1962 (9) TMI 78 - HC - Income Tax

Allahabad High Court upholds Tribunal decision on bad debt, deems legal expenditure admissible for assessment year 1944-45

Seth Champalal Ramswarup, Beawar Versus Commissioner of Income-Tax, U.P. & V.P.

Seth Champalal Ramswarup, Beawar Versus Commissioner of Income-Tax, U.P. & V.P. - [1964] 52 ITR 201 Issues Involved:1. Jurisdiction of the Allahabad High Court to hear the reference.2. Determination of whether the debt due from M/s. Ramjasmal Navrangrai had become bad and irrecoverable prior to the assessment year 1944-45.3. Admissibility of the expenditure of Rs. 24,400 claimed as legal expenditure under section 10(2)(xv) of the Indian Income-tax Act.4. Determination of whether the expenditure of Rs. 24,400 claimed as legal expenditure pertained to the assessment year 1944-45 or an earlier year.Detailed Analysis:1. Jurisdiction of the Allahabad High Court:The preliminary objection raised by the department was that the Allahabad High Court had no jurisdiction to answer the questions of law referred to it, arguing that the Rajasthan High Court alone had jurisdiction following the inclusion of Ajmer within Rajasthan in 1956. The court examined the relevant provisions of the States Reorganisation Act, 1956, specifically sections 52, 64, 123, and 125, and concluded that there was no provision for transferring pending income-tax references to the Rajasthan High Court. The court relied on the principle that jurisdiction is determined based on the conditions existing at the start of the proceedings unless a statutory provision states otherwise. The court cited the Federal Court's decision in Venugopala Reddiar v. Krishnaswami Reddiar and held that it retained jurisdiction over the matter. The preliminary objection was overruled.2. Bad Debt Determination:The first question addressed whether there was material for the Tribunal to hold that the debt from M/s. Ramjasmal Navrangrai had become bad and irrecoverable long before the assessment year 1944-45. The Tribunal's conclusion was based on the fact that no recovery had been made from the debtor for ten years and no interest had been debited to the debtor's account since Samvat year 1997. The court noted that the Tribunal had considered the statements of Tulsi Ram and Motilal, the letters dated Phagun, Samvat year 1993, and other evidence. The court found that the Tribunal's conclusion was based on relevant material and was not arbitrary. Therefore, the first question was answered in the affirmative, supporting the Tribunal's finding.3. Admissibility of Legal Expenditure:The second question was whether the expenditure of Rs. 24,400 claimed as legal expenditure was admissible under section 10(2)(xv) of the Indian Income-tax Act. The court referred to the decision in Commissioner of Income-tax v. Jagatjit Distilling and Allied Industries Ltd., which held that expenses incurred in connection with winding-up proceedings, including counsel fees and other legal expenses, should be treated as part of business expenditure. Based on this precedent, the court answered the second question in the negative, in favor of the assessee, allowing the claimed expenditure as admissible.4. Pertinence of Legal Expenditure to the Assessment Year:The third question addressed whether the expenditure of Rs. 24,400 claimed as legal expenditure pertained to the assessment year 1944-45 or an earlier year. The court noted that the expenses were incurred between 1938 and 1941, but the liability was only finalized during the assessment year when the solicitors' bills were settled. Despite the mercantile system of accounting, the court held that the liability accrued only during the year of assessment when the bills were settled. The court distinguished this case from Calcutta Co. Ltd. v. Commissioner of Income-tax, where the liability was more predictable. Therefore, the court answered the third question in the negative, in favor of the assessee, allowing the expenditure to be claimed in the year under assessment.Conclusion:The court ruled that it had jurisdiction to hear the reference, upheld the Tribunal's finding on the bad debt, allowed the legal expenditure as admissible, and determined that the expenditure pertained to the assessment year 1944-45. Both parties were directed to bear their own costs, with the department's counsel fee assessed at Rs. 300.