2008 (6) TMI 372 - AT - Income Tax

Summary

Issues Involved:
1. Taxation of interest income.
2. Disallowance of bad debts claim.

Summary:

Issue 1: Taxation of Interest Income

The common ground in both appeals is whether the interest income should be taxed under the head 'income from other sources' or 'income from business'. The Assessing Officer (AO) noticed that the assessee earned interest on FDR and loans given to other parties, thus taxable under 'income from other sources'. The AO disallowed the interest expenditure claimed by the assessee, stating it was paid on funds borrowed for business purposes, not for earning interest. The CIT(A) upheld this view, noting that the loans were given to companies floated by the group to help them survive, not as a business activity. The Tribunal agreed with the CIT(A), stating that the impugned interest income is assessable under 'income from other sources'.

Issue 2: Disallowance of Bad Debts Claim

For assessment year 2002-03, the AO disallowed the bad debts claim of Rs. 14,74,525, stating it was credited to the provision for doubtful debts account, not to the parties' account. The CIT(A) confirmed this disallowance, citing the explanation to section 36(1)(vii). The assessee argued that the requirement of section 36(1)(vii) was met even when credited to the doubtful debt account, relying on several judicial decisions. The Tribunal examined whether the 'written off' condition was satisfied by debiting the P&L account and crediting the bad debts written off account. It concluded that the assessee's claim of Rs. 14,11,120 for bad debts written off was in accordance with section 36(1)(vii) and allowed the claim.

Conclusion:

The appeal for assessment year 2002-03 is dismissed, and the appeal for assessment year 2003-04 is partly allowed as per the terms indicated.