1974 (2) TMI 5 - HC - Income Tax

Business advances deemed deductible under Income-tax Act

The High Court allowed the deduction of Rs. 27,959 claimed by the assessee as expenditure under section 37 of the Income-tax Act, 1961. The court held ... Forest contractor advanced money to sub-contractors for cutting and moving the trees. But the forest contract was not renewed. Accordingly portion of the advances became irrecoverable - After a scrutiny of the details of these bad debts the Income-tax Officer disallowed the bad debts amounting to Rs. 27,959 - The Income-tax Officer did not allow any extension in respect of a sum of Rs. 27,959 advanced to various sub-contractors on account of the fact that the assessee had not taken any step for the realisation of those debts ' Whether, on the facts and in the circumstances of the case, the deduction of Rs. 27,959 claimed by the assessee was rightly refused by the Appellate Tribunal ? ' Issues Involved:1. Whether the deduction of Rs. 27,959 claimed by the assessee was rightly refused by the Appellate Tribunal.Issue-wise Detailed Analysis:1. Refusal of Deduction by the Appellate Tribunal:The primary issue referred to the High Court was whether the Appellate Tribunal rightly refused the deduction of Rs. 27,959 claimed by the assessee. The relevant facts are as follows:- The assessment year in question is 1964-65.- The assessee is a firm of forest lessees consisting of two private limited companies.- The firm engaged sub-contractors for forest exploitation activities and provided them with advances and subsidized rations.- The assessee declared a net loss of Rs. 1,72,669, which included Rs. 40,977 for bad debts.- The Income-tax Officer disallowed Rs. 27,959 of these bad debts, as the assessee had not taken steps for their realization.- The Appellate Assistant Commissioner confirmed this disallowance, noting the lack of evidence proving these debts had become bad.- The Tribunal upheld the decision, stating the deductions were not permissible under section 36(2)(i)(a) and could not be claimed under section 37 due to the principle of generalia specialibus non derogant.2. Applicability of Section 36 and Section 37:The Tribunal's decision was based on the interpretation that section 36, being a specific provision, overrides the general provision of section 37. The Tribunal observed that section 36 is restrictive and does not cover bad debts arising from ordinary transactions except those incurred by way of sales. The Tribunal also noted that the amounts in question were advanced in a different year than when they were considered non-recoverable.3. Assessee's Argument:The assessee conceded that if the bad debt did not fall within section 36(2), it could not claim the deduction under that section. However, the assessee argued that the deduction should be allowed under section 28 read with section 37, as the advances were necessary for the business operations. The system of work required advances to sub-contractors to ensure timely labor availability.4. Department's Argument:The department argued that the advances could not be regarded as expenditure but as debts, which did not fall within section 36. They also contended that if section 36 applied, section 37 could not be invoked.5. Legal Precedents and Interpretation:The judgment referenced several legal precedents to interpret the relevant sections:- Gresham Life Assurance Society v. Styles: Profits should be understood in their natural and proper sense.- Badridas Daga v. Commissioner of Income-tax: Profits liable to tax are those understood under ordinary commercial principles.- Commissioner of Income-tax v. Basumal Jagat Narain: The nature of the debt and its recoverability are crucial in determining bad debts.- Commissioner of Income-tax v. Nainital Bank Ltd.: Trading loss is deductible if incurred in carrying out business operations and incidental to the business.- Commissioner of Income-tax v. Mysore Sugar Co. Ltd.: Distinguished between capital expenditure and revenue loss, emphasizing the nature of the transaction in relation to the business.6. Conclusion:The High Court concluded that the advances made by the assessee were necessary for the business and should be considered as expenditure laid out wholly and exclusively for business purposes. The court held that section 37, being a residuary section, could apply even if section 36 did not cover the specific case. The word 'described' in section 37 indicates that it can cover expenditures not specifically mentioned in sections 30 to 36.The court answered the question in the negative, allowing the deduction under section 37 and emphasizing that the nature of the business and the necessity of the advances justified the deduction as business expenditure.Final Judgment:The High Court ruled that the deduction of Rs. 27,959 should be allowed as expenditure under section 37 of the Income-tax Act, 1961, and answered the question referred by the Tribunal in the negative. There was no order as to costs, and a copy of the order was to be forwarded to the Appellate Tribunal as required by section 260(1) of the Income-tax Act, 1961.