1969 (4) TMI 21 - HC - Income Tax

When no evidence is adduced that a debt was not recoverable, Whether the amount advanced by the assessee-firm can be allowed as a deduction in the computation of its business income either as a bad debt or as a business loss

Summary

Issues:
Whether the amount advanced by the assessee-firm to Shri V. Nagayya can be allowed as a deduction in the computation of its business income either as a bad debt or as a business loss for the assessment year 1962-63?

Detailed Analysis:
The case involved the assessee-firm, acting as a commission agent for various companies, advancing Rs. 12,000 to Shri V. Nagayya for a joint venture to purchase dismantled building material. Nagayya failed to purchase the materials or return the amount, leading the assessee to claim it as a bad debt or business loss. The Income-tax Officer rejected the claim, stating that legal steps were not taken for recovery, and the debt was not considered in prior income calculations. The Appellate Assistant Commissioner upheld the decision, deeming the advance a capital investment for a joint venture. The Tribunal agreed, noting Nagayya's promises to repay and lack of evidence of insolvency. The Tribunal found the loss was of a capital nature, denying the deduction claim.

The High Court analyzed whether the expenditure was revenue or capital in nature. The assessee argued that the amount was for goods to be resold, thus a revenue expense. However, the department viewed it as a capital investment for a joint venture, as Nagayya was to acquire goods using the capital. The Court referenced a Supreme Court decision on revenue vs. capital expenditure. The Court considered whether the liability had become irrecoverable, a key factor in claiming a bad debt deduction. The Tribunal found no evidence of Nagayya's insolvency or inability to pay, concluding the debt was not proven as bad in the relevant year. The Court emphasized that the assessee, as a businessman, must prove a debt as bad, and in this case, there was insufficient evidence of irrecoverability. The Court upheld the Tribunal's decision, denying the deduction claim for the bad debt or business loss for the assessment year 1962-63.

In conclusion, the High Court ruled against the assessee, stating that the amount advanced to Nagayya could not be allowed as a bad debt or business loss for the assessment year 1962-63. The Court found no error in the authorities' decision based on the lack of evidence proving the debt as irrecoverable. The assessee was directed to pay the respondent's costs, including a hearing fee.