Debatable rectification, diversion of income, and bad debt deduction principles clarified in banking tax disputes.

A debatable question on adjustment of short-term capital gain from depreciable assets against brought-forward business loss cannot be rectified under section 154 because such an issue is not an apparent mistake and requires legal interpretation. The doctrine of diversion of income by overriding title applies only where income never accrues to the assessee; a bank's liquidation arrangement giving DICGC priority over realisations did not amount to diversion at source. A bad debt written off in the books in the course of banking business is deductible once the statutory conditions are met, and actual irrecoverability need not be proved.

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Issues: (i) whether the adjustment of short-term capital gain arising from sale of depreciable assets against brought forward business loss could be rectified under section 154, (ii) whether the income realised by a bank under liquidation was diverted at source by overriding title in favour of DICGC, and (iii) whether the claim for bad debt written off was allowable.

Issue (i): whether the adjustment of short-term capital gain arising from sale of depreciable assets against brought forward business loss could be rectified under section 154

Analysis: The head of income on sale of depreciable assets was treated as short-term capital gain under section 50(2), but the question whether such gain could be adjusted against brought forward business loss required interpretation and was not free from doubt. A matter that requires a long-drawn process of reasoning or involves competing views cannot be treated as an apparent mistake for rectification. The existence of a contrary view supported the conclusion that the issue was debatable.

Conclusion: The rectification under section 154 could not be sustained and was quashed; the issue was decided in favour of the assessee.

Issue (ii): whether the income realised by a bank under liquidation was diverted at source by overriding title in favour of DICGC

Analysis: The doctrine of diversion of income by overriding title applies only where income never reaches the assessee because of a superior enforceable obligation. On the facts considered, the payment obligation in favour of DICGC conferred a first preference over realisations available with the official liquidator, after meeting liquidation expenses, but did not establish that the income never accrued to the bank or stood diverted at source. The arrangement was therefore not treated as one of diversion by overriding title.

Conclusion: The plea of diversion of income at source was rejected and the issue was decided against the assessee.

Issue (iii): whether the claim for bad debt written off was allowable

Analysis: The bad debt was written off in the books, and in the case of a banking business money lent in the ordinary course of business falls within the statutory framework for deduction. Once the debt is written off as irrecoverable, the assessee is not required to establish actual irrecoverability, and the disallowance was unsupported by reasons.

Conclusion: The disallowance of bad debt was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The first appeal succeeded on the challenge to rectification, while the second appeal succeeded on the bad debt claim, resulting in partial relief to the assessee overall.

Ratio Decidendi: A debatable question of law cannot be rectified as a mistake apparent from the record under section 154, and a bad debt written off in the books in the course of banking business is deductible without proof of actual irrecoverability where the statutory conditions are otherwise satisfied.

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