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<h1>High Court Decision: Revenue wins on bad debts & guarantee discharge, legal expenses allowed for business expansion.</h1> <h3>COMMISSIONER OF INCOME-TAX AND ANOTHER Versus UNITED BREWERIES LTD.</h3> COMMISSIONER OF INCOME-TAX AND ANOTHER Versus UNITED BREWERIES LTD. - [2010] 321 ITR 546 (Karn) Issues Involved:1. Bad debts written off2. Discharge of guarantee obligations3. Legal expenses incurred4. Real income theory and interest incomeDetailed Analysis:1. Bad Debts Written Off:The assessee claimed deductions for bad debts written off under section 36(1)(vii) of the Income-tax Act, 1961. The adjudicating authority and the first appellate authority disallowed these claims, stating that the amounts were either capital advances or lacked sufficient evidence to be considered as bad debts. The Tribunal reversed these findings, allowing the claims. The High Court noted the absence of material evidence to support the claims and emphasized that a debt must be a legal obligation recoverable by action. The court concluded that the amounts claimed as bad debts were not substantiated with adequate proof of efforts to recover them and thus disallowed the claims, answering the related questions in favor of the Revenue.2. Discharge of Guarantee Obligations:The assessee claimed deductions for amounts paid to discharge guarantees given for loans taken by its subsidiaries. The adjudicating and appellate authorities disallowed these claims, stating that the liabilities were capital in nature and not directly related to the assessee's business. The Tribunal allowed the claims, following its earlier decision for the assessment year 1995-96. The High Court, however, emphasized that each assessment year is distinct and that the principle of res judicata does not apply to tax matters. The court found that the guarantees were not directly related to the assessee's business and disallowed the claims, answering the related questions in favor of the Revenue.3. Legal Expenses Incurred:The assessee claimed deductions for legal expenses incurred for obtaining advice on acquiring a foreign company. The adjudicating and appellate authorities disallowed this claim, considering it as capital expenditure. The Tribunal allowed the claim, treating it as revenue expenditure. The High Court agreed with the Tribunal, stating that the expenses were incurred for obtaining expert opinion on business expansion and not for acquiring a capital asset. Thus, the court allowed the deduction, answering the related question in favor of the assessee.4. Real Income Theory and Interest Income:The assessee excluded accrued interest income on the grounds of 'real income' theory, claiming that the income was not realizable. The adjudicating and appellate authorities included this income for tax purposes. The Tribunal allowed the exclusion, following the real income theory. The High Court disagreed, stating that under the mercantile system of accounting, income accrues with the lapse of time and must be offered to tax. The court emphasized that the concept of real income cannot override statutory provisions and disallowed the exclusion, answering the related question in favor of the Revenue.Conclusion:The High Court allowed the appeal in part, reversing the Tribunal's findings on bad debts, discharge of guarantee obligations, and interest income, while upholding the deduction for legal expenses. The court imposed costs on the respondent for both appeals.