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Interpretation of Section 10(2)(xi) of the Income-tax Act regarding deduction for bad debts arising from a business transaction. Analysis: The case involved an assessee, a public limited company engaged in the sugar manufacturing business, which sold a second-hand sugar manufacturing machine to another company. The buyer defaulted on interest payments, leading to a compromise where the buyer paid a reduced sum. The assessee claimed this reduction as a bad debt under Section 10(2)(xi) of the Income-tax Act. The main issue was whether the assessee was entitled to claim the remission amount as a bad debt deduction under Section 10(2)(xi) of the Income-tax Act. The Income-tax Officer initially rejected the claim, stating the debt did not arise in the course of the assessee's business. However, the Appellate Assistant Commissioner allowed the deduction, but the Income-tax Appellate Tribunal overturned the decision, arguing the transaction was not part of the assessee's trade but rather an investment. The High Court analyzed the transaction, emphasizing the company's memorandum of association, which authorized selling assets as part of its business activities. The court held that the sale of the machinery was a proper trading transaction within the normal course of business, as evidenced by the company's objectives and activities outlined in the memorandum of association. The court referred to precedents like the Dale Steamship Co. Ltd. case and Dalmia Cement Limited case to support its interpretation that such transactions, even if involving assets or investments, could be considered part of the company's business activities and therefore eligible for bad debt deductions under Section 10(2)(xi) of the Income-tax Act. The court distinguished the Mohsin Rehman Penkar case, where a different tax treatment was applied due to the nature of the transaction. In the present case, the court concluded that the remission amount should be treated as a bad and doubtful debt under Section 10(2)(xi) of the Income-tax Act, ruling in favor of the assessee. In conclusion, the High Court upheld the assessee's claim for a bad debt deduction, emphasizing that the transaction was a legitimate business activity falling within the scope of Section 10(2)(xi) of the Income-tax Act. The court directed the Income-tax Department to bear the costs of the reference.
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