1993 (9) TMI 2 - SC - Income Tax

Amount paid for procuring manufacturing licence and permit for release of foreign exchange - failure to obtain the licences/permits which entitled the appellant to refund of the amount - High Court held that the trading loss claimed by the appellant had occurred during the accounting year ending on April 30 1962 and cannot be allowed in the assessment year 1964-65

Summary

Issues:
Interpretation of trading loss for deduction in income tax assessment.

Analysis:
The case involves an appeal against the judgment of the Allahabad High Court regarding a deduction claimed by a partnership firm in the assessment year 1964-65. The firm, engaged in the manufacture and sale of miniature bulbs, claimed a deduction of Rs. 60,000 as a bad debt incurred in a business transaction with an individual named Mohan Lal Vyas. The firm paid the amount to Vyas for assistance in obtaining necessary licenses and permits for expanding its business to manufacture fluorescent tubes. However, Vyas failed to procure the required foreign exchange permit, resulting in the revocation of the manufacturing license obtained. The firm treated the unpaid amount as a bad debt and claimed it as a deduction.

The Income-tax Officer rejected the claim, finding the story doubtful and questioning the lack of efforts to execute the decree obtained against Vyas. The Appellate Assistant Commissioner and the Tribunal also dismissed the appeal initially. The firm later shifted its claim from bad debt to a business loss during the appeal process. The Revenue applied for a reference of the question to the High Court under section 256(1) of the Income Tax Act.

The High Court opined that the claimed trading loss should have been considered in the accounting year ending on April 30, 1962, and not in the subsequent assessment year 1964-65. The High Court rejected the firm's argument that the loss occurred when the contract became incapable of performance in the later year, emphasizing that the firm's original claim was based on Vyas' failure to obtain the foreign exchange permit by a specific date in 1962.

The Supreme Court upheld the High Court's decision, stating that the trading loss claimed by the firm indeed occurred in the earlier accounting year and could not be allowed in the subsequent assessment year. The Court found the High Court's conclusion to be well-founded based on the facts and evidence on record. Consequently, the appeal was dismissed, and no costs were awarded.

In conclusion, the judgment clarifies the timing of recognizing a trading loss for deduction in income tax assessment, emphasizing that the loss must be attributed to the accounting year in which the events leading to the loss transpired, rather than the year in which the consequences of the loss were realized.