1991 (11) TMI 93 - AT - Income Tax

Summary

Issues Involved:

1. Deduction of Rs. 8,95,277 as a trading loss under Section 28.
2. Deduction of Rs. 8,95,277 as a bad debt under Section 36(1)(vii) read with Section 36(2).
3. Levy of interest under Sections 139(8) and 217.

Detailed Analysis:

1. Deduction of Rs. 8,95,277 as a trading loss under Section 28:

The assessee claimed a deduction of Rs. 8,95,277 as a trading loss under Section 28, arguing that the amount became irrecoverable in the relevant year. The declaration of lockout by M/s Usha on 24-5-1983, dishonored cheques, and subsequent liquidation of the debtor company in 1985 were cited as evidence of the debt becoming bad. However, the revenue contended that the assessee had shown the amount as outstanding in the balance sheet and added interest on the principal amount, indicating hope of recovery. The tribunal concluded that the debt in question, being a trade debt, is governed by the specific provisions of Section 36(1)(vii) and 36(2), and not Section 28. Therefore, the deduction as a trading loss under Section 28 was not allowed.

2. Deduction of Rs. 8,95,277 as a bad debt under Section 36(1)(vii) read with Section 36(2):

The tribunal examined whether the debt could be allowed as a bad debt under Section 36(1)(vii) read with Section 36(2). The conditions to be fulfilled include: the debt should be in respect of a business carried on by the assessee, taken into account in computing income, should have become bad in the year under consideration, and should be written off as irrecoverable in the accounts. The tribunal found that the first two conditions were met. For the remaining conditions, the tribunal noted that the declaration of lockout, dishonored cheques, and subsequent liquidation indicated the debt became bad in the relevant year. The tribunal also accepted the supplementary adjustment entries made at the time of filing the revised return as valid, fulfilling the requirement of writing off the debt. Consequently, the tribunal directed the ITO to allow the deduction as a bad debt under Section 36(1)(vii).

3. Levy of interest under Sections 139(8) and 217:

The issue of levy of interest under Sections 139(8) and 217 was not addressed by the CIT(A). The tribunal restored this matter back to the CIT(A) for a fresh decision after providing reasonable opportunity to both parties.

Conclusion:

The tribunal dismissed ITA No. 1157/Ahd/88 as not pressed and partly allowed ITA No. 1594/Ahd/90, directing the ITO to allow the deduction of Rs. 8,95,277 as a bad debt and restoring the issue of levy of interest to the CIT(A) for fresh consideration.