant bank was entitled to claim the debt as bad and doubtful under section 10(2)(xi) without determining which part of the debt was irrecoverable. Judgment Analysis: The High Court examined whether the applicant bank could claim the debt as bad and doubtful without determining its irrecoverability. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal had all disallowed the claim on the grounds that the debt's irrecoverability had not been substantiated. The court noted that the applicant argued that a debt could be written off as bad and doubtful without taking any recourse against the debtor. The Tribunal, however, found that the applicant had not taken steps to realize the loan or determine the irrecoverable part, and the debt was written off primarily for tax benefits. The court emphasized that under section 10(2)(xi), the sum in respect of bad and doubtful debts or loans made in the ordinary course of business must be estimated irrecoverable by the Income-tax Officer. The court held that this condition applied to both parts of the clause, meaning that even for bad and doubtful debts, the Income-tax Officer's estimation of irrecoverability was necessary. The court concluded that the question referred was pointless, as the decisive factor was the Income-tax Officer's estimation of irrecoverability, not the applicant's claim. Therefore, the court did not provide an answer to the question and disposed of the reference accordingly. Conclusion: The High Court determined that the applicant bank could not claim the debt as bad and doubtful under section 10(2)(xi) without the Income-tax Officer's estimation of irrecoverability. The reference was disposed of without answering the question, emphasizing the necessity of the Income-tax Officer's determination in such claims.
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