2012 (8) TMI 1014 - AT - Income Tax

Allowing bad debts written off - Held that - Bad debt written off as irrecoverable is allowable as an expenditure u/s 36(1)(vii) provided the loan was advanced for the purpose of business and in normal course of business. As seen from the orders passed by the revenue authorities while the AO has disallowed the bad debt written off as a capital loss by observing that advancing loans to sister concerns is not the normal business activity of the assessee. The CIT (A) has allowed the claim of the assessee by simply following the order passed by the CIT (A) for the assessment year 2004-05. Neither the CIT (A) nor the AO has dealt with the basic facts as to what is the actual purpose of advancing the loan to the subsidiary and whether it is for the purpose of business of the assessee. It has also to be ascertained whether the writing off was approved by the Board of Directors. Interest levied u/s 115P - Held that - We fully agree with the CIT (A) that declaration of dividend is not automatic upon finalisation of accounts and presence of profits and reserves. The declaration of dividend is within the domain of Board of directors and the management and the date of declaration of dividend is when it is actually declared by the Board. From the materials on record it is very much clear that the declaration of dividend was made on 24-9-2003 and the tax on dividend was paid on 3-10-2003 which is within the time limit prescribed u/s 115-O(3). There being no failure on the part of the assessee in complying to the provision of section 115-O(3) levy of interest u/s 115P was not justified. We therefore uphold the order of CIT (A) and dismiss the ground raised by the Revenue. Disallowance of bad debts written off paid to FCI - Held that - CIT (A) was correct in holding that it is in the nature of capital loss hence cannot be allowed as an expenditure u/s 36(1)(vii). However the ld. AR has submitted before us that out of ₹ 3 crores loan given to FCI of an amount of ₹ 150 lakhs has been recovered from FCI and included income and tax has also been paid thereon. It appears from the order of the CIT (A) that though this fact was also placed before him it has not at all been considered. We therefore direct the AO to verify whether the amount of ₹ 1.5 crores recovered from FCI has been offered as income by the assessee. If the aforesaid amount has been shown in the income and tax has been paid then disallowance has to be restricted to ₹ 1.5 crores. The AO shall give reasonable opportunity of hearing to the assessee before finalising the proceedings.

Summary

Issues Involved:
1. Treatment of bad debts written off as capital loss.
2. Levying of interest under section 115P by the Assessing Officer.
3. Disallowance of bad debts written off paid to FCI.

Issue 1: Treatment of Bad Debts Written Off as Capital Loss:
The case involved cross-appeals by the assessee and the Department against the order of the CIT (A) pertaining to the assessment year 2003-04. The primary contention was regarding the allowance of bad debts written off amounting to Rs. 52.85 lakhs. The Assessing Officer disallowed the claim, treating it as a capital loss, stating that advancing loans to sister concerns was not the normal business activity of the assessee. However, the CIT (A) allowed the claim based on a similar decision for the assessment year 2004-05 without delving into the purpose of the advances or Board approval. The ITAT set aside the decision, directing the AO to re-examine the issue considering the purpose of the advances and Board approval.

Issue 2: Levying of Interest under Section 115P:
The second issue revolved around the interest levied under section 115P by the AO, which was later deleted by the CIT (A). The AO had imposed interest based on the declaration of dividend and deemed decision date. However, the CIT (A) ruled in favor of the assessee, emphasizing that the declaration of dividend required a specific decision by the Board, not automatic upon finalization of accounts. The ITAT upheld the CIT (A) decision, stating that the declaration of dividend was made within the prescribed time limit, and hence, the interest levy was unjustified.

Issue 3: Disallowance of Bad Debts Written Off Paid to FCI:
The third issue pertained to the disallowance of bad debts written off amounting to Rs. 3 crores paid to FCI. The AO treated this as a capital loss as the loan to FCI was not part of the business operations of the assessee and not in the ordinary course of business. The ITAT agreed with the CIT (A) that advancing a loan to FCI was without business consideration and hence, in the nature of a capital loss. However, the ITAT directed the AO to verify if a portion of the loan had been recovered and included in the income, instructing to restrict the disallowance accordingly.

In conclusion, the ITAT allowed the Revenue's appeal in part, upheld the CIT (A) decision regarding interest levy, and treated the assessee's appeal as allowed for statistical purposes, subject to verification of the recovered loan amount.