2011 (10) TMI 462 - HC - Income Tax

Bad Debt - dis-allowance - appellant, agent of non resident shipping company - Held That - Tribunal has correctly considered that the assessee, being the agent of the non-resident tax payer, when it had paid the tax, the same cannot be claimed as a bad debt. The tax itself has been recovered lawfully in accordance with the provision of Section 173. See Abdullabhai Abdulkadar (1960 - TMI - 49539 - SUPREME Court), Indian Aluminum Co.(1971 - TMI - 6229 - SUPREME Court) - Decided in favor of Revenue

Summary

Issues:
1. Rejection of claim of bad debts by all authorities.
2. Justification of disallowance of bad debt/business loss.
3. Interpretation of tax paid by agent for non-resident principal as bad debt.
4. Applicability of Section 173 of the Income Tax Act, 1961.
5. Deductions under Section 36 for bad debts.
6. Expenditure allowed under Section 37 for business purposes.

Analysis:
1. The appellant, an agent of a non-resident shipping company, filed a tax case appeal against the rejection of a claim of bad debts amounting to Rs. 2,72,420 for the assessment year 1992-1993. The appeal was admitted based on substantial questions of law regarding the correctness of disallowance of the bad debt/business loss by the lower authorities and the Tribunal.

2. The issue revolves around the interpretation of tax paid by the agent on behalf of the non-resident principal as bad debt. Citing Supreme Court judgments in similar cases, it was established that tax paid by the agent for the principal cannot be treated as bad debt, as the tax itself has been lawfully recovered in accordance with Section 173 of the Income Tax Act, 1961.

3. Section 36 of the Act allows for deductions in respect of bad debts written off as irrecoverable in the accounts of the assessee. However, in this case, the tax paid by the agent for the non-resident principal does not fall under the purview of bad debts eligible for deduction, as clarified by the Tribunal based on legal provisions and precedents.

4. Section 37 of the Act permits deductions for expenditures laid out exclusively for the business or profession of the assessee. The tax paid by the agent, based on a contractual obligation with the principal, does not qualify as an expenditure exclusively for the agent's business and hence cannot be considered as bad debt for deduction purposes.

5. The judgment concludes that the appeal is misconceived, upholding the Tribunal's decision to disallow the claim of bad debt. The appellant is directed to pay costs to the Chief Justice Relief Fund, emphasizing the legal principle that tax paid by an agent for a non-resident principal cannot be treated as bad debt under the Income Tax Act.