Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee, a firm exporting minerals and ores to foreign countries through STC, entered into an agreement with a transport company for transport of ore - Said transporter owned ten lorries under hire-purchase agreement with a financing company - On account of transporter having defaulted in its payments to financing company, lorries were seized - Assessee-firm, therefore, entered into a tripartite agreement with said transporter and financing company to pay instalments due to latter by making adjustments against freight charges payable to transporter - After such adjustment certain sum remained outstanding against transporter, being irrecoverable - Whether impugned amount was allowable as deduction for purpose of determining assessee's total income - Held, yes FACTS The assessee-firm carried on business of exporting iron ore to foreign countries through the STC. It entered into an agreement with a proprietary transport concern for transporting the ore. The transport company owned ten trucks under hire-purchase agreement entered into with a financing company. The transport company was in financial strain and due to its default in making payment of instalments, the finance company seized the trucks. The assessee-firm, therefore, entered into a tripartite agreement with the transport company and the financing company, stipulating therein that it would make advance payments on behalf of the transport company to the financing company and adjust them against the freight charges payable by it to the transport company for transport of ore. However, at the end of the three-year contract with the transport company a certain amount still remained payable to the assessee by the transport company. The financial position of the transport company was so bad that the assessee could not recover any amount from it. The assessee, therefore, claimed the said amount as bad debt, business expenditure or alternatively loss to be deducted from the total income. The ITO held that there was no bad debt which satisfied the conditions of section 36(2). He also held that the amount was advanced to enable…

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