2011 (5) TMI 243 - HC - Income Tax

Revised return - Disallowance - Since they could not realize Rs.25.32 lakhs from said Corporation, they had to suspend the supplies to them and ultimately had to suspend the orders placed by them on M/s.Kanpur Boot House - When the assessee had written off the dues recoverable from the Corporation and the same were accepted by the Department and it had also so written off, the advances made to M/s.Kanpur Boot House in its books of accounts, what else could be the proof with the assessee for its being unable to recover the same - Merely because the claim was not made out under one particular provision of the Act, but was so made out under another provision of law - it was legally permissible to raise question of deduction under Section 37 of the Act even if it was not raised before the authorities below - Appeals are allowed

Issues Involved:
1. Disallowance of deduction of Rs. 4,22,114/- as bad debts under Section 36(1)(vii) of the Income Tax Act, 1961.
2. Alternative claim of deduction as business loss under Section 28 read with Section 37 of the Income Tax Act, 1961.
3. Permissibility of raising new legal grounds at the appellate stage.

Issue-wise Detailed Analysis:

1. Disallowance of deduction of Rs. 4,22,114/- as bad debts under Section 36(1)(vii) of the Income Tax Act, 1961:
The appellant, engaged in manufacturing various products, claimed a deduction of Rs. 4,22,114/- as bad debts for the assessment year 1986-87. The Assessing Officer disallowed this deduction, citing a lack of evidence regarding efforts made for recovery and failure to establish that the debt became bad during the year. The CIT(A) reversed this decision, but the Tribunal upheld the Assessing Officer's order, leading to the present appeal.

2. Alternative claim of deduction as business loss under Section 28 read with Section 37 of the Income Tax Act, 1961:
The appellant argued that even if the debt did not qualify for deduction under Section 36(1)(vii), it should be allowed as a business loss under Section 28 read with Section 37. The appellant relied on precedents, including *Chenab Forest Co. v. Commissioner of Income-Tax, Patiala* and *Commissioner of Income-Tax, Mysore v. Mysore Sugar Co. Ltd.*, to support this claim. The court noted that the advances made to M/s. Kanpur Boot House were essential for maintaining business continuity and were written off due to non-recovery from the Corporation and the death of the proprietor, Bhagwan Das. The court found the appellant's decision to write off the debt well-founded and aligned with the principles of business expenditure.

3. Permissibility of raising new legal grounds at the appellate stage:
The Revenue argued that the appellant could not raise the alternative plea of Section 28 and Section 37 at the appellate stage. However, the court referred to *Commissioner of Income-Tax, Madras v. Mahalakshmi Textile Mills Ltd.*, which held that an assessee's right to relief is not restricted to the pleas raised before the departmental authorities or the Tribunal. The court emphasized that legal questions related to the assessment could be raised at any stage.

Conclusion:
The court concluded that the advances made by the appellant were business expenditures laid out wholly and exclusively for business purposes. The debt was written off due to genuine business reasons, and the deduction should be allowed under Section 37 of the Act. The court also affirmed that raising new legal grounds at the appellate stage was permissible. Consequently, the appeal was allowed, and the question was answered in the affirmative.

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