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1962 Supreme(Mad) 245
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE JAGADISAN & THE HONOURABLE MR. JUSTICE SRINIVASAN
Commissioner of Income Tax, Madras - Appellant
Versus
Somasundaram Mills Limited - Respondent
Case No : No
Decided On : 28 August 1962
A debt can be incidental to a business only if it arises out of a transaction, which was necessary in furtherance of the business and was within the range of the business activities.
Headnote:
INCOME TAX - Bad debt - Whether the sum of Rs. 65, 802, being part of the amount due from the Alwaye Textiles Ltd., as per decree of court and not realised is properly a trade debt allowable as a bad debt in the computation of the income for the assessment year 1952-53? - NO
Fact of the Case:
The assessee, a private limited company, was carrying on business in spinning and weaving cotton yarn. The assessee had sold goods and machinery to Alwaye Textiles Ltd. and had also made cash advances to it. Alwaye Textiles Ltd. defaulted, and the assessee filed a suit against it and obtained a decree for a sum of about Rs. 4, 79, 228. The assessee assigned and transferred the decree to Messrs. S. Kathayee & Co. receiving a sum of Rs. 1, 52, 000. The assessee wrote off the sum of Rs. 1, 93, 552 as bad debt on December 31, 1951. The Income-tax Officer allowed a deduction of Rs. 10, 401 as bad debt. The Appellate Assistant Commissioner allowed a further amount of Rs. 65, 802 to make up the total bad debt of Rs, 76, 203. The Tribunal affirmed the decision of the Appellate Assistant Commissioner.
Finding of the Court:
The Tribunal's view that the liability of the debtor, Alwaye Textiles Ltd., was under a decree of court on the date of the writing off, and that was sufficient to constitute it as a trade debt susceptible of being brought under section 10(2)(xi), is untenable. A capital loss cannot be claimed to be written off under the guise of a bad trade debt. The assessee cannot call that a trade debt which at the inception when it was good was not treated and dealt with as income receipt. The sale of the machinery by the assessee to Alwaye Textiles Ltd. did not result in income, profits or gains chargeable to tax, nor "capital gain" within the meaning of section 12B. The debt was not incidental to the assessee's manufacturing business and could not be treated as a trade debt liable to be written off.
Issues: Whether the sum of Rs. 65, 802, being part of the amount due from the Alwaye Textiles Ltd., as per decree of court and not realised is properly a trade debt allowable as a bad debt in the computation of the income for the assessment year 1952-53?
Ratio Decidendi: The words "in respect of" in section 10(2)(xi) of the Income-tax Act mean "in the matter of". A debt can be incidental to a business only if it arises out of a transaction, which was necessary in furtherance of the business and was within the range of the business activities. Everything associated or connected with the business cannot be said to be incidental thereto. Not merely should there be a close proximity of the debt to the business as such, but it should also be an integral and essential part of the carrying on of the business.
Final Decision: The question referred to the court is answered against the assessee, and the department will be entitled to its costs.
JAGADISAN J.
The question that has been referred to us under section 66 of the Indian Income-tax Act is :
"Whether the sum of Rs. 65, 802, being part of the amount due from the Alwaye Textiles Ltd., as per decree of court and not realised is properly a trade debt allowable as a bad debt in the computation of the income for the assessment year 1952-53 ?" *
Somasundaram Mills Ltd., which will hereinafter be referred to as the assessee, is a private limited company incorporated under the Indian Companies Act. The company is carrying on business in spinning and weaving cotton yarn at Coimbatore. The assessee is also a partner in three registered firms of partnership, Messrs. Krishna Ginning Factory, Messrs. Somavilas Ginning Factory and Messrs. Sundaravilas Ginning Factory, holding 7/8, 8/12 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 Textiles Ltd. During the same period the assessee had also made cash advances to Messrs. Alwaye Textiles Ltd. As a result of these transactions Alwaye Textiles 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, 52, 000. It appears that the assessee received some further amounts also towards this decree. It is now common ground that the assessee was able to recover in all a sum of Rs. 1, 61, 771 towards the amounts due to it from Alwaye Textiles Ltd. We must mention at this stage, before continuing the narration, that in accordance with the assessee's books of account the written down value of the machinery sold as on January 1, 1944, was Rs. 38, 981. They were sold for Rs. 1, 20, 000 resulting in a profit to the assessee to the extent of Rs. 81, 019 (Rs. 1, 20, 000 minus Rs. 38, 981). This amount less Rs. 5, 080 assessed under section 10(2) was treated as capital gain or accretion by the department and was not assessed to tax. Section 12B, which came upon the statute book for the first time by the Income-tax and Excess Profits Tax (Amendment) Act, 1947, rendered capital gains as a subject of taxation only in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after March 31, 1946, and before April 1, 1948. The present section 12B was introduced by the Finance Act of 1956, and now tax is payable by an assessee under the head "capital gains" in respect of any profits or gains arising from sale, exchange or relinquishment of capital asset effected after March 31, 1946. It is clear that the sale of machinery by the assessee to Alwaye Textiles Ltd. did not result in income, profits or gains chargeable to tax, nor " capital gain " within the meaning of section 12B which as stated came into force only from 1947. The assessee having waited sufficiently long hoping to realise the decree in full and finding ultimately that the decree amount was irrecoverable wrote off the sum of Rs. 1, 93, 552 as had debt on December 31, 1951. The accounting year of the assessee is the calendar year and the assessee wrote off the debt as bad in the year of account ending with December 31, 1951. The relevant assessment year for the previous calendar year 1951 is 1952-53, It is i
