2007 (5) TMI 352 - AT - Income Tax

Disallowance of Bad Debts - Pendency of the recovery proceedings - CIT(A) held that the appellant has not carried out any business activity and income earned out of interest is assessable under the head Income from other sources and, therefore bad dept in respect of K.M. Nemani is not allowable u/s 36(1)(vii) - HELD THAT - In the present case the assessee has entered into number of transactions over the years whereby it has earned interest on loans and advances given in the ordinary course of its activities. Assessment year 1997-98 was only the second year, however this is the 5th year of the engagement of the assessee in the same kind of transactions, hence, having regard to the nature of transactions undertaken by the assessee, it can be held that the assessee is engaged in the business of money lending. We are also of the view that absence of money lending licence is not so crucial for the purpose of Income-tax Act, 1961, if the nature of activity undertaken by the assessee can be decided on the basis of other facts. As stated, the assessee is engaged in granting of loans on regular basis and interest income has also been shown as business income which also reflects the intention of the assessee. We are also of the view that pendency of recovery proceedings cannot come into the way of allowing of bad debts, if other facts clearly establish that there are no chances of any recovery of the money even if a decree in favour of the assessee is pronounced by the Court. The bad debt of Mr. K.M. Nemani stand on the same footing. However, in the absence of details regarding loan transactions with M/s. Videocon Holding (P.) Ltd. the same cannot be allowed. Thus, we are of the view that the decision of the Tribunal in the earlier assessment year is not applicable and assessee s claim in respect of bad debts of Mr. K.M. Nemani is justified. Accordingly, order of the ld. CIT(A) stands modified and we direct the Assessing Officer to allow the claim of bad debt in respect of this account. Thus ground No. 1 stands partly allowed and ground Nos. 2 and 3 stand accepted. In the result, the appeal filed by the assessee stands partly allowed.

Issues:
1. Disallowance of Bad Debts
2. Validity of money lending business
3. Assessment of income under different heads

Issue 1: Disallowance of Bad Debts
The appellant contested the disallowance of Bad Debts amounting to Rs. 34,10,000 by the ld. CIT(A) for assessment year 1999-2000. The Assessing Officer questioned the validity of the bad debts claimed by the appellant, particularly focusing on a loan of Rs. 29,10,000 given to Shri K.M. Nemani, citing pending recovery proceedings as a reason for disallowance. The ld. CIT(A) upheld the Assessing Officer's decision, emphasizing the absence of a money lending license and the nature of the appellant's income sources. The Tribunal noted the appellant's previous successful claim in 1997-98, but observed inconsistencies in the treatment of interest income under different heads. The Tribunal considered legal precedents and subsequent developments, ultimately allowing the appellant's claim in respect of the bad debts related to Mr. K.M. Nemani, directing the Assessing Officer to accept the claim.

Issue 2: Validity of Money Lending Business
The debate revolved around whether the appellant was engaged in the business of money lending, as the Assessing Officer questioned the validity of the bad debts claimed. The ld. CIT(A) and the Tribunal analyzed the nature of the appellant's transactions, the absence of a money lending license, and the treatment of interest income. The Tribunal considered the appellant's consistent engagement in loan transactions over several years, the intention reflected in showing interest income as business income, and the relevance of recovery proceedings in determining bad debts. The Tribunal concluded that the absence of a money lending license was not decisive, and based on the nature of the appellant's activities, upheld the claim related to bad debts of Mr. K.M. Nemani.

Issue 3: Assessment of Income under Different Heads
The assessment of income from interest under different heads was a point of contention, with the ld. CIT(A) suggesting it should be categorized as "Income from other sources." The Tribunal noted inconsistencies in the treatment of interest income across assessment years and the reliance on legal precedents. The Tribunal emphasized the nature of the appellant's activities, the regularity of loan transactions, and the intention behind showing interest income as business income. Ultimately, the Tribunal modified the ld. CIT(A)'s order, directing the Assessing Officer to allow the claim of bad debt related to Mr. K.M. Nemani. Grounds 2 and 3 were accepted, while ground 1 was partly allowed.

In conclusion, the Appellate Tribunal ITAT MUMBAI, in the case under consideration, addressed the issues of disallowance of bad debts, validity of money lending business, and assessment of income under different heads. The Tribunal analyzed the appellant's transactions, legal precedents, and subsequent developments to allow the claim related to bad debts of Mr. K.M. Nemani, directing the Assessing Officer to accept the same. The decision highlighted the importance of the nature of the appellant's activities and the treatment of interest income in determining the validity of the claimed bad debts.

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