Law:

Section:

Section 36(1)(vii) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xi) of Indian Income-tax Act, 1922] - Bad debts - Assessment year 1942-43 - Assessee-HUF advanced a sum in 1931 to a firm which was under proprietorship of Karta's younger brother - No legal steps were taken to recover that amount - Assessee claimed deduction of that amount as bad debts - Whether amount was not advanced in course of money lending business - Held, yes - Whether debt had become bad prior to year of account and, therefore, not allowable in relevant year - Held, yes FACTS During the accounting year relevant to assessment year 1942-43, a sum of Rs. 3,25,000 was due to the assessee-HUF from the younger brother of the karta of the assessee, who carried on a proprietary business. That proprietary concern 'AM' had a current account, with the assessee for a number of years in which there were large cash payments on either side. This account was also credited with sales of cotton and other goods made by the assessee on behalf of 'AM', while the account was debited with speculation losses and differences paid by the assessee on AM's account. In Samvat year 1987-88, the year ending November, 1931, advances made to AM in this account rose up to Rs. 11 lakhs. During this year the assessee took a mortgage of the immovable property of AM for Rs. 3 lakhs and credited the amount to the current account, the debit being given to a new account. In the next accounting year the assessee took over the interest of AM in the managing agency of a company and also its shares for which also a credit was given in the current account. In the same year on 3-11-1932, the assessee also obtained a pro-note from AM for Rs. 3,25,000 crediting the amount to the current account, the debit for which was given to a new account. After these adjustments the current account was left with a debit balance of Rs. 25,626. Thereafter, there were only petty transactions and adjustments. At the commencement of the Samvat year 1994-95, there was a debit balance of Rs. 9,017. The assessee purchased AM's card of the East India Cotton Association for a sum of Rs. 20,000 resulting in a credit balance in favour of AM of Rs.…

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