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Turner Morrison And Co. Ltd. v. Commissioner Of Income-Tax
Factual and Procedural Background
This opinion addresses a reference involving six questions concerning the assessment of income and allowable deductions related to certain sums of money and legal expenses incurred by the assessee. The questions arise from findings of the Tribunal and the Assessing Officer regarding income from undisclosed sources, legal expenses on a property, and the allowance of a substantial deduction claimed as bad debt. The matter involves scrutiny of assessments made in the relevant previous year and challenges to the Tribunal's conclusions.
Legal Issues Presented
- Whether the Tribunal's finding that Rs. 49,599 was the income of the assessee from undisclosed sources is based on any material, or arrived at by ignoring relevant materials, or is perverse.
- Whether Rs. 49,599 could be treated as the assessee's income from undisclosed sources of the relevant previous year.
- Whether the Tribunal's finding that Rs. 12,507 spent on legal expenses for Habra land was not connected with the assessee's business and/or was a capital expenditure is based on any material, or arrived at by ignoring relevant materials, or is perverse.
- Whether Rs. 12,507 incurred on legal expenses for the said Habra land was an allowable deduction.
- Whether the Tribunal's finding that Rs. 15,40,264 was not an allowable deduction and/or could not be allowed during the previous year is based on any material, or arrived at by ignoring relevant material, or is perverse.
- Whether Rs. 15,40,264 was an allowable deduction during the relevant previous year.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. United Bank of India, [1993] 69 Taxman 505 | Finalisation of accounts and retrospective effect of board resolutions approving bad debt write-offs after the accounting year end. | The Court relied on this precedent to reject the Tribunal's view that bad debt shown after the accounting year end was not allowable, emphasizing that accounts can be finalized later with retrospective effect upon board approval. |
Court's Reasoning and Analysis
The Court examined each question in light of the materials and evidence on record. Regarding questions 1 and 2, the Court found that the Tribunal and lower authorities correctly fixed the value of the property at Rs. 49,599, rejecting the notion of a notional value of Re. 1 post-civil court decree. There was no perversity in this finding.
For questions 3 and 4, the Court upheld the Tribunal's conclusion that the Rs. 12,507 legal expenses related to the Habra land were not business expenses and thus not allowable deductions.
On questions 5 and 6 concerning the disallowance of Rs. 15,40,264, the Court disagreed with the Tribunal's reasoning. The Tribunal had disallowed the deduction partly because the amount was shown after the accounting year end and because the assessee was not a money-lender. The Court found these reasons unsound.
Relying on the precedent of CIT v. United Bank of India, the Court held that accounts can be finalized retrospectively, and the timing of the bad debt recognition post-accounting year is immaterial. Further, the Court interpreted section 36(1)(vii) of the Income Tax Act and its subsections to mean that bad debt deductions are not limited only to money-lenders. Since the Rs. 15,40,264 related to advances to a subsidiary company which was wound up, rendering recovery impossible, the amount qualified as a bad debt and was deductible.
The Court therefore found the Tribunal's order on this point to be perverse and reversed it accordingly.
Holding and Implications
The Court answered the six questions as follows:
- Question 1: Negative—The Tribunal's finding on Rs. 49,599 as income from undisclosed sources was not without material or perverse.
- Question 2: Affirmative—The sum of Rs. 49,599 could be treated as income from undisclosed sources.
- Questions 3 and 4: Negative—The Rs. 12,507 legal expenses were not allowable deductions.
- Question 5: Partly negative and partly affirmative—The Tribunal's disallowance of Rs. 15,40,264 was perverse; the deduction is allowable.
- Question 6: Affirmative—The sum of Rs. 15,40,264 was an allowable deduction during the relevant previous year.
There was no order as to costs. The decision directly affects the parties by confirming some deductions and disallowances and overturning others, but the opinion does not establish any new precedent beyond the application of existing principles.
1. The following six questions form the subject-matter of this reference:
“1. Whether the finding of the Tribunal that the sum of Rs. 49,599 was the income of the assessee from undisclosed sources is based on any material and/or was arrived at by ignoring the relevant materials and/or is perverse?
2. Whether the sum of Rs. 49,599 could be treated as the assessee's income from undisclosed sources of the relevant previous year?
3. Whether the finding of the Tribunal that the sum of Rs. 12,507 spent on legal expenses in respect of Habra land was not in connection with the assessee's business and/or was a capital expenditure is based on any material and/or was arrived at by ignoring the relevant materials and/or is perverse?
4. Whether the sum of Rs. 12,507 incurred on account of legal expenses for the said Harba land was an allowable deduction?
