Court allows bad debt deduction & rejects taxability of rental income.

The Court held that the sum of Rs. 57,122 constituted a bad debt allowable under section 36(1)(vii) of the Income-tax Act, 1961, as it met the criteria for being a genuine write-off. Additionally, the Court ruled in favor of the assessee regarding the taxability of rental income received during the assessment year 1961-62, stating that the income could only be assessed for the accounting year 1959 when the compromise took place, not for the later year. Consequently, both issues were decided in favor of the assessee, allowing the bad debt deduction and rejecting the taxability of rental income for the relevant assessment year.

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Issues:
1. Allowability of bad debt under section 36(1)(vii) of the Income-tax Act, 1961.
2. Taxability of rental income received during the assessment year 1961-62.

Issue 1:
The judgment addressed the first issue of whether a sum of Rs. 57,122 was a bad debt allowable under section 36(1)(vii) of the Income-tax Act, 1961. The assessee, a registered firm, had debts due from various concerns, including Fida and its subsidiaries. The Tribunal held that the amount due directly from Fida was a business debt and became a bad debt when the new management indicated unwillingness to pay more than 10%. As for debts due from subsidiaries transferred to Fida's account, the Tribunal found the transfer did not change the nature of the debts, and the write-off was genuine. The Court agreed with the Tribunal's findings, holding that Rs. 57,122 constituted a bad debt and was allowable as a deduction under the Act.

Issue 2:
The second issue involved the taxability of rental income received during the assessment year 1961-62. The assessee had received rental income from a property under dispute, which was settled through a compromise in 1959. The ITO assessed this income for the year 1960-61 under the "Other sources" head, citing the cash system of accountancy. However, the Tribunal found that the assessee followed the mercantile system of accounting and had not changed it for this income source. The Tribunal concluded that the rental income could only be assessed for the accounting year 1959, when the compromise occurred, and not for 1961-62. The Court upheld the Tribunal's decision, stating that the ITO's inconsistent assessment approach and lack of evidence of a change in the accounting system justified the deletion of the rental income inclusion.

In conclusion, both issues were decided in favor of the assessee, allowing the bad debt deduction and rejecting the taxability of rental income for the relevant assessment year.

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