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Interpretation of whether a sum was rightly considered as a bad debt under Section 10(2)(xi) of the Income-tax Act. Determination of whether the sum in question was a capital receipt or a revenue receipt. Analysis: The case involved a dispute regarding the treatment of a sum of money, amounting to Rs. 50,108, by the Income-tax Tribunal. The question arose from the assessment of the Multan Electric Supply Co., Ltd., for the year 1940-41. The sum in question was originally the face value of shares forfeited by the company. The Tribunal initially considered the entire sum as a bad debt under Section 10(2)(xi) of the Income-tax Act, without distinguishing between capital and revenue receipts. However, the High Court clarified that the essential issue was not whether the sum was a bad debt but whether it constituted a capital or revenue receipt. The sum of Rs. 50,108 represented circulating capital of the company and was deemed a capital asset. The Court emphasized that the sum, being a capital receipt, could not be classified as a bad debt. The Court further analyzed the appropriation of the sum towards the principal debt and interest. It was determined that Rs. 47,051, appropriated towards the principal, was a capital receipt and a legitimate deduction. On the other hand, the remaining amount, Rs. 3,057, allocated to interest, was considered revenue and thus assessable for taxation. In conclusion, the Court held that Rs. 47,051 should be treated as a capital receipt and deducted accordingly, while Rs. 3,057 was deemed income of the company and assessable for tax purposes. The Court's decision aimed to clarify the confusion surrounding the nature of the sum in question and ensure justice between the parties involved.
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