2014 (5) TMI 235 - HC - Income Tax

Loans provided to the bank - Disallowance of bad debts u/s 36 of the Act Held that - Providing the loans to company involved in the business and manufacturing of soft drinks beverages was in the nature of the business of the assessee it was incidental to the business of the assessee the amount of loan was provided to M/s Dhillon Kool Drinks and Beverages Limited - it cannot be said that the interest on the loan amount provided by the assessee company was not incidental to the business of the assessee Relying upon Mohanmeakin Ltd. vs. C.I.T. 2011 (5) TMI 243 - DELHI HIGH COURT - section 36(1)(vii) is premised upon treating the income as business income as is evident from the specific reference to section 28 - Once the revenue had the option of not treating the amount as business income, as it did in 1999-2000, it cannot give the background of circumstances in this case in a later year and refuse to treat the interest income as business income and interdict the assessee from exercising its right u/s 36(1)(vii) as such no substantial question of law arises for consideration Decided against Revenue.

Summary

Issues:
1. Disallowance of claim of bad debts for assessment year 2003-04.
2. Interpretation of section 36(1)(vii) and section 36(2) of the Income Tax Act.
3. Determination of whether the amount written off as bad debts was incidental to the business of the assessee.

Analysis:
1. The case involved the disallowance of a claim of bad debts amounting to Rs.1,01,18,849/- for the assessment year 2003-04. The revenue challenged the order of the ITAT which accepted the assessee's contention that the claim of bad debts was justified. The assessing officer rejected the claim on the grounds that the amount could not be treated as a business debt. The ITAT considered the objects of the assessee-company and its previous history, where the interest was assessed as business income in the assessment year 1999-2000.

2. The Tribunal held that providing loans to a company involved in the business of soft drinks and beverages was incidental to the business of the assessee. It emphasized that the loan amount was provided in the course of business and had become irrecoverable. The Tribunal also referred to a High Court decision stating that the amount was deductible as a business loss under section 37 of the Income Tax Act. The revenue contended that the assessee's business activities did not include giving advances, and therefore, the write-off should be disallowed. However, the Court opined that section 36(1)(vii) required treating the income as business income, and since the revenue had previously treated the interest income as business income, it could not now refuse to do so and disallow the write-off.

3. The Court concluded that no question of law arose for consideration, and the appeal was dismissed. It held that the revenue could not interdict the assessee from exercising its right under section 36(1)(vii) based on the background of circumstances in a later year. The Court found that the write-off of bad debts was justified based on the past treatment of the income as business income and the incidental nature of the transaction to the assessee's business.