1932 (4) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of bad debts for income tax purposes.
2. Authority of the assessee versus the Income Tax Officer in determining bad debts.
3. Relevance of the statute of limitations in assessing bad debts.

Issue-wise Detailed Analysis:

1. Deduction of Bad Debts for Income Tax Purposes:
The central issue in this case was whether the assessee could deduct a sum of Rs. 7,481-13-9 as bad debts from his gross income for the year 1926-1927. The assessee had initially claimed a total deduction of Rs. 17,983-11-6 for bad debts, but the Income Tax Officer disallowed Rs. 7,481-13-9 of this amount, stating that these debts were very old and time-barred. The Assistant Commissioner upheld this disallowance.

2. Authority of the Assessee versus the Income Tax Officer in Determining Bad Debts:
The Judicial Commissioner initially ruled in favor of the assessee, asserting that the assessee has the option of declaring debts bad when he finds, after sufficient waiting, that he is unable to recover them. The Judicial Commissioner believed that the assessee should be the sole arbiter of whether a debt is bad and when it became bad. This view was based on the notion that the assessee alone understands the risks and circumstances affecting the recovery of debts.

However, the Privy Council disagreed, stating that the views of the Judicial Commissioner were erroneous. The Council clarified that whether a debt is bad, and when it became bad, are questions of fact to be determined by the appropriate tribunal, not by the assessee. The Council emphasized that the losses must be incurred in the same year for which profits and gains are being assessed, and not from previous years.

3. Relevance of the Statute of Limitations in Assessing Bad Debts:
The Judicial Commissioner appeared to be influenced by the belief that writing off a debt as bad in the books of accounts puts an end to any right to recover the debt. The Privy Council refuted this, stating that a statute-barred debt is not necessarily bad, and a debt not statute-barred is not necessarily good. The age of the debt is relevant but not solely determinative. The appropriate tribunal must consider all relevant circumstances to determine whether a debt is bad and when it became bad.

Conclusion:
The Privy Council concluded that the assessee does not have the "option" to unilaterally declare debts bad. The questions of whether a debt is bad and when it became bad are factual determinations to be made by the appropriate tribunal based on evidence. The Privy Council advised that the appeal should be allowed, and the order of the Assistant Commissioner, dated 25th April 1927, should be restored concerning the Rs. 7,481-13-9. There were no costs awarded for this appeal.