1981 (2) TMI 10 - HC - Income Tax

Summary

Issues:
1. Deduction of bad debt during insolvency proceedings.
2. Allowability of messing expenses as business expenditure.

Analysis:

Issue 1: Deduction of Bad Debt during Insolvency Proceedings
The case involved a dispute regarding the deduction of bad debt claimed by the assessee during insolvency proceedings. The assessee had claimed a bad debt amounting to Rs. 27,000, stating that the debtor had filed for insolvency. However, the Income Tax Officer (ITO) disallowed the claim, citing that no dividend had been declared, and the insolvency petition had not been finally decided. The Appellate Assistant Commissioner (AAC) allowed a partial deduction of Rs. 13,500. The Tribunal later allowed the claim as a bad debt but restricted the disallowance to 10% of the total claim. The High Court held that until the official assignee or receiver declared a final dividend, the debt could not be considered a bad debt. The court referred to past judgments to support this view, emphasizing that the determination of a bad debt during insolvency proceedings is contingent upon the declaration of a final dividend. The court rejected the argument that the determination of a bad debt was a question of fact, asserting that in the context of insolvency proceedings, it was a legal question. Consequently, the court answered question No. 1 in the negative, favoring the Department.

Issue 2: Allowability of Messing Expenses as Business Expenditure
The second issue pertained to the allowability of messing expenses claimed by the assessee as a business expenditure. The assessee, engaged in the adhatiya business, had claimed messing expenses, which were initially disallowed by the ITO, citing that they were in the nature of entertainment expenditure. However, the AAC allowed a reduced amount, and the Tribunal upheld the allowance, stating that adhatiyas were entitled to claim such expenses as per prevailing practices. The High Court, relying on a previous decision, affirmed the Tribunal's view that the messing expenses were admissible business expenditures and not entertainment expenses under Section 37(2B) of the Income-tax Act. Consequently, the court answered question No. 2 in the affirmative, favoring the assessee.

In conclusion, the High Court ruled in favor of the Department regarding the deduction of bad debt during insolvency proceedings but sided with the assessee on the allowability of messing expenses as business expenditure.