2011 (6) TMI 273 - HC - Income Tax

Bad debts u/s 36(1)(vii) read with section 36(2). - Tribunal misdirected itself in holding that the conditions of section 36(2) were not fulfilled in a case where the advance/debt itself was not shown as income in the profit and loss account. - Held that - Amount should be advanced in ordinary course of business which by itself proves its revenue nature and no further conditions are required to be satisfied as per Section 36(2). decided in favour of Assessee.

Issues Involved:
1. Justification of bad debts allowance under section 36(1)(vii) read with section 36(2) of the Income-tax Act.
2. Fulfillment of conditions under section 36(2) concerning income inclusion of the advance/debt.

Issue-wise Detailed Analysis:

1. Justification of Bad Debts Allowance under Section 36(1)(vii) Read with Section 36(2):

The assessee, a non-banking financial company, claimed bad debts amounting to Rs. 34,95,000 for the assessment year 2000-01. The Assessing Officer disallowed this claim, stating that under section 36(2), the debt must have been included in the income of earlier years, which was not done. The Tribunal upheld this decision, noting that the advances were made without collateral security, indicating they were not made in the ordinary course of business. The Tribunal also observed that the assessee failed to prove the amount was shown as income in any previous years.

The main contention from the assessee's counsel was that writing off the bad debt itself suffices for claiming the deduction under section 36(2). The counsel argued that the section does not necessitate that the entire money lent, which has become irrecoverable, must be shown as income in the case of a non-banking money-lending business. The Revenue's counsel countered that the debt or part thereof was not shown as income in the previous year, thus failing to meet the conditions under section 36(2).

The court examined the interpretation of sub-section (2)(i) of section 36, which states that no deduction shall be allowed unless the debt has been taken into account in computing the income of the assessee of the previous year in which the debt is written off or represents money lent in the ordinary course of business of banking or money lending.

The court referenced the Division Bench's decision in CIT v. Morgan Securities and Credits P. Ltd., which clarified that a bad debt claim is allowed in the year it is written off as irrecoverable in the accounts of the assessee. The court also considered the judgment of the Madras High Court in P. C. Dharmalinga Mudaliar v. CIT, which emphasized that in money-lending or banking business, the money lent is regarded as stock-in-trade and automatically comes into the revenue account.

The court concluded that the only condition in the second part of sub-section (2) of section 36 is that the amount should be advanced in the ordinary course of business, proving its revenue nature. No further conditions are required, unlike the first part concerning non-money-lending business.

2. Fulfillment of Conditions under Section 36(2) Concerning Income Inclusion of the Advance/Debt:

The court noted that the controversy was whether the debt itself should be shown as income before qualifying for a bad debt claim. The Madras High Court's interpretation indicated that for money-lending business, it is sufficient to show that the debt was advanced in the ordinary course of business, without the need to prove it was taken into account in computing the income.

The court agreed with the assessee's counsel that the second part of sub-section (2)(i) of section 36 does not require the debt to be shown as income if it was advanced in the ordinary course of business. Consequently, the authorities below were not justified in disallowing the bad debt claim of Rs. 34,95,000.

Conclusion:

The court answered the questions in favor of the assessee, stating that the authorities were not justified in disallowing the bad debt claim under section 36(1)(vii) read with section 36(2). The additional plea for allowing the deduction as a business loss under section 37 was deemed unnecessary for consideration. The appeal of the assessee was allowed.

← Previous Next →