The assessee is a whole-seller in cloth. It made supplies worth Rs. 120,000 to one `X; in 1993-94 who made an initial payment of Rs. 20,000. Thereafter his whereabouts are not traceable.

Hence in the financial year 1995-96, the assessee, feeling convinced that the amount is not recoverable and after filing an FIR with the police wrote off the entire amount as bad debt.The Assessing Officer proposes to disallow the claim. Can the A.O. disallow the claim of bad debt?

Ram Narain, Lucknow

As per section 36(1)(vii) of the IT Act amount of any bad debt or part thereof, which is written off as irrecoverable in the account of the assessee for the previous year, is allowable as deduction subject to the following conditions laid down in section 36(2):

a. the debt has been taken into account in computing the income of the assessee of the previous year in which the amount is written off or of an earlier previous year, or

b. it represents money lent in the ordinary course of business of money-lending which is carried on by the assessee.

In order to claim deduction under section 36(1)(vii) , one must keep in view these conditions.

These conditions are apparently satisfied in this case. Besides in the case under consideration, no legal proceedings can be taken as the debtor is not traceable. Taking into account the totality of the circumstances, the assessee's claim for writing off the amount as bad debt is legally tenable. In case the debt is realized subsequently, it can be taxed as income under section 41(1) of the IT Act 1961.

My father was running a small factory which was destroyed by fire. Because of this, generation of income ceased . However, father took loan from the banks for reconstructing the fire-gutted factory. Some amount of the loan which was not needed immediately was put in fixed deposit and earned interest. The issue is whether the interest earned could be adjusted against the interest paid to banks for the loans taken.

Om Prakash Aggrawal-Bhopal

There are decisions to the effect that interest earned should be subjected to tax as income from other sources. However, I do not agree with this view. The earning of interest and payment of the same are inter-linked. Income has arisen because of borrowed funds. There is direct nexus between interest paid and interest earned. Hence it would be logical for the assessee to set off the interest paid against interest earned and offer the balance amount of interest for tax as income from other sources!

I am a partner in a firm representing my HUF. However, out of my individual funds, I have given a loan to a firm of Rs. 1 lakh on which the firm is to pay an interest of 15 per cent. The assessing officer in the assessment of the firm proposes to disallow the interest under section 40(b). Is he correct in his decision?

R.S.Kothari,Mumbai

The present section 40(b) is in place of old section 40(b) and is operative from 01.04.93. The new section 40(b) authorises an assessing officer to consider disallowance of the interest payment to a partner as per the provisions of explanation 1 to section 40(b). This explanation, from the assessment year 1993-94 provides that where an individual is a partner in a firm on behalf, or for the benefit, of any other person, the interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. But the payment of the following interest shall not be taken into account.

(i) where an individual is a partner in a firm on behalf, or for the benefit, of any other person, interest paid by the firm to such individual otherwise than as partner in a representative capacity; and

(ii) where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual, if such interest is received by him on behalf, or for the benefit, of any other person.

I came from Canada and was in immediate need of a house for my residence. I negotiated for a property in Ghaziabad at a price which was higher than the market price by Rs. 60,000. I paid a higher price because I wanted the house urgently and the landlord said that he will have to pay nearly Rs. 60,000 to a tenant (who had been occuping the house) for giving me vacant posession of the house. The gift tax officer has now asked me to show cause why gift tax be not levied on the extra price of Rs. 60,000 which is over and above the market price under the Gift Tax Act.

Bahadur Singh Ghaziabad

This is not a case of payment of excess consideration gratuitously. The extra price has been paid for valid reasons. An ordinary instance of purchase of property for a valid consideration cannot be brought with in the purview of the definition of gift merely because a somewhat higher price vis-a-vis market price has been paid.

I am a partner in a firm along with two other partners. We have transferred one car to one of our very devoted and sincere employees at book price which is lower than the market price by about Rs. 50,000. Does the firm owe any liability for gift tax in respect of this transaction?

Xavier De Gama, Calcutta.

In my opinion, no liability for gift tax should arise in such a situation. Firstly, the concept of "market value" has now been replaced by rules contained in Schedule II to the Gift-tax Act for determining the value of each category of gifted assets, Section 4(1)(a) has been amended so that deemed gift shall now be an amount by which the value of the transferred property determined in the manner laid down in Schedule II exceeds the value of the consideration.

Hence the concept of market value is no longer relevant for the purpose of determining the amount of gift tax. Further for attracting this section, a finding to the effect that consideration paid is inadequate will have to be recorded. The expression "adequate consideration" has to be construed in a broad sense, and merely because there may be some difference between the consideration for a transfer, and the true value of the property transferred, the same would not attract the applicability of section 4(1)(a) of the Act. In case the firm is getting the value that is entered in its books. Hence the consideration cannot be said to be inadequate or fixed in a malafide manner.

Whether ground rent and property tax collected by the assessee as a builder from flat owners would constitute income in the hands of the company?X Construction Co.,Ltd. Nagpur.

No. The assessee while collecting share of ground rent and property tax from the land owners gave them an undertaking that it was being collected for payment to DDA and, amounts was not collected to be pocketed by the asessee. Any collection in excess of liability of the flat owners had also, it is presumed, is to be refunded. Therefore, the same could not be treated as trading receipt. See Sharma Associates v.CIT (1996) 217 ITR 1 (AP & Pragati Construction Co. v CIT (1997) 60 ITD 544 (Delhi Trib). y

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.