1973 (9) TMI 17 - HC - Income Tax

Court denies deduction for alleged bad debt, emphasizes expenditure not transformed into debt due.

The High Court ruled against the assessee, holding that the sum of Rs. 76,306 was not allowable as a deduction in computing the profits and gains for the ... Certain expenses were incurred prior to nationalisation. This was allocated between life and general business. The claim of expenses allocated to life business was rejected by Life Insurance Corporation, whether the amount can be set off as bad debts - ' Whether Tribunal was right in law in holding that the sum of ₹ 76,306 was allowable as deduction in computing the profits and gains of the business for the year 1961 relevant to the assessment year 1962-63 ? ' - Unless there was an admitted debt and it became irrecoverable, no question of writing it off as a bad debt would arise. - Reference answered in the negative Issues Involved1. Whether the sum of Rs. 76,306 was allowable as a deduction in computing the profits and gains of the business for the assessment year 1962-63.Detailed Analysis1. Background and Allocation of Expenses:The assessee, a public limited company engaged in insurance, allocated common expenses between its life and general insurance sections. Post-nationalization in 1956, the life insurance section's management vested in the Government and later in the Life Insurance Corporation (LIC). The assessee allocated 5/6ths of management expenses to the life insurance section and 1/6th to the general section for the year ending December 31, 1955. This allocation, done without the Custodian's consent, led to a disputed claim of Rs. 76,306 against LIC.2. Legal Proceedings and Tribunal Findings:The assessee filed a writ petition seeking the recovery of Rs. 76,306 from LIC, which was dismissed by the High Court. The Court held that unilateral allocation of expenses by the assessee did not bind the Government or LIC. Subsequently, the Life Insurance Tribunal found that LIC was entitled to recover certain amounts from the assessee. In its 1961 profit and loss account, the assessee wrote off Rs. 76,306 as a bad debt and claimed it as a deduction for the assessment year 1962-63.3. Income-tax Officer and Appellate Assistant Commissioner's Disallowance:The Income-tax Officer disallowed the claim on three grounds: the bad debt related to a dead business, it was a capital loss not related to any specific business advance, and the claim was a fictitious asset with no valid claim against LIC. The Appellate Assistant Commissioner upheld this disallowance, stating the expense was not legitimate for 1955 and not an allowable expenditure for 1961.4. Tribunal's Allowance of the Deduction:The Appellate Tribunal allowed the deduction, reasoning that the loss arose from pre-nationalization expenses recoverable from the life insurance section. It considered the loss as a trading loss allowable in the year 1961 when it became clear that LIC would not entertain the claim.5. High Court's Decision:The High Court, referencing the case of National Petroleum Co. Ltd. v. Commissioner of Income-tax, held that the sum of Rs. 76,306 was an expenditure incurred in 1955 and could not transform into a debt due from LIC by mere allocation. The Court emphasized that unless there was an admitted debt that became irrecoverable, no bad debt write-off could be claimed. The Court concluded that the expenditure was related to the general insurance business and not allowable for the year 1961.6. Conclusion and Reference Answer:The High Court answered the reference in the negative, ruling in favor of the revenue. The Court held that the sum of Rs. 76,306 was not allowable as a deduction in computing the profits and gains of the business for the assessment year 1962-63. The assessee was also ordered to pay costs amounting to Rs. 250.Reference Answered in the Negative.