2012 (10) TMI 570 - AT - Income Tax

Disallowance of claim of bad debts Revenue or personal expense - Commission for arranging the loan for Purchase of land Proposal did not materialize AO argued that claim was neither revenue in nature nor was it a loan or debt incurred in respect of the business - Held that - Recording of such transaction by itself would not render it an allowable expense either as bad debt or as a business loss. If it was only a fee paid for arranging loan for the assessee s business, the amount need not have been shown as debt due with name of commission agent. Partner has suffered a personal loss, and trying to charge such loss in the accounts of the assessee by claiming it as bad debt. Issue decides in favour of revenue Addition on account of unexplained cash - Cash introduced by one of the partner in a firm AO basis for addition was that the partner could not give any explanation Held that - As relevant transaction are available in books of introducing partners. Capital introduced was by the partner and hence it would not come within the definition of cash credit automatically. If the partner was unable to give explanation which was satisfactory, an addition no doubt could have been made in the hands of said partner. Thus, in our opinion, addition made in the hands of the assessee cannot be justified. Issue decides in favour of assessee

Summary

Issues:
1. Disallowance of claim of bad debt/business loss
2. Addition of credits in the current account of a partner

Issue 1: Disallowance of claim of bad debt/business loss
The appeal involved two grievances raised by the assessee. The first issue pertained to the disallowance of a claim of bad debt/business loss amounting to Rs. 22,94,000, which was confirmed by the CIT(Appeals). The Assessing Officer noted that the amount was charged as bad debts in the Profit & Loss account. The assessee claimed that the sum was paid to a person who promised to arrange a loan at a low interest rate. However, the Assessing Officer concluded that the claim was not revenue in nature and disallowed it. The CIT(Appeals) upheld this decision, stating that the facts presented did not establish a business link or commercial expediency for the payment made. The appellant argued before the tribunal that the payment was a commission for arranging a loan for business expansion, but the tribunal found that the claim was rightly disallowed. The tribunal emphasized the lack of evidence demonstrating a business purpose behind the payment, leading to the dismissal of the appeal.

Issue 2: Addition of credits in the current account of a partner
The second issue involved the addition of sums introduced by a partner into the business through his current account. The Assessing Officer added certain amounts as unexplained cash in the hands of the assessee. The CIT(Appeals) upheld this addition, leading to the appeal before the tribunal. The appellant contended that if any addition was warranted, it should have been made in the partner's hands, not the firm's. The tribunal observed that the introduction was made by the partner into the firm through his capital account, and the burden of proving the source of the money was on the partner. As the partner could not provide a satisfactory explanation for a portion of the introduction, an addition could have been made in his hands. The tribunal concluded that the addition made in the hands of the firm was not justified and proceeded to delete the addition of Rs. 2,50,000. Consequently, the appeal was partly allowed on this issue.