1983 (9) TMI 44 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction of Rs. 52,083 as a bad debt for the assessment year 1973-74.
2. Computation and set-off of loss for the assessment year 1973-74 against the income of the assessment year 1974-75.

Detailed Analysis:

Entitlement to Deduction as Bad Debt:
The primary issue revolves around whether the assessee is entitled to claim Rs. 52,083 as a bad debt for the assessment year 1973-74. The assessee, engaged in money-lending and financial advising, had guaranteed a loan of Rs. 50,000 taken by Shri Gandhi from M/s. Annamalai Timber Trust (P.) Ltd. Shri Gandhi defaulted on the loan, leading the company to recover the amount from the assessee. The assessee subsequently wrote off the amount as irrecoverable.

The Income Tax Officer (ITO) disallowed the claim, reasoning that the guarantee was not part of the assessee's money-lending business. The Appellate Assistant Commissioner (AAC) upheld this view, stating that the transaction was not in the course of the assessee's business, thus not qualifying as a business loss or bad debt under sections 36(1)(vii) or 28 of the Income Tax Act, 1961.

The Income Tax Appellate Tribunal (ITAT) initially found inconsistencies, noting that the guarantee was a solitary, gratuitous act and not part of the assessee's regular business activities. Despite this, the ITAT later concluded that the liability arose in the course of the assessee's business, allowing the bad debt claim.

The High Court, however, disagreed with the ITAT's latter conclusion. It emphasized that the nature of the transaction, as determined by the ITAT, was not part of the assessee's business. The court cited precedents, including Ramaswami Ayyangar v. CIT and Brij Mohan Laxmi Narain v. CIT, to underscore that a personal liability discharged using business assets does not transform into a business liability. Thus, the High Court held that the debt did not arise in the course of the assessee's business, answering the first question in the negative and against the assessee.

Computation and Set-off of Loss:
The second issue pertains to whether the loss for the assessment year 1973-74 should be computed and set off against the income of the assessment year 1974-75. The assessee argued that the loss should be treated as a short-term capital loss and set off under section 71(3) of the Act.

The High Court noted that the ITAT had not addressed this alternative contention. Consequently, the court directed the ITAT to consider the assessee's argument regarding the short-term capital loss and provide its views. The second question was thus returned unanswered, with instructions for further consideration by the Tribunal.

Conclusion:
1. The High Court concluded that the assessee is not entitled to claim Rs. 52,083 as a bad debt for the assessment year 1973-74, as the transaction was not in the course of the assessee's business.
2. The issue of whether the loss should be treated as a short-term capital loss and set off against the income of the subsequent year was remanded to the ITAT for further consideration.

The Revenue was awarded costs, with counsel's fee set at Rs. 500.