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Issues:
1. Whether the sum of Rs. 60,000, being irrecoverable advances made to the employees' co-operative stores, should be allowed as a business loss? 2. Whether the loss incurred by the stores in previous years can be claimed during the assessment year? 3. Whether the loss should be treated as a business loss or a capital loss? Analysis: Issue 1: The Revenue filed a petition under section 256(2) of the Income-tax Act seeking a direction to refer the question of allowing Rs. 60,000 as a business loss to the court. The assessee, a sugar manufacturer, had advanced this amount to an employees' co-operative store for the purchase of provisions. The store faced serious irregularities, resulting in a loss of Rs. 1,42,615. The assessee decided to write off 50% of the loss and recover the balance over five years. The Income-tax Officer disallowed this amount as a business loss, stating it was not admissible for the assessment year 1976-77. However, the Commissioner of Income-tax (Appeals) allowed it, considering it a deduction due to commercial expediency. The Appellate Tribunal also upheld this decision, stating the loss should be treated as a business loss sustained during the year it was found irrecoverable. The court agreed with the Tribunal's decision, emphasizing the expenditure was for the purpose of business and necessary to keep the employees contented. Therefore, the sum of Rs. 60,000 was allowed as a business loss. Issue 2: The Revenue contended that since the stores incurred the loss in years preceding the assessment year, the assessee could not claim it during the assessment year. However, the Tribunal found that the sum of Rs. 60,000 was deemed irrecoverable only in the assessment year in question. The court concurred with this finding, stating that the loss, as far as the assessee was concerned, occurred during the assessment year, making it eligible for deduction based on commercial expediency. Issue 3: The Revenue argued that the loss should be treated as a capital loss, not a business loss. However, the Tribunal did not consider this aspect, focusing solely on the timing of the loss's irrecoverability. The court held that the step taken by the assessee to write off a portion of the amount due to it was a commercial expediency necessary to maintain employee contentment. Therefore, the loss was considered a business loss rather than a capital loss. The court dismissed the petition, affirming the Tribunal's decision to allow the sum of Rs. 60,000 as a business loss.
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