1989 (6) TMI 53 - HC - Income Tax

High Court overturns Tribunal, upholds tax claim, emphasizes immediate tax liability accrual.

The High Court quashed the Income-tax Appellate Tribunal's orders and restored the Appellate Assistant Commissioner's decision allowing the bad debt claim ... Amount Due From Company, Bad Debt, Writ Issues Involved:1. Quashing of orders passed by the Income-tax Appellate Tribunal.2. Determination of bad debt claim amounting to Rs. 83,937 for the assessment year 1975-76.3. Preferential treatment of tax liability u/s 41(2) of the Income-tax Act.Summary:Issue 1: Quashing of Orders by the Income-tax Appellate TribunalThe petitioner sought to invoke the extraordinary powers of the court u/s 226 and 227 of the Constitution of India to quash the orders passed by the Income-tax Appellate Tribunal on December 22, 1978, May 19, 1979, and March 10, 1980. The Tribunal had rejected the petitioner's claims on the grounds that the tax liability on the Mill Co. in liquidation was merely a contingent liability and that it ranked after the assessee's claim. The High Court found these findings inconsistent with the record, stating that the liability u/s 41(2) of the Income-tax Act was not contingent but a specific liability accruing on the sale of the assets of the liquidated company.Issue 2: Determination of Bad Debt ClaimThe petitioner, a partnership firm dealing in cotton, sold 91 bales of cotton worth Rs. 83,937 to Shri Krishnakumar Mills in the assessment year 1969-70. The mills were wound up, and the petitioner could not recover the amount, thus showing it as a bad debt in 1972-73. The Income-tax Officer disallowed the claim, stating it was prematurely written off. The Appellate Assistant Commissioner directed reconsideration of the claim in subsequent years. For the assessment year 1975-76, the petitioner again claimed the amount as a bad debt, supported by letters from the Official Liquidator and other judgments. The Income-tax Officer disallowed the claim, but the Appellate Assistant Commissioner allowed it, finding the claim justified. The Tribunal, however, overturned this decision, which the High Court found to be based on flawed reasoning.Issue 3: Preferential Treatment of Tax Liability u/s 41(2)The High Court emphasized that the liability u/s 41(2) of the Income-tax Act is not contingent but accrues immediately on the sale of the assets of the company in liquidation. The court referred to section 178(2) and (3) of the Income-tax Act, which mandates the liquidator to set apart the tax liability before satisfying other claims. The Tribunal's finding that this liability was subsequent and not preferential was deemed perverse. The court noted that similar claims by other creditors, including Bhaidas Karsandas, were allowed by the Appellate Assistant Commissioner, indicating discriminatory treatment against the petitioner.Conclusion:The High Court quashed the orders of the Income-tax Appellate Tribunal dated December 22, 1978, May 19, 1979, and March 10, 1980, and restored the order of the Appellate Assistant Commissioner of Income-tax dated October 5, 1977, which allowed the bad debt claim of Rs. 83,937. The court asserted that rejecting the petition on technical grounds after a long lapse would be unjust and emphasized the need for rational and logical adjudication in tax matters. Rule was made absolute with no order as to costs.