1991 (11) TMI 14 - HC - Income Tax

Summary

Issues:
1. Validity of writing off bad debts totaling Rs. 8,04,199.
2. Cessation of liability regarding credit balances of Rs. 1,46,285.
3. Justifiability of the claim for bad debts when not engaged in money-lending business.

Analysis:

Issue 1: Validity of writing off bad debts
The petitioner had written off debts amounting to Rs. 8,04,199 as bad debts in the assessment year 1973-74. The Income-tax Officer raised concerns about the nature and origin of these debts, noting they were non-trading and some belonged to the petitioner's sister concern. The Income-tax Officer found no evidence of efforts made for debt recovery. The Tribunal allowed the claim for bad debts, relying on a director's report indicating the parties were heavily indebted with no recovery possibility. The High Court considered the question of law regarding the validity of writing off these bad debts, emphasizing the lack of evidence provided before the Income-tax Officer and the non-challenge of the Officer's reasons. Citing relevant case law, the High Court concluded that a question of law indeed arose concerning the validity of the bad debts written off, particularly as some debts were related to sister concerns.

Issue 2: Cessation of liability for credit balances
Regarding the credit balances of Rs. 1,46,285, the Inspecting Assistant Commissioner's jurisdiction under section 144B(4) was questioned. The Tribunal held that the Commissioner had no jurisdiction to direct the addition of an item not proposed in the draft assessment. The High Court reframed the question of law to address whether the balance of Rs. 74,633 from advances received and credited in the profit and loss account should be considered as the income of the assessee-company. The Court found that a question of law did arise in this context.

Issue 3: Claim for bad debts without money-lending business
The Tribunal had allowed the claim for bad debts, although the petitioner was not engaged in a money-lending business during the previous year. The High Court noted that the framing of question 3 was based on incorrect facts, as the Tribunal had found the petitioner to be involved in money-lending business. The Court emphasized that questions of law cannot be based on incorrect suppositions, leading to the conclusion that question 3 did not arise from the Tribunal's order.

In conclusion, the High Court directed the Tribunal to refer specific questions of law related to the validity of writing off bad debts and the treatment of the balance from advances received, thereby partly allowing the reference application without costs.