1971 (1) TMI 3 - SC - Income Tax

Payments made by the assessee as taxes under s. 18(3B) of Indian Income-tax Act 1922 and which it could not recover from the non-resident cannot be treated as a bad debt under s. 10(2)(xi) of Indian Income-tax Act 1922. The payment made under a statutory obligation because the assessee was in default does not amount to an expenditure laid out for the purposes of assessee s business - assessee s appeal dismissed

Summary

Issues:
1. Deductibility of a sum from business income under specific sections of the Income-tax Act.
2. Interpretation of sections 18(3B) and 18(7) of the Act regarding tax deduction at the source.
3. Claim for deduction under section 10(2)(xi) for a written-off amount as a bad debt.
4. Claim for deduction under section 10(2)(xv) for an amount laid out for the purpose of the business.

Detailed Analysis:

1. The case involved the question of whether a sum of Rs. 1,24,199 was deductible from the business income of the assessee under sections 10(1), 10(2)(xi), or 10(2)(xv) of the Income-tax Act. The assessee, a public limited company, had entered into an agreement with a company in Canada for technical assistance, for which a retainer fee was paid. The Income-tax Officer treated the assessee as being in default for not deducting tax from payments made to the Canadian company. The High Court held that the sum was not deductible as a bad debt or as a business expense.

2. Sections 18(3B) and 18(7) of the Act were crucial in this judgment. Section 18(3B) mandated the deduction of income tax at the time of payment to non-residents. Failure to deduct tax, as required by this section, would result in the assessee being deemed in default under section 18(7). The refusal of the Canadian company to reimburse the tax amount led to the assessee claiming it as a bad debt. However, the court found that the debt did not qualify as a bad debt under section 10(2)(xi) due to non-compliance with tax deduction provisions.

3. The claim for deduction under section 10(2)(xi) for the written-off amount was contested by the assessee. The court emphasized that a business debt must directly relate to the business and be incidental to it to qualify as a bad debt. In this case, the debt arose from non-compliance with tax deduction provisions and was not incidental to the business. The court concluded that the payment to income tax authorities, which was not recovered from the Canadian company, was more a matter of commercial expediency than a bad debt.

4. The assessee also sought deduction under section 10(2)(xv) for the amount laid out for the business purpose. The court examined a precedent where a penalty paid for customs release was considered a business expense. However, in this case, the payment was made under a statutory obligation due to default, and no contractual obligation existed for such payments. The court held that a payment made under statutory obligation could not be considered an expense laid out for the business purpose. The appeal was dismissed, upholding the High Court's decision on the non-deductibility of the sum.