1981 (12) TMI 71 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of Rs. 2,29,990 as a bad debt under section 36(1)(vii).
2. Allowability of Rs. 2,29,990 as a trading loss under section 28(i).
3. Nature of advances made to Gokal Chand Jagan Nath Private Limited.
4. Timing of the loss recognition.

Detailed Analysis:

1. Allowability of Rs. 2,29,990 as a Bad Debt:
The assessee, a registered firm, claimed Rs. 2,29,990 as a bad debt under section 36(1)(vii). The ITO disallowed this claim on the grounds that:
(i) The assessee did not possess a money lending license.
(ii) The partners of the assessee-firm and the shareholders of the debtor company were common.
(iii) The claim had not become time-barred in the relevant year.

The AAC upheld the ITO's decision, and there was no appeal by the assessee against this finding.

2. Allowability of Rs. 2,29,990 as a Trading Loss:
The assessee alternatively claimed the amount as a trading loss under section 28(i). The AAC allowed this claim, relying on the judgments in the cases of B.D. Bharucha and T.J. Lalvani. However, the revenue contested this decision.

The Tribunal found that the AAC erred in allowing the loss as a trading loss. It was noted that the partners of the assessee-firm and the shareholders of the debtor company were the same individuals. By lifting the corporate veil, it was evident that the partners had advanced money to themselves, and thus, the loss could not be allowed as a trading loss.

3. Nature of Advances Made to Gokal Chand Jagan Nath Private Limited:
The Tribunal examined whether the advances were made in the course of the assessee's business or were capital in nature. It was found that:
- The advances were made even before the incorporation of the company.
- A significant amount was transferred to the share capital account.
- The advances were used for setting up a factory, indicating a capital nature.

The Tribunal concluded that the advances were not made for facilitating the purchase of goods but for establishing a factory, which provided an enduring benefit. Therefore, the advances were capital in nature and not incidental to the assessee's business.

4. Timing of the Loss Recognition:
The Tribunal also considered whether the loss pertained to the relevant year. It was noted that:
- The factory was sold in 1967.
- A substantial repayment was made in the year ending 31-3-1968.
- The assessee did not write off the amount earlier, expecting recovery from the partners.

The Tribunal found that no recovery proceedings were initiated against the company, and the limitation period for recovery had not expired. Therefore, it could not be concluded that the loss became irrecoverable in the relevant year.

Conclusion:
The Tribunal reversed the AAC's order and held that the sum of Rs. 2,29,990 was not a trading loss pertaining to the relevant year. The appeal by the revenue was allowed.