1966 (4) TMI 13 - HC - Income Tax

Baddebt - IT department was not legally justified in rejecting the claim of the assessee under s. 10(2)(xi)

Summary

Issues:
- Whether the assessee was entitled to claim a sum of Rs. 8,324 as a bad debt for the assessment year 1959-60?
- Whether the debt concerned is a bad debt?
- If so, at what point of time did it become a bad debt?

Analysis:

The case involved a dispute regarding the claim of a sum of Rs. 8,324 as a bad debt for the assessment year 1959-60 by the assessee-company, United Industrial Corporation (Agencies) Private Ltd., Hyderabad. The debt in question arose from transactions with Messrs. Chinoy Challani and Co., where a substantial amount became due from the debtor to the assessee. The debtor expressed inability to pay due to financial circumstances, leading to a settlement offer of Rs. 249-4-4, which the assessee accepted and wrote off the remaining amount as bad debt in its accounts.

The Income-tax Officer initially disallowed the claim of bad debt, citing lack of legal action taken by the assessee and the debt being time-barred. The Appellate Assistant Commissioner partially allowed the claim, acknowledging a portion of the debt as bad. The Tribunal, however, dismissed the appeal on grounds including failure to write off the debt despite indications of irrecoverability and lack of evidence of recovery hopes between 1956 and 1958.

The main legal questions revolved around whether the debt was indeed a bad debt and when it became irrecoverable. The courts emphasized that determining bad debt status and timing are factual inquiries, not purely legal matters. The relevant provisions of the Income-tax Act, specifically section 10(2)(xi), were crucial in assessing the allowance for bad and doubtful debts, with conditions specifying the irrecoverability of debts in the relevant accounting year.

Citing precedents, the courts highlighted that the status of a debt as bad and the timing of its irrecoverability are fact-specific inquiries, requiring consideration of all relevant circumstances. The Tribunal's findings, based on evidence including correspondence indicating financial difficulties of the debtor, were deemed sufficient to support the conclusion that the debt had become bad within the relevant accounting year.

In conclusion, the court answered the questions in the negative, favoring the department, and awarded costs to the same. The decision underscored the factual nature of determining bad debts and the importance of evidence and circumstances in such assessments, emphasizing the need for honest judgment by the assessee regarding debt status and recoverability.