2006 (3) TMI 543 - AT - Income Tax

Summary

Issues Involved:
1. Validity of re-opening assessment under section 147.
2. Disallowance of bad debts of Rs. 10 lakhs under section 36(1)(vii).

Issue-wise Detailed Analysis:

1. Validity of Re-opening Assessment under Section 147:

The assessee challenged the legal validity of the assessment proceedings initiated under section 147. The Assessing Officer (AO) issued a notice under section 148 on 23-2-2005, within four years from the end of the assessment year 2001-02. The AO's reason for reopening was that the bad debt written off was an irrecoverable loan, considered a capital loss and not deductible as a revenue expense. The assessee argued that there were no new facts justifying the reopening and relied on several judgments to support this claim. However, the Tribunal found that the AO's decision to reopen the assessment was valid based on the information available in the return of income filed. The Tribunal noted that the AO could not verify the veracity of any claims except for prima facie errors while passing the intimation under section 143(1). The Tribunal concluded that the proceedings under section 148 were valid as the AO had reasonable grounds to believe that the assessee's claim warranted examination. Thus, the challenge to the validity of the assessment proceedings under section 147 was dismissed.

2. Disallowance of Bad Debts of Rs. 10 Lakhs under Section 36(1)(vii):

The assessee claimed a deduction for bad debts written off, arguing that the loan was advanced in the course of its money lending business. The AO disallowed the claim, stating that the debt was not a trade debt but a capital loss. The CIT(A) upheld the AO's decision, noting that the assessee was not engaged in the business of money lending. The Tribunal examined the facts and found that the assessee had lent money to two parties and written off the amount as a bad debt. However, there was no substantial evidence to prove that the assessee was regularly carrying on a money lending business. The Tribunal observed that the assessee's annual accounts did not reflect any money lending activity, and the interest received on the loans was nominal. The Tribunal concluded that the bad debt written off represented a loan or advance of a capital nature and not a bad debt arising from a money lending business. Therefore, the Tribunal upheld the disallowance of the bad debt claim under section 36(1)(vii).

The Tribunal dismissed the assessee's appeal, affirming the validity of the re-opening assessment under section 147 and the disallowance of the bad debts claim under section 36(1)(vii).