2011 (4) TMI 1165 - HC - Income Tax

Write off of amounts lent as bad debt - Whether Tribunal was right in holding that the assessee is in the business of money-lending and allowed write off? - whether amounts given to the parties were for the purpose of and incidental to the business of the assessee? - Held that - Considering the consistent treatment of the transactions of the assessee as one of business in nature and the income therefrom as a business income & as regards the money lent to the close relatives who happened to be the partners of the debtor firm and incidentally the directors of the company too the Tribunal held that the Department had the knowledge that the directors of the company and the partners of the firm were closely related yet AO accepted the bona fides of the claim and allowed the interest arising from the same transaction as a business income although on the claim of bad debt he rejected the assessee s contention. The status or relationship between the parties by itself is not a ground for rejecting the claim of the assessee particularly when the Revenue itself had accepted the interest arising out of the same transaction as business income. In the absence of any material at the hands of the Revenue the Tribunal rightly held that the claim of the assessee could not be rejected. Having regard to the pure finding of fact by the Tribunal no hesitation in confirming the order of the Tribunal. Considering the amendment introduced to section 36(1)(vii) on and after April 1 1989 it is not necessary for the assessee to establish that the debt in fact had become irrecoverable. See T. R. F. Ltd. v. CIT 2010 (2) TMI 211 - SUPREME COURT . In favour of assessee.

Summary

Issues:
1. Whether the assessee is engaged in the business of money-lending and entitled to write off bad debts?
2. Whether the transactions between the assessee and M/s. Dyes and Pigments were for the purpose of evading tax?

Analysis:
1. The assessment pertains to the year 2000-01, where the assessee was involved in manufacturing chemicals on a job work basis and also in money-lending. The dispute arose when the assessee sought to write off a substantial amount due from M/s. Dyes and Pigments India. The Revenue initially rejected this claim, leading to appeals and subsequent rulings. The Tribunal found that the assessee indeed had a money-lending business, supported by consistent interest income reported and accepted by the Revenue. The Tribunal also noted that the memorandum and articles of association did not specifically authorize money-lending but emphasized the substance of the transactions. The Tribunal ultimately upheld the assessee's money-lending business status.

2. Regarding the write-off of the principal amount as bad debt, the Tribunal examined the nature of the transaction where an amount initially meant for technical know-how purchase was converted into a loan. The Tribunal found no justification to disallow the write-off claim, especially as the interest income from the same transaction was consistently treated as business income. The Tribunal also addressed the relationship between the parties involved and the acceptance of interest income by the Revenue, emphasizing that mere relationships do not invalidate the claim. The Tribunal's decision was supported by legal precedents and amendments to relevant tax laws, leading to the dismissal of the Revenue's appeal.

In conclusion, the High Court upheld the Tribunal's decision, confirming the assessee's money-lending business and the legitimacy of the write-off claim. The judgment highlighted the importance of substance over form in assessing business activities and debt write-offs, ultimately rejecting the Revenue's appeal.