1977 (11) TMI 11 - HC - Income Tax

High Court allows bad debt claim but denies loss claim for property not used for business.

The High Court allowed the bad debt claim of Rs. 94,513 (excluding Rs. 2,700 for legal expenses), finding the write-off justified. The Court upheld the ... Bad Debt, High Court, Income Tax Act Issues Involved:1. Disallowance of bad debt of Rs. 94,513.2. Use of Pagalkhana property for firm's business.3. Allowance of loss of Rs. 30,988 on sale of Pagalkhana property under section 10(2)(vii).Detailed Analysis:Issue 1: Disallowance of bad debt of Rs. 94,513The assessee claimed a bad debt of Rs. 94,513 related to New Era Textile Mills Ltd. The ITO disallowed this claim for several reasons, including the lack of details regarding the money-lending business and the assertion that the transaction was not part of the assessee's business as sole selling agents of Empress Mills. The AAC upheld the ITO's decision, stating that the business had ceased before the relevant accounting period. The Tribunal also upheld the disallowance, concluding that the debt had not become bad in the accounting year and that the write-off was premature.The High Court examined the evidence, including the statement of the managing director of New Era, which indicated that New Era's financial position was weak even at the time of the write-off. The Court found that the Tribunal had ignored this relevant material and misdirected itself. The Court concluded that the write-off was justified and allowed the bad debt claim, except for the legal expenses of Rs. 2,700, which were not considered part of the bad debt.Issue 2: Use of Pagalkhana property for firm's businessThe assessee claimed a loss on the sale of the Pagalkhana property, asserting that it was used for business purposes. The ITO and AAC disallowed the claim, stating that the property was not used for business during the relevant accounting year. The Tribunal found that the property was used for business in the past but concluded that there was no evidence of business activity or use of the property for business during the accounting year.The High Court agreed with the Tribunal's conclusion, noting that the evidence did not support the claim of actual business use during the accounting year. The Court emphasized that the assessee's claim had to be based on actual use, not merely on past use or potential use.Issue 3: Allowance of loss of Rs. 30,988 on sale of Pagalkhana property under section 10(2)(vii)The assessee claimed a loss of Rs. 30,988 on the sale of the Pagalkhana property under section 10(2)(vii). The ITO and AAC disallowed the claim, and the Tribunal upheld this decision, stating that there was no evidence of business use of the property during the accounting year.The High Court found that the Tribunal's conclusion was correct and that there was no presumption of continued business use based on past use. The Court held that the claim for the loss had to be based on actual use during the accounting year, which was not established by the evidence.Conclusion:1. The High Court allowed the bad debt claim of Rs. 94,513 (excluding Rs. 2,700 for legal expenses), finding that the write-off was justified.2. The High Court upheld the Tribunal's decision that the Pagalkhana property was not used for business during the accounting year, disallowing the loss claim.3. The High Court agreed with the Tribunal that the loss of Rs. 30,988 on the sale of the Pagalkhana property could not be allowed under section 10(2)(vii) due to the lack of evidence of business use during the accounting year.The parties were directed to bear their own costs of the reference.