1962 (8) TMI 93 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 65,802, being part of the amount due from Alwaye Textiles Ltd., is a trade debt allowable as a bad debt in the computation of the income for the assessment year 1952-53.

Detailed Analysis:

1. Background and Facts:
Somasundaram Mills Ltd. (the assessee) is a private limited company engaged in the spinning and weaving of cotton yarn. Between 1943 and 1945, the assessee sold goods and machinery to Alwaye Textiles Ltd. and also made cash advances, resulting in a total indebtedness of Rs. 3,55,323. The breakdown of this amount is:
- Value of goods supplied: Rs. 19,383
- Sale price of machinery: Rs. 1,20,885
- Loans and cash advances: Rs. 2,15,055

Alwaye Textiles Ltd. defaulted on the payment, leading the assessee to file a suit and obtain a decree for Rs. 4,79,228. The decree remained undischarged, and the assessee eventually recovered Rs. 1,61,771 after assigning the decree to Messrs. S. Kathayee & Co. The assessee wrote off Rs. 1,93,552 as bad debt on December 31, 1951, claiming it as a deduction for the assessment year 1952-53.

2. Income-tax Officer's Decision:
The Income-tax Officer allowed the deduction only for the value of the stock-in-trade sold (Rs. 19,388), apportioning the receipt of Rs. 1,61,771 between "trade" and "non-trade debts". The officer allowed Rs. 10,401 as a bad debt.

3. Appellate Assistant Commissioner's Decision:
The assessee appealed, contending that the unrecovered part of the machinery sale price should also be treated as a bad debt. The Appellate Assistant Commissioner allowed a further amount of Rs. 65,802, considering the sale of machinery as part of the assessee's normal business operations.

4. Tribunal's Decision:
The Tribunal affirmed the Appellate Assistant Commissioner's decision but based on different reasoning. The Tribunal held that the decree debt was a trade debt under section 10(2)(xi) and that the return of machinery stamped the debt as a trade debt. This view was deemed erroneous by the court.

5. High Court's Analysis:
The court examined whether the debt was in respect of the assessee's business under section 10(2)(xi). The court noted that the assessee's business did not include trading in machinery, and the debt from the machinery sale was not incidental to the business of spinning and weaving. The court emphasized that a capital loss cannot be claimed as a bad trade debt under section 10(2)(xi). The court cited the principle that a debt must be incidental to the business and not merely connected to it. The court disagreed with the Tribunal's view that the decree debt's origin and nature need not be considered.

6. Conclusion:
The court concluded that the debt from the machinery sale was not a trade debt and thus not allowable as a bad debt under section 10(2)(xi). The reference was answered against the assessee, and the department was entitled to its costs.

7. Alternative Contention:
The assessee raised an alternative contention that the written down value of the returned machinery should be allowed as a loss. The court did not express an opinion on this matter and left it open for the Tribunal to consider.

Summary:
The High Court held that the debt from the machinery sale was not incidental to the assessee's business of spinning and weaving and thus could not be claimed as a bad debt under section 10(2)(xi). The reference was answered against the assessee, and the department was awarded costs. The court left open the alternative contention regarding the written down value of the returned machinery for the Tribunal to consider.