1962 (4) TMI 124 - HC - Income Tax

Summary

Issues Involved:
1. Allowability of claims for losses under Section 10(1) of the Indian Income-tax Act.
2. Allowability of claims for losses under Section 10(2)(xi) of the Indian Income-tax Act.
3. Allowability of claims for losses under Section 10(2)(xv) of the Indian Income-tax Act.

Detailed Analysis:

Issue 1: Allowability of Claims for Losses under Section 10(1)
The claim under Section 10(1) was disallowed by the Tribunal on the grounds that the remission of debts by the bank was a voluntary act. The Tribunal reasoned that a loss must be involuntary to be deductible under this section. The Supreme Court's decision in Badridas Daga v. Commissioner of Income-tax was cited, which established that losses deductible under Section 10(1) must arise directly from the carrying on of business and be incidental to it. The Court concluded that the loss of pledged ornaments in a dacoity did not meet this criterion as it was a loss suffered by the bank as a holder of property, not as a businessman. Thus, the Tribunal's conclusion that the loss was not allowable under Section 10(1) was upheld.

Issue 2: Allowability of Claims for Losses under Section 10(2)(xi)
The claim under Section 10(2)(xi) was refused because the assessee did not demonstrate that the debtors were incapable of paying the loans or that the loans were bad or doubtful. The Tribunal noted that the solvency of the debtors was never questioned, and the bank could have legally recovered the loans. The Tribunal's decision was based on the specific provision for disallowance of bad and irrecoverable loans under Section 10(2)(xi). The counsel for the assessee conceded that the deduction could not be allowed under this section, and the Tribunal's decision was affirmed.

Issue 3: Allowability of Claims for Losses under Section 10(2)(xv)
The Tribunal initially overruled the claim under Section 10(2)(xv), stating that the remission of debts did not constitute expenditure as there was no actual outgoing from the bank's funds. However, the Court found that the act of adjusting the loans against the value of the stolen ornaments through account entries did constitute expenditure. The Court reasoned that the bank's decision to pay the value of the ornaments to maintain business goodwill and client confidence was a voluntary act of expenditure laid out wholly and exclusively for business purposes. The Court drew parallels with the English case Cooke v. Quick Shoe Repair Service, where voluntary payments to preserve business goodwill were deemed allowable deductions. Consequently, the Court concluded that the amounts of Rs. 48,891 and Rs. 1,21,760 for the assessment years 1953-54 and 1954-55 were allowable as deductions under Section 10(2)(xv).

Conclusion:
The reference was returned to the Tribunal with the answer that the claims for losses were allowable as deductions under Section 10(2)(xv) of the Indian Income-tax Act for the assessment years 1953-54 and 1954-55.