1939 (10) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. Justification for the Income-tax Officer's refusal to allow the assessee to write off Rs. 23,039 as a bad debt in the year of account 1935-36.
2. Allegation of fraudulent intent by the assessee in postponing the write-off of the debt.
3. The impact of litigation outcomes on the timing of the debt write-off.

Detailed Analysis:

1. Justification for the Income-tax Officer's refusal to allow the assessee to write off Rs. 23,039 as a bad debt in the year of account 1935-36:
The assessee was a creditor of C.K.N. & Sons, which was adjudicated insolvent in February 1929. The firm owed the assessee Rs. 26,330, which he wrote off as a bad debt in the year of account 1935-36. The Income-tax Officer allowed only Rs. 3,291 as a deduction, arguing that the debt should have been written off to the extent of at least 14 annas in the rupee at the time of the adjudication. The Commissioner of Income-tax referred the question to the court to determine if there was material to justify the Income-tax Officer's refusal to allow the write-off of Rs. 23,039 in the year of account.

2. Allegation of fraudulent intent by the assessee in postponing the write-off of the debt:
The Income-tax Officer suggested that the assessee postponed the write-off to set it off against the profit from a contract in 1935-36, implying fraudulent intent. This conclusion was based on the correspondence between the assessee and the Official Assignee. However, the court found no evidence to support the claim of fraudulent intent. The court emphasized that the refusal to allow the deduction was based entirely on an unfounded allegation of fraud, and there was no material evidence to justify this conclusion.

3. The impact of litigation outcomes on the timing of the debt write-off:
C.K.N. & Sons had significant assets, but their liabilities were larger. The adjudication led to extensive litigation involving secured creditors like the Mercantile Bank of India and the Central Bank of India, with claims amounting to around Rs. 20,00,000. The Official Assignee's refusal to accept the banks' secured creditor status led to a case that went to the Privy Council, which ultimately ruled in favor of the banks in October 1934. Additionally, the Port Trust claimed priority under Section 49(1) of the Presidency Towns Insolvency Act, which was upheld by the court in May 1936. The assessee wrote to the Official Assignee in January 1936, seeking information on potential dividends, and was informed that there was little prospect of any dividend for unsecured creditors. Based on this information, the assessee wrote off the debt in April 1936. The court noted that the true financial position was not clear until after the litigation outcomes, and it was reasonable for the assessee to wait until 1935-36 to write off the debt.

Separate Judgments:

Leach, C.J.:
The Chief Justice concluded that there was no justification for the Income-tax Officer's refusal to allow the write-off in 1935-36. The court found no evidence of fraudulent intent by the assessee and emphasized that the decision should be based on facts, not speculation. The court ruled in favor of the assessee, allowing the deduction for the full amount claimed.

Mockett, J.:
Mockett, J., agreed with the Chief Justice, stating that there was no material evidence to support the Income-tax Officer's conclusion. He highlighted the complexity and uncertainty of the insolvency proceedings and the difficulty for any creditor to predict the outcome. He emphasized that the decision of the Income-tax Officer was based on conjecture and lacked factual basis.

Krishnaswami Ayyangar, J.:
Krishnaswami Ayyangar, J., concurred with the Chief Justice, acknowledging initial doubts but ultimately agreeing that the Income-tax Officer's decision lacked material evidence. He noted that the decision was not based on the outcome of the Privy Council case but on an incorrect assumption that the debt should have been written off in 1929.

Conclusion:
The court answered the reference in favor of the assessee, allowing the write-off of Rs. 23,039 in the year of account 1935-36. The assessee was awarded costs of Rs. 250 and a refund of the Rs. 100 deposit.