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Issues Involved:
1. Deductibility of Rs. 37,11,433 as business loss. 2. Allowability of advances as incidental to business. 3. Classification of the claim under sections 28(1), 36, or 37(1) of the Income-tax Act. Issue-wise Detailed Analysis: 1. Deductibility of Rs. 37,11,433 as Business Loss: The primary issue revolves around whether the sum of Rs. 37,11,433, which became irrecoverable from Mysore Spinning and Manufacturing Company Limited and Minerva Mills Limited, is deductible as a business loss. The assessee argued that the advances were made as a business proposition and became irrecoverable due to the nationalization of the mills by the Sick Textile Undertakings (Nationalisation) Act, 1974. The Assessing Officer and the Commissioner of Income-tax (Appeals) rejected this claim, stating that the transactions were not directly related to the assessee's business operations. 2. Allowability of Advances as Incidental to Business: The assessee contended that the advances were incidental to its business, emphasizing that the three mills had common bankers, fixed deposit holders, and suppliers. The assessee argued that the advances were necessary to maintain the overdraft facility with the bank, procure raw materials, and avoid a run on fixed deposits. The Tribunal considered this argument and noted that the amounts paid to creditors for expenses and fixed depositors were indeed for ensuring the regular supply of stores and raw materials and avoiding a run on the company. Thus, these payments were regarded as directly furthering the business interests of the assessee. 3. Classification of the Claim under Sections 28(1), 36, or 37(1) of the Income-tax Act: The Departmental Representative argued that the claim was not allowable under section 28(1) as a business loss, nor under section 36 as a bad debt, or under section 37(1) as business expenditure. The Tribunal analyzed the figures and transactions, noting that the management of the debtor companies was taken over by the National Textile Corporation in 1971, and interest was charged on a regular basis only after this takeover. The Tribunal concluded that the interest charged constituted an allowable deduction due to its direct nexus with the assessee's business. However, the Tribunal rejected the alternative claims under sections 36 and 37(1) since the amounts were not written off in the books, nor were they disbursed in the relevant year. Conclusion: The Tribunal partly allowed the assessee's appeal, recognizing a portion of the claim as a business loss. The allowable amounts included interest and payments made to creditors for expenses and fixed depositors, totaling Rs. 24,98,295. The Tribunal emphasized the necessity of these payments to avoid hindrance in business operations and maintain the supply chain, thus furthering the business interests of the assessee. The appeal was partly allowed, with specific amounts detailed as follows: 1. Interest: Rs. 17,07,108 2. Payments to creditors for expenses and fixed depositors: - Rs. 2,90,747 (creditors for expenses) - Rs. 3,12,900 (fixed depositors) - Rs. 1,87,388 (creditors for cotton, etc.) - Rs. 152 (creditors for cotton, etc.) Total allowable deduction: Rs. 24,98,295
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