1937 (2) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Justification for excluding interest amount from the computation of profits.
2. Deficit in the account of the assessee with a discontinued partnership business.
3. Irrecoverability of debts in the business account.
4. Badness of debts from an insolvent estate.

Issue-Wise Detailed Analysis:

1. Justification for Excluding Interest Amount from Computation of Profits
The first question addressed whether the assessee was justified in excluding the sum of Rs. 12,447 charged against Wazir Chand-Chaman Lal from the interest account and crediting it to Suspense. The assessee argued that the exclusion was part of its regular accounting system and cited a previous instance where a similar item was excluded without protest by the Income Tax authorities. However, the court found that this solitary instance did not establish a regular system. The court emphasized that under the mercantile system of accounting, entries are made on the date of transaction irrespective of payment. The court concluded that the exclusion was not justified as there was no evidence to support that the item was irrecoverable, and the exclusion was not based on any regular accounting system. Thus, the court upheld the decision of the Income Tax authorities.

2. Deficit in the Account of the Assessee with a Discontinued Partnership Business
Questions 2 and 3 were related and addressed together. The court examined whether the deficit in the assessee's account with a discontinued partnership business could be considered a revenue charge. The assessee had started a separate business under the "Seeds Department" and suffered heavy losses, leading to its closure in 1931. The assessee claimed exclusion of bond debts as irrecoverable loans, which were disallowed by the Income Tax Officer and the Assistant Commissioner. The court held that the business was indeed a partnership and emphasized that losses from a discontinued business could not be set off against profits from a current business. The court cited the principle that both businesses should be alive during the current year for losses to be set off. Therefore, the court answered Question No. 2 in the negative, and Question No. 3 did not arise.

3. Irrecoverability of Debts in the Business Account
Question 4 addressed whether the Assistant Commissioner was bound to allow the claim of bad debts on the ground of limitation reached in the account period. The court found that the debts had been considered bad in the balance sheet for the year ending September 1933, and the assessee had not provided evidence to show that the debts became bad during the account year. The court cited precedents that the determination of when a debt becomes bad is a question of fact to be decided by the appropriate tribunal. The court concluded that the finding of the Assistant Commissioner was based on relevant and admissible evidence and was therefore conclusive. The court answered Question No. 4 in the negative.

4. Badness of Debts from an Insolvent Estate
Question 5 related to the badness of debts from an insolvent estate, specifically a transaction with Dart and Company. The court noted that the Official Assignee had not wound up the estate and had paid dividends to creditors even after the year of account. The Income Tax Officer and the Assistant Commissioner disallowed the item, concluding that the debt had become bad before the previous year. The Commissioner supported the final conclusion, stating that the scheme of the Act did not favor 'piecemeal write-off.' The court agreed with the Commissioner, stating that as long as there was hope of recovering the debt, it could not be considered irrecoverable. The court answered Question No. 5 in the affirmative.

Conclusion
The court upheld the decisions of the Income Tax authorities on all five questions, emphasizing the principles of the mercantile system of accounting, the inadmissibility of setting off losses from a discontinued business, and the importance of evidence in determining the badness of debts.