1992 (6) TMI 85 - AT - Income Tax

Summary

Issues:
1. Assessment under section 41(1) - Appropriation of amount waived by the bank.
2. Disallowance of bad debts - Recovery chances from debtors and treatment of business outlay.

Analysis:
1. Assessment under section 41(1):
The case involved an assessment year where the assessee declared a loss, but the Income Tax Officer (ITO) determined the income at a higher amount due to the addition of waived amount by the bank under section 41(1). The Commissioner (A) remitted the matter to the ITO for further consideration. The key issue was the appropriation of the amount waived by the bank. The Tribunal considered the agreement between the assessee and the bank, noting that the agreement did not specify the appropriation of the amount paid by the assessee. Referring to Section 60 of the Contract Act and legal principles, the Tribunal held that in the absence of specific intimation by the debtor, the money paid would be presumed to discharge the interest first. The Tribunal directed the ITO to ascertain if the assessee had intimated any specific appropriation to the bank regarding the amount paid.

2. Disallowance of bad debts:
Regarding the bad debts, the assessee had written off debts from two debtors as irrecoverable. The ITO disputed the write-off, suggesting that there were chances of recovery from the debtors. The Commissioner (A) differed in opinion, stating that one debtor's debt could be recovered due to ongoing contracts, while the other debtor's debt could be treated as bad except for a specific amount. The Tribunal considered the submissions from both sides, including the possibility of recovery from the debtors and the treatment of a specific amount given as a business outlay. The Tribunal concluded that further consideration was required by the ITO, especially regarding the cancellation of contracts with one debtor and the status of recovery from the other debtor in liquidation. The Tribunal directed the ITO to reevaluate the issue, considering all relevant factors, and allowed the appeals for statistical purposes.

In conclusion, the Tribunal's judgment addressed the issues of appropriation of waived amount under section 41(1) and the disallowance of bad debts, emphasizing the need for the ITO to reassess the matters based on specific legal principles and factual circumstances.