1961 (10) TMI 80 - HC - Income Tax

Summary

Issues:
Assessment of deduction under section 10(2)(ix) for outstanding debts written off by a registered firm for the assessment year 1950-51.

Analysis:
The judgment by the Madras High Court involved a case where a registered firm engaged in various businesses, including making advances to third parties for the production of oil. The firm was dissolved in 1945, but the books were kept open, and outstanding amounts were being accounted for. The firm was finally wound up in 1949, and outstanding debts were written off. The firm claimed a deduction for these written-off debts under section 10(2)(ix) for the assessment year 1950-51.

The Income-tax Officer initially disallowed the deduction, stating that the advances were not part of the firm's business activities and that the debts had become bad in 1945. However, the Appellate Assistant Commissioner allowed the deduction, considering the advances as part of the firm's business and genuine write-offs. The department appealed to the Tribunal, which upheld the Appellate Assistant Commissioner's decision, stating that the financing of other mills was part of the firm's business activities.

The Tribunal referred the matter to the High Court to determine if the outstanding debts were liable for deduction under section 10(2)(ix) for the assessment year 1950-51. The High Court analyzed the partnership deed, which did not specifically mention making advances to other mills but allowed for the enlargement of business activities by mutual agreement among partners. The court emphasized that a partnership's business scope is not limited like a company's and that the firm had been making advances since 1942, generating income from interest and commission.

The court concluded that the advances were part of the firm's normal trading activities, even after the firm ceased its oil mill business in 1945. The regular conduct of making advances, the income derived from them being treated as business income in previous years, and the continued profit-making activity supported the Tribunal's decision. The court held that the advances were made in the course of the firm's business and were allowable as deductions under section 10(2)(ix) for the assessment year 1950-51.

In summary, the High Court affirmed the Tribunal's decision, allowing the deduction for the outstanding debts written off by the registered firm, as the advances were deemed part of the firm's normal trading activities, even after the cessation of the oil mill business.