5. Whether the finding of the Tribunal that the sum of Rs. 15,40,264 was not an allowable deduction and/or could not be allowed during the previous year is based on any material and/or were arrived at by ignoring the relevant material and/or perverse?
6. Whether the sum of Rs. 15,40,264 was an allowable deduction during the relevant previous year?”
2. In so far as questions Nos. 3 and 4 are concerned, we find that there is no perversity and that the sum of Rs. 12,507 could not be treated as an allowable deduction.
3. In so far as questions Nos. 1 and 2 are concerned, after hearing the detailed arguments of the learned advocates for the parties we find that the finding's of the Assessing Officer, the Commissioner of Income-tax (Appeals) and the Tribunal that the fixation of notional value of Re. 1 on the property in question subsequent to the passing of the decree by the civil court was wrong, is based on correct appreciation of the evidence and the materials on record and that the Revenue was justified in fixing the value of the property at Rs. 49,599.
4. We do not see any perversity in the order of the Tribunal.
5. Coming to questions Nos. 5 and 6, with regard to the disallowance of Rs. 15,40,264, the Assessing Officer and the Commissioner of Income-tax (Appeals) have disallowed this deduction on the ground that no material was placed before them by the assessee to establish that the amounts were irrecoverable. The Tribunal, on the other hand, has dealt with this question from two angles—firstly, that the deduction was disallowable since the assessee had shown this amount after the close of the accounting year as on May 13, 1982; and, secondly, because the assessee was not in the business of money-lending. On both the counts, we disagree with the Tribunal for the following reasons.
6. It is immaterial whether the bad debt is shown after the close of the accounting year or during the accounting year itself. A Division Bench of this court, in the case of CIT v. United, Bank of India, [1993] 69 Taxman 505, has held as under (headnote):
“The accounts of a company are generally made up for every year after a particular date at a later point of time. A company is entitled in law to finalise later as to what was the position of its accounts up to a particular date. A company can similarly finalise its accounts for various purposes at a later date with retrospective effect. In the instant case, in the accounts necessary entries were made for writing off the debt as bad in the light of the facts and circumstances of the case. Recommendation was moved by the concerned branch of the bank to write off the amounts in dispute which was forwarded to the board of directors for approval. The board of directors accepted and approved the recommendation and adopted resolution to that effect. In view of the process involved in the preparation of accounts, until the recommendation was accepted and resolution passed by the directors, the accounts did not become final. In such a case the approval of the board of directors could not have been obtained before the dose of the accounting year. The resolution, approving and accepting the recommendation relating to the treatment of certain items, must be related back to the date up to which the accounts were finalised and such determination or approval must be treated as being effective from that date.”
7. Even a plain reading of section 36(1)(vii) of the Act, read with subsection (2)(i) thereof, clearly suggests that the aforesaid view taken by the Tribunal was incorrect. Further reading of clause (i) of sub-section (2) of section 36 of the Act clearly suggests that deduction as a bad debt being allowable only to a money-lender in the ordinary course of the business of banking or money-lending is not the only aspect of the matter and that bad debt as such can be allowed as a deduction in computing the income of the assessee even if the bad debt comes into existence because of the expenditure by the assessee or because of the advancing of the money to a subsidiary company of the assessee. In the present case, undoubtedly Shalimar Works Private Limited at the relevant time was a subsidiary of the assessee and this company was wound up because of the orders passed by this court and all the assets of the company were purchased by a wholly owned company of the Government of West Bengal for a sum of Rs. 74,00,000 and the entire amount went to the secured creditor with the result that undoubtedly the assessee had no chance of recovering the amount in question from the aforesaid subsidiary. Under these circumstances, therefore, entirely and obviously since the amount was spent by the assessee and if thing's would have remained normal the assessee would have been able to recover this amount from the subsidiary, the question of recovery became impossible and thus in all respects, the amount could be treated as a bad debt entitling the assessee to the allowance on account of deduction from its income for the relevant year. In our opinion, therefore, the order passed by the Tribunal is very perverse on the face of it looking at the facts and circumstances of the case and the materials on record.
8. We answer all the aforesaid questions accordingly. Question No. 1 is answered in the negative. Question No. 2 is answered in the affirmative. Questions Nos. 3 and 4 are answered in the negative. Question No. 5 is answered partly in the negative and partly in the affirmative by holding that the finding was perverse and that the deduction is allowable. Question No. 6 is answered in the affirmative.
9. There will be no order as to costs.
10. All parties concerned are to act on a xeroxed signed copy of this dictated order on the usual undertaking's.
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