Rastogi, J. - (1.) THIS is a reference under Section 256(1) of the I.T. Act, 1961, (hereinafter "the Act") and the Income-tax Appellate Tribunal, Allahabad Bench, has stated the case on the following question of law; "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 60,000 paid to Shri Mohan Lal Vyas represented a trading loss of the assessment year 1964-65 ?"
(2.) M/s. Glass Miniature Bulb Industries, Kanpur, hereafter referred to as "the assessee", a partnership firm, carried on business in manufacture and sale of miniature bulbs. In its assessment to income-tax for the assessment year 1964-65, the previous year ended on April 30, 1963, the assessee claimed deduction of a sum of Rs. 60,000 as bad debt. The assessee claimed to have advanced this amount to Sri Mohan Lal Vyas between July, 1961, and April, 1962, and the debits were made as under in his account: JUDGEMENT_41_ITR130_1981Html1.htm The purpose for making these advances was stated to be to procure a manufacturing licence under the provisions of the Industries (Development and Regulation) Act, and a licence or permit for the release of foreign exchange necessary for import of machinery, plant and equipment, for starting manufacture of fluorescent tubes. The assessee wanted to start this venture in collaboration with some West German parties, with whom an agreement had been entered into to that effect. Mohan Lal Vyas procured a manufacturing licence which was issued to the assessee on December 5, 1961, but he could not procure a licence or permit for the release of foreign exchange for the import of necessary machinery, plant and equipment, with the result that the Government revoked the manufacturing licence as well. Thereafter, the assessee filed a suit against Mohan Lal Vyas for recovery of Rs. 60,000 in the court of the Civil Judge, Kanpur, being Suit No. 106 of 1964. That suit was decreed ex parte. However, the decree was not put into execution because Mohan Lal Vyas was not possessed of any assets. The claim was transferred as bad debt and debited to the profit and loss account on 30th of April, 1963, and the amount was claimed for deduction in the year under consideration. The ITO did not allow the assessee's claim for the following reasons ;
(3.) FIRSTLY, that the payment of the disputed amount to Mohan Lal Vyas itself was doubtful, secondly, that the civil suit had been filed to give a colour to the whole story and no proceedings were ever taken for execution of the decree and, lastly, that the purpose for which the payment had been made was not known and there was nothing in writing to substantiate the claim of the assessee that the money had been advanced for obtaining an import licence. He also held that, as required under Section 36(2) of the Act, the disputed amount had not been taken into account in computing the income of the assessee of any previous year. The assessee's claim for deduction of the alleged bad debt, therefore, was not allowed. The assessee appealed and disputed the disallowance of this claim. It was contended before the AAC that its effort to start manufacture of fluorescent tubes was only by way of extension of the existing business and the disputed amount having been spent in respect thereof was allowable as an expenditure relating to business. The AAC did not accept that contention on the view that the expenditure had been incurred in the previous year relevant to the assessment year 1962-63 and could not be claimed for deduction in 1964-65. He was also of the view that manufacture of fluorescent tubes could not be strictly treated as extension of the assessee's business. Further, he agreed with the ITO that the amount could not be treated as bad debt because the execution of the decree was not taken out.;