2013 (11) TMI 672 - AT - Income Tax

Bad debts claimed u/s. 36(1)(vii) - Assessee has advanced a sum of Rs.30.00 lakhs to another public limited company in the financial year 1996-97. According to the assessee, it has accounted for interest income arising from the above said advance fom financial year 1996-97 to the financial year 2005-06 and offered the same as business income. The aggregate amount of interest so offered works out to Rs.23,76,274/-. The contention of the assessee is that the bad debt claim of Rs.30.00 lakhs is allowance u/s 36(1)(vii) of the Act, since it has advanced the said amount of Rs. 30 lakhs in the regular course of its business as required u/s 36(2)(i) of the Act Held that - Assessee has not furnished any material to show that the amount of Rs. 30.00 lakhs was advanced in the regular course of business activity of lending money. The agreement, if any, entered between the assessee company and M/s Peermade Tea Company Ltd was not furnished to prove that it was a loan transaction. Assessee has simply placed reliance on Clause 22 of the object clause to contend that it is authorised by Memorandum of Association to carry on money lending activity. However, the Tribunal in the case of Poysha Oxygen (P) Ltd. 2007 (12) TMI 304 - ITAT DELHI has held that the object clauses mentioned in the Memorandum of Association are not relevant for considering whether the activity undertaken by the limited company amounts to business activity or not - In the instant case, as stated earlier, no material was placed before us to show that the amount of Rs. 30.00 lakhs was advanced with the intention of lending money in the ordinary course of business and not as investment. The assessee has also not shown that he was carrying on this kind of transactions repeatedly. Hence, in the facts and circumstances of the case, the condition laid down u/s. 36(2)(i) has not been satisfied by the assessee in this regard - Decided against the Assessee. Bad debt claim of interest amount of Rs. 23,76,274/- - The contention of the assessee is that it has accounted for the accrued interest in all the years and offered the same for taxation Held that - This aspect has not been examined by the tax authorities. They have rejected the claim of the assessee only for the reason that the assessee could not substantiate that the interest amount was offered for tax in the earlier years. Since the assessee has filed the copies of the interest received account for various years, this matter requires fresh examination at the end of the Assessing Officer Decided partly in favor of Assessee.

Issues Involved:
1. Disallowance of bad debts claim made by the assessee.
2. Compliance with conditions specified under Section 36(2)(i) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debts Claim:
The primary issue in this appeal is the disallowance of the bad debts claim made by the assessee. The assessee, engaged in the business of dealing in shares, claimed a deduction for bad debts written off amounting to Rs. 53,76,274/-. This amount included a principal sum of Rs. 30 lakhs given as an inter-corporate loan to M/s Peermade Tea Company Limited and accrued interest of Rs. 23,76,274/- on the said loan. The Assessing Officer (AO) disallowed the claim on the grounds that the inter-corporate deposit did not qualify as a loan given in the ordinary course of business as per Section 36(2)(i) of the Income Tax Act. Furthermore, the AO noted the absence of documentary evidence showing that the interest provision was accounted for as income in previous years. Consequently, the AO added the entire sum to the total income returned by the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance.

2. Compliance with Conditions Specified Under Section 36(2)(i):
The assessee contended that it had complied with the conditions under Section 36(2)(i) of the Act. The assessee argued that the principal amount of Rs. 30 lakhs was advanced in the ordinary course of business, as authorized by the object clause of the company and in accordance with the Companies Act. The assessee also claimed that the accrued interest was offered for income tax purposes in earlier years, thus satisfying the conditions of Section 36(2)(i). The assessee provided a table detailing the interest accounted for in each year from 1996-97 to 2005-06. Additionally, the Board of Directors had resolved to write off the loan due to the financial crisis faced by M/s Peermade Tea Company Ltd, which was supported by a Board resolution.

The assessee relied on several case laws to support its claim, including Goetze (India) Ltd. vs. Dy. CIT, Poysha Oxygen (P) Ltd. vs. Asstt. CIT, and ITW Signode India Ltd. vs. Dy. CIT. However, the Tribunal noted that the assessee had not provided any material evidence to prove that the amount was advanced in the regular course of business activity of lending money. The Tribunal also observed that the object clauses in the Memorandum of Association were not relevant for determining whether the activity constituted a business activity.

The Tribunal concluded that the assessee failed to demonstrate that the loan was advanced with the intention of lending money in the ordinary course of business and not as an investment. Consequently, the condition laid down under Section 36(2)(i) was not satisfied, and the bad debt claim of Rs. 30 lakhs was rightly disallowed by the CIT(A).

Separate Judgment for Interest Component:
Regarding the interest component of Rs. 23,76,274/-, the Tribunal noted that the tax authorities had rejected the claim because the assessee could not substantiate that the interest amount was offered for tax in earlier years. The assessee provided account copies of interest received for financial years 1996-97 to 2005-06, indicating that the accrued interest was offered for taxation. The Tribunal found that this aspect had not been examined by the tax authorities. Therefore, the Tribunal set aside the order of the CIT(A) on this issue and remanded the matter to the AO for fresh examination and appropriate decision in accordance with the law.

Conclusion:
The appeal filed by the assessee was partly allowed. The disallowance of the principal amount of Rs. 30 lakhs was upheld, while the issue regarding the interest component of Rs. 23,76,274/- was remanded to the AO for fresh examination. The judgment was pronounced on 06-11-2013.

← Previous Next →