1966 (2) TMI 83 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of Rs. 54,989-6-0 as a trade loss under section 10(1) or an expenditure under section 10(2)(xv) of the Indian Income-tax Act.
2. Timing of the claim for deduction.
3. Entitlement to claim deduction for interest and litigation expenses.

Issue-Wise Detailed Analysis:

1. Deduction of Rs. 54,989-6-0 as a Trade Loss:
The assessee, a partnership firm, borrowed Rs. 1 lakh jointly with another firm, Sadasukh Gambhirchand. The assessee took Rs. 50,000, and Sadasukh Gambhirchand took the remaining Rs. 50,000. Sadasukh Gambhirchand failed to repay its share, leading the assessee to pay the entire loan amount. The assessee wrote off Rs. 54,989-6-0, including interest and litigation expenses, and claimed it as a deduction under section 10(1) of the Indian Income-tax Act. The Income-tax Officer disallowed the claim, but the Appellate Assistant Commissioner allowed it, considering it a permissible deduction under section 10(2)(xv). The Tribunal reversed this decision, stating that the claim should have been made in the year the payment was made to the bank, not in the assessment year 1956-57.

2. Timing of the Claim for Deduction:
The Tribunal held that the deduction should have been claimed in the year 1950 when the payment was made to the bank. However, the court found that the trading loss could be claimed in a later assessment year when it became clear that the recovery from Sadasukh Gambhirchand was impossible. The court cited the Supreme Court's decision in the Associated Banking Corporation of India Ltd. v. Commissioner of Income-tax, which established that a trading loss arises when there is no reasonable chance of recovery. The court concluded that the assessee was entitled to claim the deduction in the assessment year 1956-57 when it realized that recovery was impossible.

3. Entitlement to Claim Deduction for Interest and Litigation Expenses:
The court addressed the breakdown of the claimed amount: Rs. 50,369-13-6 for the half share of the loan, Rs. 2,031-9-0 for interest, and Rs. 2,587-15-6 for litigation expenses. The assessee conceded that it was not entitled to claim the interest amount but argued that litigation expenses should be deductible under section 10(2)(xv). The court disagreed, stating that the litigation expenses were not incurred wholly and exclusively for the business of the assessee. The expenditure was related to recovering a non-trading debt from Sadasukh Gambhirchand and, therefore, did not qualify for deduction under section 10(2)(xv).

Conclusion:
The court concluded that Rs. 50,369-13-6 is a proper deduction as a trading loss incurred on the ground of commercial expediency under section 10(1) of the Indian Income-tax Act. The assessee was not entitled to claim deductions for the interest and litigation expenses. The Commissioner was directed to pay the costs of the assessee.