2015 (8) TMI 573 - HC - Income Tax

Write off of bad debts - can Assessing officer verify the claim in exercise of powers as provided under provisions of Section 36(2) of the I.T.Act? - CIT(A) and ITAT held that claims on deduction on the ground of write off of bad debts of assessee corporation, having become irrecoverable are covered by provisions of Sub-Section 36(1)(vii) and not under Sub- Section 36(1)(vii-a) of the I.T.Act,1961, we do not find any justification to reopen the issues - Held that - In the instant case, Assessee Corporation being a Non-Banking Financial Company has been held to be entitled to have a policy of writing off of irrecoverable debts which were not subjected to scrutiny by Assessing officer when debtors in question stopped existing in books of account of Assessee Company. Assessing officer, infact, should not have isolated such claim of Assessee Corporation just by picking notes on accounts disclosure, and disallowed where as such notes were to be considered in the entirety alongwith financial statements, particularly when policy of Assessee Corporation also indicated that such a claim had been made in accordance with provisions of the I.T.Act. Further, I.T.Appellate Tribunal also noticed that no controverting material was brought on record by Revenue on this point, therefore, impugned order passed by learned CIT (A) deserved to be upheld also on that count. According to CIT(A) w.e.f. 1.4.1989, provisions of Section 36(1)(vii) with addition of explanation have undergone a change. Therefore, there was no requirement on the part of assessee to establish that any debt had become bad in the previous year. The only requirement on the part of assessee is to write off the bad debt as irrecoverable. As Assessee Corporation had never claimed any benefit under Section 36(1)(vii-a), the question of applicability of Section 36(2)(v) of the I.T. Act, 1961, would not arise. Thus, finding of Assessing officer was found to be erroneous. CIT(A) and I.T.A.T. are in agreement that such a claim of bad debt upon write off is allowable under provisions of Section 36(1)(vii) and no part of this claim for deduction of bad debt, can be disallowed under Section 36(2). Writing off of bad debts by assessee unilaterally is sufficient ground for claim to be allowed irrespective of fact that Assessing officer harbours a belief that debt in question has not yet become a bad debt. Assessee Corporation MIDC is a public sector non-banking financial company. Therefore, it was entitled to have a policy of writing off of bad and irrecoverable debts which were not to be subjected to scrutiny by Assessing officer. When Datas in question in regard to irrecoverable loans stopped existing in books of accounts of assessee company. Assessing officer, should not have isolated such claims of assessee corporation just by picking notes on accounts disclosure and disallowed such claims. Moreover, assessee corporation also indicated that such a claim had been made in accordance with provisions of the I.T.Act. Further, there was no controverting material brought by Revenue on record on this point to deny the claims. We thus do not find any ground to differ from views taken by CIT(A) and I.T.A.T on the issue of write off of bad debts in both the I.T. Appeals. With regard to standing guarantor in respect of loans given to debtor company namely Meghalaya Phytochemicals Ltd, CIT(A) and I.T.A.T have not returned any finding. Further this point has also not been raised in appeals. Thus, we express no opinion in respect thereof. - Decided against revenue.

Issues Involved:
1. Addition of interest on loans and advances as taxable income.
2. Disallowance of bad debts and investment losses.
3. Application of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961.
4. Validity and applicability of CBDT Circulars.
5. Treatment of interest on sticky loans.
6. Classification of investments as stock in trade or capital investments.

Detailed Analysis:

1. Addition of Interest on Loans and Advances as Taxable Income:
The Assessing Officer added Rs. 582.66 lacs as taxable income, arguing that the assessee, a non-banking financial company, followed the mercantile system of accounting and did not account for this interest. The assessee countered by referring to a 1989 notification from the Ministry of Industry, which allowed the disclosure of such interest by way of notes in the annual accounts. CIT(A) and ITAT upheld the assessee's position, noting that the income on sticky advances should be maintained as memoranda and disclosed by way of notes, to be taxed only upon receipt.

2. Disallowance of Bad Debts and Investment Losses:
The Assessing Officer disallowed the write-off of Rs. 37.85 lacs, arguing that the investment loss is allowable only when assets are disposed of. CIT(A) disagreed, stating that investments in the capital of industrial enterprises are integral to the business and should be considered as stock in trade. ITAT concurred, emphasizing that once the principal amount became bad, the associated shares also lost their value, warranting a cumulative write-off.

3. Application of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961:
CIT(A) and ITAT found that the requirements of Section 36(1)(vii) and Section 36(2) were met, allowing the write-off of bad debts. They noted that post-1989, there was no need to prove that the debt had become bad in the previous year; writing off the debt as irrecoverable was sufficient.

4. Validity and Applicability of CBDT Circulars:
The judgment referenced various CBDT Circulars, particularly those from 1952, 1978, and 1984, which provided guidelines on the treatment of interest on sticky loans. The court upheld the binding nature of these circulars, emphasizing that they are designed to provide relief to a class of assessees and are legally binding on the revenue authorities.

5. Treatment of Interest on Sticky Loans:
The court reiterated that interest on sticky loans should not be taxed until actually received, following the principle that non-receipt of interest for the first three years does not constitute taxable income. This position aligns with the Supreme Court's judgment in UCO Bank vs. CIT (1999).

6. Classification of Investments as Stock in Trade or Capital Investments:
CIT(A) and ITAT agreed that the investments in question were not capital investments but were held as stock in trade. The intention was to hold shares as part of loan agreements, not as capital investments. This classification justified the write-off of the associated losses.

Conclusion:
The High Court upheld the decisions of CIT(A) and ITAT, affirming that the assessee's claims for bad debt write-offs and the treatment of interest on sticky loans were valid under the provisions of the Income Tax Act and relevant CBDT Circulars. The appeals filed by the revenue were dismissed, reinforcing the principles laid out in previous judicial precedents and administrative guidelines.

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