2012 (9) TMI 448 - HC - Income Tax

Disallowance claim u/s. 36(1)(vii) r.w.s. 36(2) - AO invoked Section 14A for disallowance - assessee is a statutory corporation established under the SIDBI Act, 1989 - ITAT allowed the claim - Held that - Section 14A of the Act would have no application to the present facts. It is not the revenue s case that bad debts have been incurred in relation to income which does not form part of the total income. Section 50 of SIDBI Act,1989 only exempts payment of income tax. It does not provide that such income of the SIDBI Bank will not be a part of the total income. As the assessee carried on business of banking and the amounts being written off as bad debts was the money lent in the ordinary course of its business. In terms of Section 36(1)(vii) the assessee is entitled to claim deduction of an amount of debt or part thereof written off as irrevocable in the year in which business claims that a particular debt is not recoverable. In this case, the respondent-assessee in the assessment year 2003-04 had taken a business decision that the amount of Rs.178/- crores had become bad and had to be written off as bad debt. This decision has to be of the business alone. However, this bad debt is allowable under Section 36(1)(vii) subject to satisfaction of Section 36(2)(i). In this case admittedly the respondent-assessee satisfies the same. The debt which is being written off represents money lent in its ordinary course of business of banking - no substantial question of law arises - in favour of assessee.

Summary

Issues:
- Interpretation of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961
- Applicability of exemption under Section 50 of the SIDBI Act, 1989
- Allowability of bad debts claimed by the respondent-assessee
- Consideration of Section 14A of the Income Tax Act

Analysis:

Interpretation of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961:
The appeal by the revenue challenged the order of the Income Tax Appellate Tribunal regarding the respondent-assessee's claim under Section 36(1)(vii) read with Section 36(2) of the Act. The Tribunal allowed the deduction of bad debts claimed by the respondent-assessee under Section 36(1)(vii) of the Act, stating that it satisfied the requirements of the proviso to Section 36(2) of the Act. The Tribunal held that the respondent being in the business of banking for SSI units, the bad debts claimed were allowable under the provisions of the Act.

Applicability of exemption under Section 50 of the SIDBI Act, 1989:
The respondent-assessee, a statutory corporation established under the SIDBI Act, 1989, was engaged in the business of promotion, financing, and development of the Small Scale Industry. Initially, the income of the respondent-assessee was exempted from payment of income tax by virtue of Section 50 of the SIDBI Act, 1989. However, this exemption was withdrawn from 1/4/2002 by the Finance Act, 2001. The withdrawal of this exemption impacted the assessment of the respondent-assessee for the year 2003-04.

Allowability of bad debts claimed by the respondent-assessee:
The respondent-assessee claimed an amount of Rs.178.00 crores as bad debts in its return of income for the assessment year 2003-04. The Assessing Officer disallowed this deduction on the grounds that the respondent was not chargeable to income tax for the assessment year 2001-02 and earlier. The Commissioner of Income Tax (Appeals) upheld this decision, stating that the deduction of bad debts would only be available if the debt was taken into consideration in computing the income of the respondent in an earlier assessment year. However, the Tribunal allowed the respondent's appeal, stating that the bad debts claimed were allowable under Section 36(1)(vii) of the Act.

Consideration of Section 14A of the Income Tax Act:
The issue of Section 14A of the Act being applicable was raised during the appeal. The revenue argued that expenditure incurred for earning income exempted from tax would not be allowed as a deduction. However, the Court held that Section 14A would not apply in this case as the bad debts were incurred in relation to income forming part of the total income. The Court also noted that the issue of Section 14A was not raised before the authorities under the Act and could not be raised in the appeal under Section 260A of the Act.

In conclusion, the Court dismissed the appeal, stating that the respondent-assessee, engaged in the business of banking, was entitled to claim the deduction of bad debts under Section 36(1)(vii) of the Act as it satisfied the requirements of Section 36(2)(i) of the Act. The Court found that the question raised was not a substantial question of law requiring consideration.