BANERJEE, J. -
(1.)PURSUANT to the direction given by this Court under S. 256(2) of the IT Act, 1961, the following questions of law have been forwarded by the Tribunal:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in treating the amount of Rs. 85,510 due from H.V. Law and Co. Ltd. As bad debt allowable as deduction? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the amount of Rs. 8,552 being the unrealisable rent against the rent due as deductible against the business income treating the name as business debt? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in treating the law charges of Rs. 20,670 as business expenditure and in that view allowing deduction against business income?"
(2.)SHORTLY stated the facts are that the assessee Karnani Finance Enterprises Ltd. For the asst. yr. 1983-84 corresponding to the accounting year ended on 31st March, 1983 claimed bad debt of Rs. 85,510 in respect of M.V. Law and Co. (P) Ltd. And Rs. 6,552 on account of unrealisable rent from Someswar & Co. In respect of bad debts of Rs. 85,510,the assessee submitted that it stood as
'guarantor' to H.V. Law & Co. (P) Ltd. In respect of the Money Execution Case No. 2/72 (H.V. Law
& Co. (P) Ltd. vs. State of West Bengal) in the District Court, Howrah and the State of West Bengal
challenged the order of the District Court before the High Court, which was pending. Pending that
suit the assessee agreed to pay lump sum amount of Rs. 40,000 against outstanding sum of Rs.
1,25,510 on a settlement with H.V. Lal and Co.(P) Ltd. and further agreed to pay Rs. 2,500 per year till the disposal of the case by the High Court. The Board of Directors of the assessee-company
passed a resolution on 15th June, 1982. The assessee claimed that the bad debt of Rs. 85,510 (Rs.
1,25,510-40,000) was caused by business consideration and as a practical business it has settled the matter. So the same should be allowed as a business bad debt. The ITO did not allow the
assessee's claim on the ground that the assessee had voluntarily surrendered its income already
accrued to it without any cogent reason and, therefore it was not a real and genuine bad debt. As
regard the bad debt claim of Rs. 8,552 was the rent due from Somewar & Co., the assessee
claimed that the tenant did not pay the rent for the Asamsol property and it filed suit for realisation
of the due. In the meantime, the property in question had been sold to a third party and as a result
the rent could not be realised and it was, therefore, a bad debt. The ITO however, did not allow the
assessee's claim on the ground that the amount of Rs. 8,552 related to rental income from
property at Asamsol, which was sold and the amount represented unrealised rent against the rental
income, which could not be regarded as a bad debt deductible against the business income or even
property income. Against these two disallowances, the assessee filed appeal before the CIT (A).
The CIT (A) held that the amount of Rs. 85,510 represented a bad debt forgone by the assessee
for valid business consideration and it should be allowed as a business loss. As regards the
disallowance of Rs. 8,552, the CIT (A) held that the assessee had satisfied the conditions laid down
in r. 4 of the IT Rules and the amount should be allowed as a deduction.
Against the order of the CIT (A) deleting the addition of Rs. 94,092(Rs. 85,510 + Rs. 8,552) the
Department filed appeal before the Tribunal. The Tribunal did not interfere with the CIT (A)'s order
and upheld the same.
The assessee also claimed law charges of Rs. 20,670 relating to the property income against business income. The ITO disallowed the assessee's claim on the ground that the law charges were
relating to property income. On appeal, the CIT (A) held that the law charges were related to
property held by the assessee as stock-in-trade and hence it should be allowed as a business
deduction. The Tribunal on appeal by the Department upheld the order of the CIT (A) on this point
(3.)THE learned counsel appearing on behalf of the Revenue submitted that the Tribunal was wrong in allowing a sum of Rs. 85,510 as the said settlement would not have been arrived at by a prudent
businessman and accordingly, the said amount should have been disallowed by the CIT (A).
Secondly, it was submitted that the unrealisable rent from the tenant should not have been treated
as bad debt in view of the fact that the property was sold and the sale price should be deemed to
include the arrears of rent from the tenant.