TaxTMI 
TaxTMI 
1962 (8) TMI 93
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and 1/12 shares in each of the three concerns respectively. In this reference, we are not concerned with any question relating to the share income of the assessee in these partnership firms. We are only concerned with the business activities of the assessee in regard to its own business as textile manufacturers. Between the years 1943 to 1945, the assessee sold goods (stock-in-trade) and certain items and pieces of machinery to Messrs. Alwaye Textile Ltd. During the same period the assessee had also made cash advances to Messrs. Alwaye Textiles Ltd. As a result of these transactions Alwaye Textile Ltd. became indebted to the assessee in a total sum of Rs. 3,55,323; the particulars of this total indebtedness are as follows: Rs. 1. Value of goods supplied 19,383 2. Sale price of machinery sold 1,20,885 3. Loans and cash advances 2,15,055 Total 3,55,323 Alwaye Textiles Ltd. defaulted to pay and the assessee filed a suit against it and obtained a decree for a sum of about Rs. 4,79,228. Even thereafter the decree remained undischarged and the assessee assigned and transferred the decree to Messrs. S. Kathayee & Co. receiving a sum of Rs. 1,50,000....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... very properly, that loans and cash advances made to Alwaye Textile Ltd. were not incidental to the manufacturing business and could not be treated as trade debts liable to be written off. The assessee however claimed deduction under section 10(2)(xi) of the Act in respect of a proportionate part of the sum of Rs. 1,03,552 attributable to the value of goods supplied and machinery sold. The Income-tax Officer upheld the assessee's claim only in so far as it related to the value of the stock-in-trade sold, namely, Rs. 19,388. He apportioned the receipt, Rs. 1,61,771, between "trade" and "non-trade debts" and worked out the figure of Rs. 8,987 as deemed to have been received towards Rs. 19,388. The excess of Rs. 19,388 over Rs. 8,987, namely, Rs. 10,401, was allowed to be written off as bad debt. In the appeal to the Appellate Assistant Commissioner by the assessee it was contended that the price of machinery sold taken as Rs. 1,20,000 not having been recovered in full, the unrecovered part thereof should also be treated as bad debt. The value of goods (stock-in-trade) and machineries sold was taken as Rs. 1,40,000 by rounding off the total of Rs. 19,388 plus Rs. 1,20,000. Out ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r section 10(2)(xi). That provision reads as follows: "Such profits or gains shall be computed after making the following allowances, namely:--.....(xi) when the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee: Provided that if the amount ultimately recovered on any such debt or loan is greater than the difference between the whole debt or loan and the amount so allowed, the excess shall be deemed to be a profit of the year in which it is recovered, and if less, the deficiency shall be deemed to be a business expense of that year." The assessee is not carrying on business in banking or money-lending. The second part of the section relating to the assessees, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee, we must observe that we did not understand him to support it. This view is in the teeth of the section. If the assessee, who is not a banker or moneylender, and whose stock-in-trade is not money, lends money taken out of the business, for a purpose not connected with the business, surely such a debt cannot be claimed to be within the section if bad and irrecoverable only on the ground that a decree has been obtained by the assessee. This certainly is an extreme illustration, but we are giving it to emphasise the fallacy underlying the Tribunal's view. The allowances provided for under section 10(2) in the computation of assessable profits or gains of a business, profession or vocation are generally of a revenue nature. Depreciation allowance in respect of buildings, machinery, plant or furniture is of an exceptional kind and that is perhaps the solitary instance where a capital loss is charged against the revenue receipt. It is true that while an expenditure in the nature of capital expenditure is specifically excepted under section 10(2)(xi) no such express provision is found in the words of section 10(2)(xi). The scheme of the Act regarding deduction of allowances in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it could be brought on the credit side of the profit and loss account, and if so brought would swell the profits of the assessee. An assessee cannot call that a trade debt which at the inception when it was good was not treated and dealt with as income receipt. Now the question is whether the assessee can be said to have failed to realise a trading receipt by reason of its failure to recover the decree amount fully from Alwaye Textiles Ltd. What the assessee sold to the Alwaye Textiles Ltd. was certainly a capital asset. The assessee treated the excess of sale price over the written down value of the machineries as capital gain not chargeable to tax. It is enough to point out that the assessee did not treat it as income, profits or gains. The mere fact that the assessee was obliged to sue Alwaye Textiles Ltd. for recovery of the money due on a sale of capital asset cannot in the least alter the character of the asset. If the Alwaye Textiles Ltd. had paid the full sale price, the receipt in the hands of the assessee would have been of a capital nature. This is beyond question. The course of transactions between the assessee and Alwaye Textiles Ltd. in regard to the sale of the it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Act. In construing the provisions of section 10(2)(xi), Chagla C.J. observed thus at page 78: "Now, in the first place, the Legislature has not used the expression in section 10(2)(xi) 'in the course of business'. It has used the expression with a wider connotation and the expression is 'in respect of the business'. Therefore, what the Legislature required was that there must be a connection between the debt and the business, and it is difficult to understand how in this particular case it could possibly be urged that there is no connection between the business of the assessee and the debt which has become a bad debt.....It is perfectly true that, even giving to the expression 'in respect of' the widest connotation, the debt must be incidental to the business." The actual decision in the Bombay case has been reversed by the Supreme Court in Commissioner of Income-tax v. Abdullabhai Abdulkadar [1961] 41 I.T.R. 545; [1961] 2 S.C.R. 949. With respect we agree with the learned Chief Justice that the particular debt should be incidental to the business before it can fall within the ambit of section 10(2)(xi). But if the learned Chief Justice me....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... result of the compromise was that the assessee had to remit a sum of Rs. 33,343. It is clear from this narration of the facts that the assessee realised the principal amount due under the mortgage but what was ultimately forgone was only a part of the interest due. This is made clear by the terms of the question referred to for the opinion of the High Court which was in these terms: "Whether the department having previously taxed the interest income of Rs. 41,843-12-0 during the years 1938-39 to 1941-42 on mercantile basis as business income the amount of Rs. 33,343 realised short subsequently as interest can be allowed as a deduction?" The Patna High Court held that the transaction was a proper trading transaction in the course of the normal business of the assessee, that the loss resulting to the assessee from the shortfall was eligible to be treated as a bad debt under section 10(2)(xi). We respectfully agree with the principle of the decision. It is obvious that the interest forgone by the assessee had attracted tax in its hands as the mercantile system of accountancy had been adopted. The loss consequent on the non-realisation of the interest amount was certainly ....