1981 (4) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of a sum of Rs. 1,68,487 under section 28(i) of the Income-tax Act, 1961.
2. Nature of the loss (capital or revenue).
3. Year in which the loss should be claimed.

Issue-wise Detailed Analysis:

1. Deductibility of a sum of Rs. 1,68,487 under section 28(i) of the Income-tax Act, 1961
The Tribunal was tasked with determining whether the assessee was entitled to a deduction of Rs. 1,68,487 in the computation of business profits for the assessment year 1965-66. The assessee, a registered firm engaged in the ice cream business, had borrowed funds through hundis facilitated by a broker, Nand Lal. Nand Lal misappropriated some of these funds, leading to a loss for the assessee. The Tribunal found that the loss was a business loss allowable under section 28(i) of the Income-tax Act, 1961, and not a bad debt under section 36. The Tribunal held that the loss was incurred in the ordinary course of business and was thus deductible.

2. Nature of the loss (capital or revenue)
The Tribunal rejected the Department's contention that the loss was of a capital nature. It observed that the loss was directly related to the business activities of the assessee, specifically the need to raise finance through hundis. The Tribunal stated, "The assessee had necessarily to raise finance through hundis, that it had necessarily to act through a broker is one of the unavoidable risks which it had necessarily to take if it had to continue to secure finances." The Tribunal concluded that the loss was a revenue loss, arising in the ordinary course of business, and thus allowable as a deduction.

3. Year in which the loss should be claimed
The Tribunal also addressed the issue of the year in which the loss should be claimed. The Department argued that the loss should have been claimed in the year the payments were made on the hundis, not in 1964. The Tribunal found that the loss was incurred when it became certain that Nand Lal could not reimburse the assessee. The Tribunal noted, "The assessee waited for three years to recover the amount and at the end of the third year held that the loss became present and actual." The Tribunal concluded that the loss was correctly claimed in the assessment year 1965-66.

Conclusion:
The High Court upheld the Tribunal's findings, confirming that the loss of Rs. 1,68,487 was a business loss deductible under section 28(i) of the Income-tax Act, 1961. The loss was not of a capital nature and was correctly claimed in the assessment year 1965-66. The question referred to the court was answered in the affirmative and in favor of the assessee. The Commissioner was directed to pay the costs of the reference, with counsel's fee fixed at Rs. 350.