1962 (3) TMI 8 - SC - Income Tax

Whether a debt had become irrecoverable and was to be treated as a bad debt in 1947 was one of fact and not liable to be reopened in a reference under section 66 of the Income-tax Act for there was evidence on which the conclusions of the Appellate Assistant Commissioner and the Tribunal could be founded? Held that - In this case before the Tribunal there was evidence on which it could hold that the debt had become bad in the year 1947. If the debt had become had in the year 1947 by its mere subsequent amalgamation unilaterally made by the creditor with a debt which was recoverable it did not cease to be bad. Appeal dismissed.

Summary

Issues:
Assessment of bad and doubtful debt for income-tax purposes under section 10(2)(xi) of the Indian Income-tax Act for the year 1950-51.

Detailed Analysis:

The case involved a public limited company engaged in banking, which claimed an amount of Rs. 4,22,582 written off as irrecoverable in the year 1949 to be treated as a bad and doubtful debt under section 10(2)(xi) of the Indian Income-tax Act for the assessment of profits for the year 1950-51. The amount comprised three items due from different firms. The Income-tax Officer disallowed the claim, asserting that the entire amount became irrecoverable in 1947, not 1949. The Appellate Assistant Commissioner differentiated the recoverability status of the amounts due from various firms, concluding that only a portion became irrecoverable in 1949. The Income-tax Appellate Tribunal concurred with the Appellate Assistant Commissioner's findings, denying the deduction for the amounts deemed irrecoverable in 1947. The High Court, in a reference under section 66(2) of the Income-tax Act, upheld the Tribunal's decision, emphasizing that the determination of irrecoverability was a factual inquiry. The Supreme Court, on appeal, affirmed the lower courts' findings, highlighting the factual nature of assessing bad debts and the sufficiency of evidence supporting the debts' irrecoverability in 1947.

The Tribunal's decision was based on the fact that the debts due from certain firms had become bad in 1947, leading to the disallowance of the bad debt claim for the year 1949. The appellant contended that the amalgamation of accounts did not automatically render the debts irrecoverable, especially if the debtor could still pay towards the consolidated account. However, the lack of evidence indicating exclusive ownership of the debtor in the other firms, coupled with insufficient assets for debt satisfaction, supported the Tribunal's conclusion regarding the irrecoverability of the debts in 1947. The Supreme Court reiterated that the determination of a bad debt's status was a factual matter, not subject to reevaluation in a reference under the Income-tax Act.

The Supreme Court emphasized that the assessment of a debt as bad or doubtful is a factual determination, requiring consideration of all relevant circumstances. While the Act did not explicitly authorize deductions for bad debts at the time of the case, such deductions were deemed necessary to reflect accurate profits and gains. The Court upheld the Tribunal's decision, stating that if a debt was deemed bad in 1947, its subsequent amalgamation with a recoverable debt did not alter its bad status. Consequently, the appeal was dismissed, affirming the denial of the bad debt claim for the year 1949.