2012 (12) TMI 716 - AT - Income Tax

Writing off Advances as Bad Debts nature of the assessee s business - Held that - Considering the exact nature of assessee s business as mentioned in assessment order the assessee is in the financial sector, whereas in the written submissions the assessee has stated that it is in the investment company & if it is found that the assessee is an investment company and the advances made by the assessee to M/s BPL Ltd., and its sister concerns are for the purpose of investments in shares, then the advances written off by the assessee cannot be considered as a trading loss or bad debt but has to be treated as capital loss which is not eligible for deduction u/s 36 or 37 while computing the income from business u/s 28 - As neither the AO nor the CIT(A) has actually gone into this aspect of the issue nor have they examined the correct nature of advance given by the assessee or the purpose of such advances the issue is to be remitted back to the file of the AO for verification - in favour of assessee for statistical purposes. Set off income offered against the disallowance of deduction u/s 36(1)(vii) - Held that - Unable to accept the contention of the assessee that if the claim of advance written off by the assessee is not accepted, the same analogy has to be applied to the liabilities written back by the assessee. Each claim of the assessee has to be considered independently and in accordance with law. As rightly pointed out by the DR, the nature of the liability and the condition under which the liability has been written back has not bee explained by the assessee and in fact it is the assessee which has treated the same as its income. The claim of the assessee to set off is not permissible until and unless there is clear nexus between the two which is absent in the present case. As the nature of the liability written back has not been examined by any of the authorities below it is desirable to remit issue back to AO for consideration - in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Whether the advances written off by the assessee qualify as bad debts or business loss under sections 36(1)(vii), 36(2), 37, or 28 of the Income-tax Act.
2. Whether the liabilities written back by the assessee should be considered as income under section 41(1) of the Income-tax Act.

Detailed Analysis:

1. Advances Written Off:

The assessee company filed its return of income for the relevant assessment year on 30.11.2006, returning nil income. During the assessment proceedings under section 143(3) of the Income-tax Act, the Assessing Officer (AO) noticed that the assessee debited Rs.7,53,55,636/- as advances written off in its profit and loss accounts. The AO held that these advances did not qualify for deduction under section 36(1)(vii) read with section 36(2) as they were not on revenue account and were part of a capital loss, not a trading loss.

The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's findings, stating that the advances written off were neither allowable as bad debts under section 36(2)(vii) nor under sections 28 or 37 of the Income-tax Act. However, the CIT(A) granted relief of Rs.4,88,88,278/- to the assessee, considering that this amount had never been claimed as expenditure and should not be considered as income under section 41(1).

The assessee appealed, arguing that it was in the financial sector and that the advances should be considered part of its money lending business, thus allowable under section 36(2)(vii) read with section 36(2). The Revenue also appealed against the relief granted by the CIT(A).

The Tribunal noted that the primary issue was the nature of the assessee's business. If the assessee was in the business of money lending, the advances written off could be allowed as bad debts under section 36(1)(vii) read with section 36(2). However, if the assessee was an investment company, the advances would be considered a capital loss, not eligible for deduction under sections 36 or 37. The Tribunal remitted the issue to the AO to verify the nature of the assessee's business and the purpose of the advances, directing the AO to allow the advances written off as bad debts if they were for money lending or trading purposes and met the conditions under section 36(2).

2. Liabilities Written Back:

The assessee had offered Rs.5,01,15,902/- as income, representing liabilities no longer payable. The CIT(A) accepted the assessee's contention that this amount should only be treated as income if it had been claimed as expenditure in earlier years under section 41(1). The Revenue appealed, arguing that the nature of the liability and the conditions under which it was written back were not explained by the assessee.

The Tribunal held that each claim must be considered independently and in accordance with the law. It found that the nature of the liability written back had not been examined by the authorities below and remitted the issue to the AO for reconsideration. The AO was directed to verify the nature of the liability written back and whether section 41(1) applied, ensuring the assessee was given a fair opportunity of hearing.

Conclusion:

The appeals filed by both the Revenue and the assessee were allowed for statistical purposes, with both issues remitted to the AO for further verification and reconsideration.