2015 (11) TMI 1704 - AT - Income Tax

Disallowance of interest on loan - interest added back on the ground that the diversion of loans made for non-business purposes - Held that - the decision in the case of The Commissioner of Income Tax Versus Reliance Utilities it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee - addition not justified. Appeal dismissed - decided against Revenue.

Summary

Issues:
1. Disallowance of interest on loans diverted for non-business purposes.
2. Disallowance of bad debts.

Issue 1 - Disallowance of interest on loans diverted for non-business purposes:
The appeal was against an assessment order determining taxable income by disallowing interest on loans diverted for non-business purposes. The AO disallowed interest of Rs. 9.68 crores due to diversion of loans for non-business use. The CIT(A) found no factual basis for this claim, noting the loans were for microfinance, and investments were made to comply with loan conditions. The CIT(A) stated that interest income earned was offered for tax, and no proof of disproportionate interest expenditure was provided. The CIT(A) held that the AO's disallowance was not supported by facts and deleted the disallowed amount. The department appealed, arguing the loans were diverted for non-business purposes. The tribunal dismissed the appeal, citing precedents that investments could be presumed from interest-free funds if available, as in this case.

Issue 2 - Disallowance of bad debts:
The AO disallowed bad debts of Rs. 4.52 crores as the conditions of Section 36(2) were not met. The assessee argued practical difficulties in following the AO's criteria for bad debt write-offs. The CIT(A) allowed the appeal based on a jurisdictional High Court decision, emphasizing that after 1.4.1989, it was sufficient for the debt to be written off as irrecoverable in the accounts. The department appealed, contending that Section 36(2) requirements must be fulfilled. The tribunal upheld the CIT(A)'s decision, following the Supreme Court's ruling that a bad debt can be written off based on the accounts without proving irrecoverability. The department's appeal was dismissed, affirming the allowance of bad debts.

In conclusion, the tribunal dismissed the revenue's appeal on both issues, emphasizing the importance of factual basis and legal precedents in determining the disallowance of interest on loans and bad debts. The judgment highlighted the necessity of complying with legal provisions and accounting practices in such assessments.