1985 (11) TMI 15 - HC - Income Tax

Summary

Issues:
1. Whether the amount advanced by the assessee to the official liquidator can be treated as a bad debt and deductible as an expenditure.
2. Whether the loss incurred by the assessee is of a capital nature or attributable to its money-lending business.
3. Whether the deduction claimed by the assessee in the assessment year 1970-71 is allowable.

Analysis:

1. The case involved a company under liquidation, and some shareholders wished to lease the company to protect the workers' employment and investors' capital. The assessee-firm was granted registration to work the company. The court directed the assessee to provide funds to discharge the company's debts. The assessee advanced funds totaling Rs. 8,66,600 to the liquidator. The mill was later auctioned, and the assessee purchased it, still having a deficit of Rs. 1,33,493. The assessee claimed this amount as a bad debt and loss deductible as an expenditure, which was initially rejected by the Income-tax Officer.

2. The Revenue contended that the advanced sum was part of the lease agreement and resembled an investment rather than a business transaction. Referring to a Supreme Court decision, it was argued that the nature of the loss should be considered. However, the Tribunal held that the loss was a direct result of the assessee's money-lending business and not of a capital nature. The court emphasized that the lease and the advance to the liquidator were distinct transactions, not linked to each other, and the loss was a consequence of continuing the money-lending business.

3. The Revenue also argued that the deduction claimed in the assessment year 1970-71 was not allowable since the sale occurred in February 1969. However, the court clarified that the sale was confirmed by the court only in June 1969, making the deduction claim in 1970-71 valid. The court answered the question in favor of the assessee, allowing the deduction and awarding costs.

This judgment clarifies the treatment of the advanced amount, the nature of the loss incurred, and the timing of the deduction claim, providing a detailed analysis of the legal and business aspects involved in the case.