1988 (10) TMI 89 - AT - Income Tax

Summary

Issues: Disallowance of business loss deduction claimed by the assessee.

In this case, the appeal was directed against the sustention of a disallowance of Rs. 2,93,359 by the Income Tax Officer (ITO). The assessee, a registered firm engaged in the business of stevedoring, had a running account with another company. A compromise decree was passed by the High Court, stating conditions for payment. The debtor failed to pay the amount, leading the assessee to write off a portion of the debt in its accounts for the previous year. The ITO disallowed the deduction, claiming that the debt had revived. The Commissioner of Income Tax (Appeals) also rejected the claim, considering it a premature bad debt claim. The assessee argued that the written-off amount was a business loss, not a bad debt, as it was related to supplies made in earlier years. The Tribunal found that the written-off amount was indeed a business loss, as the outstanding amounts were for supplies already accounted for on an accrual basis. The compromise decree only allowed for partial recovery, and the debtor's financial situation made full recovery unlikely. The Tribunal concluded that the deduction claimed by the assessee should be allowed as a business loss. Therefore, the orders of the lower authorities were set aside, and the ITO was directed to recompute the total income after allowing the deduction of Rs. 2,93,359, with consequential amendments to the assessment of the partners.

Overall, the key issue in this case was whether the disallowed deduction claimed by the assessee should be considered a bad debt or a business loss. The Tribunal analyzed the nature of the outstanding amounts, the compromise decree terms, and the financial circumstances of the debtor to determine that the written-off amount was indeed a business loss. The Tribunal emphasized that the amounts outstanding were for supplies already taken into account on an accrual basis, making it a business loss rather than a bad debt. The Tribunal highlighted that the compromise decree only allowed for partial recovery, and the debtor's financial situation made full recovery unlikely, leading to the conclusion that the deduction claimed should be allowed as a business loss.