High Court allows bad debt claim as trading loss under s. 28 of I.T. Act, 1961

The High Court held in favor of the assessee, M/s. Abdul Razak & Company, allowing the bad debt claim as a trading loss under s. 28 of the I.T. Act, 1961. The court emphasized that the advances made in the course of commission agency business were part of the general business operations, thus deeming the loss incidental to business. The court rejected the contention that the advances were not in the ordinary course of money-lending business, stating that financial lending was integral to the commission agency business. The revenue's question was answered in favor of the assessee, with costs directed to be paid by the Commissioner.

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Issues Involved:

1. Whether the impugned debt could be said to be a bad debt and allowable u/s 36(2) of the I.T. Act, 1961.
2. Whether the impugned loss could be said to be incidental to the business of the assessee and allowable u/s 28 of the I.T. Act, 1961.
3. Whether the advance to M/s. Mohmad Peer Mohmad was not in the ordinary course of money-lending business.

Summary:

Issue 1: Bad Debt Allowability u/s 36(2) of the I.T. Act, 1961

The assessee, M/s. Abdul Razak & Company, claimed a bad debt of Rs. 78,824 due from M/s. Mohmad Peer Mohmad of Nasik. The ITO disallowed the claim, stating the debt was neither incurred in the course of money-lending nor commission agency. The AAC upheld the ITO's view but granted partial relief by reducing the amount by Rs. 4,396, being the interest charged but not received. The Tribunal concluded that the advances made to M/s. Mohmad Peer Mohmad were not in the ordinary course of money-lending business and thus, the bad debt claim was not sustainable.

Issue 2: Loss Incidental to Business u/s 28 of the I.T. Act, 1961

The Tribunal considered whether the loss could be allowed as incidental to the business under s. 28 of the I.T. Act, 1961. It held that since the assessee had dealings with M/s. Mohmad Peer Mohmad and there was no evidence of any relation between the partners of the two firms, the loss should be allowed as a deduction under s. 28. The High Court agreed, stating that financing is an integral part of the commission agency business. The court noted that the assessee-firm advanced money to constituents in the course of commission agency business, and these advances were part of the general business operations. Thus, the loss was allowable as a trading loss under s. 28.

Issue 3: Ordinary Course of Money-Lending Business

The Tribunal's inference that the advances were not part of the ordinary course of business was not justified. The High Court emphasized that the financial lending involved in commission agency is an integral part of the business. The court highlighted that the assessee-firm had been making advances in the course of commission agency business and that the debtor-firm had long-standing trading relations with the assessee-firm. Therefore, the advance to M/s. Mohmad Peer Mohmad was in the ordinary course of business.

Conclusion:

The High Court answered the question referred by the revenue in the affirmative, in favor of the assessee, stating that the loss being a bad debt is allowable as a trading loss under s. 28 of the I.T. Act, 1961. The question referred by the assessee did not require an answer. The Commissioner was directed to pay the costs of the reference to the assessee.

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