1953 (5) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Whether the claim for the allowance of bad debts at Rs. 10,00,000 for the relevant chargeable accounting period was justified as against Rs. 6,10,052 allowed.

Detailed Analysis:

1. Background and Facts:
The applicant company, which acted as managing agents for two other companies, Craig Jute Mills Limited and Waverly Jute Mills Limited, wrote off Rs. 5,00,000 from each debtor company and claimed this amount as a bad debt in its excess profits tax assessment. The Income-tax Appellate Tribunal concluded that the applicant company had been aware since the 1934-35 assessment year that the loans would not be fully realized. Consequently, the interest amounts on the loans were credited to an interest reserve account instead of being taken to the profit and loss account. These credits were treated as a suspense account and deducted from the total debts in the balance sheets.

2. Tribunal's Findings:
The Tribunal found that the sums of Rs. 1,88,579 and Rs. 2,01,368 were not the incomes of the years in which they were credited to the interest reserve account. The conduct of the applicant in crediting the interest to the interest reserve account and reducing the debt in the balance sheets indicated that the applicant did not treat this interest as income. The Tribunal held that these amounts were in the nature of credits to a suspense account created for meeting bad debts. The Tribunal further opined that Rs. 2,01,368 was wrongly assessed to income-tax in the years 1938-39 and 1939-40 and was of the same nature as Rs. 1,88,579.

3. Legal Question:
The legal question referred was: "Whether on the facts and in the circumstances of this case, the claim for the allowance of bad debts at Rs. 10,00,000 for the relevant chargeable accounting period was justified as against Rs. 6,10,052 allowed?"

4. Arguments and Legal Provisions:
The applicant argued that the sums of Rs. 1,88,579 and Rs. 2,01,368 were incomes for the years they were credited to the interest reserve account. The Tribunal, however, determined that these amounts were not incomes but credits to a suspense account. The relevant legal provision discussed was Section 10(2)(xi) of the Income-tax Act, which allows for the deduction of bad and doubtful debts, provided they are actually written off as irrecoverable in the books of the assessee.

5. Judgment Analysis:
The court held that Section 10(2)(xi) does not necessitate an amount to be actually written off in the books in a particular year for it to be considered irrecoverable. The Income-tax Officer is given discretion to allow such an amount as he estimates to be irrecoverable, not exceeding the amount written off. The Tribunal's decision was based on the applicant's treatment of the interest amounts and the reduction of debts in the balance sheets, which indicated that the amounts had become irrecoverable in the earlier years. The court found that the Tribunal's conclusion that the amount of Rs. 3,89,948 became irrecoverable during the earlier years was supported by the evidence.

6. Conclusion:
The court concluded that the claim for the allowance of bad debts at Rs. 10,00,000 was not justified. The Tribunal's decision to allow only Rs. 6,10,052 was upheld. The answer to the referred question was in the negative, and the Commissioner of Excess Profits Tax, West Bengal, was awarded the costs of the reference.