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Issues: Interpretation of Section 10(2)(xi) of the Income-tax Act; Determination of irrecoverable debt for deduction under Section 10(2)(xi); Classification of a transaction as a loan in money-lending business.
In the judgment delivered by the High Court of Bombay, the issue at hand pertains to the interpretation of Section 10(2)(xi) of the Income-tax Act. The Court noted the requirement for a deduction under this section, specifically for individuals engaged in business with non-cash basis accounting. The deduction is contingent upon the debt being bad or doubtful, deemed irrecoverable by the Income-tax Officer, and actually written off by the assessee. The Court emphasized that the determination of when a debt becomes irrecoverable is crucial, as it affects the eligibility for deduction. The judgment clarified that the timing of irrecoverability must align with the accounting year in question, as illustrated in the case of bankers and money-lenders. The Court referenced a Privy Council case to emphasize the factual determination required in assessing bad debts. Regarding the specific case before the Court, the assessee engaged in money-lending business and had advanced a sum for a motion picture project. The debtor absconded, leading to complications in recovering the amount. The assessee eventually sold assets related to the project and claimed the remaining debt as irrecoverable in a subsequent accounting year. The Tribunal, however, opined that the debt had become "practically irrecoverable" in an earlier year, raising doubts about the timing of irrecoverability. The Court stressed that factual findings are crucial in determining the irrecoverability of a debt, emphasizing the need for a clear determination by the Tribunal based on available evidence. In response to the first question raised, the Court affirmed that the transaction between the assessee and the debtor constituted a loan within the money-lending business, despite some ambiguity in the Tribunal's findings. The Court emphasized the need to consider the overall circumstances to ascertain the nature of the transaction, ultimately affirming it as part of the money-lending business. Concerning the second question, the Court reiterated the importance of the Income-tax Officer's determination of when a loan becomes irrecoverable, as highlighted in the precedent set by the Privy Council. The Court refrained from providing a direct answer to the question, opting to remand the matter to the Tribunal for a more precise determination based on the legal principles elucidated in the judgment.
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