2015 (8) TMI 719 - HC - Income Tax

Disallowance of amount written off on account of bad intercorporate deposits (ICD) - Tribunal deleting the disallowance - whether assessee is neither in the business of banking or moneylending de hors the provisions of Sec. 36(1)(vii) - Held that - Respondent-Assesee had during the earlier Assessment Years offered to tax an amount of ₹ 42.65 lakhs received as interest on the deposit made with M/s. GSB Capital Market Ltd. The Appellant had since Assessment Year 1998-99 claimed an amount of ₹ 49.82 lakhs as doubtful debts from M/s. GSB Capital Market Ltd. This consisted of the aggregate of principal and interest payable by M/s. GSB Capital Market Ltd. It was in the subject Assessment Year that a settlement was arrived at between the parties and the Respondent-Assessee received ₹ 15 lakhs from M/s. GSB Capital Market Ltd. and the balance amount of ₹ 34.82 lakhs being nonrecoverable was being claimed as bad debts by writing off the same in its books of account. It would thus be noticed the amount of ₹ 34.82 lakhs which constitutes partly the principal amount of the intercorporate deposits and partly the interest which is unpaid on the principal debt. The Assessing Officer s contention that amount of ₹ 34.82 lakhs was not offered to tax earlier and, therefore, deduction under Section 36(2)(i) of the Act is not available, is no longer reintegra. This very issue came up for consideration before this Court in Shreyas S. Morakhia (2012 (3) TMI 103 - BOMBAY HIGH COURT ) wherein the assessee was a stock broker and engaged in the business of sale and purchase of shares. The brokerage payable by the client was offered for tax. Subsequently, it was found that the principal amount which was to be received from its clients would not be received. The assessee sought to claim as bad debts not only the brokerage amounts not received but the aggregate of principal and brokerage amounts not received in respect of the shares transacted. This Court held that the debt comprises not only the brokerage which was offered to tax but also principal value of shares which was not received. Therefore, even if a part of debt is offered to tax, Section 36(2)(i) of the Act, stands satisfied. The test under the first part of Section 36(2)(i) of the Act is that where the debt or a part thereof has been taken into account for computing the profits for earlier Assessment Year, it would satisfy a claim to deduction under Section 36(1)(vii) read with Section 36(2)(i) of the Act. In fact, the Revenue also does not dispute the above provisions as no submission in that regard were made during the course of hearing before us. Therefore in view of the above self evident position in Section 36(2)(i) of the Act as well as decision of this Court in Shreyas Morakhia (supra), no substantial question of law arises for our consideration.It is clarified that in view of the Respondent-Assessee being entitled to deduction on bad debts in view of first part of Section 36(2)(i) of the Act, we have not opined on the second part thereof viz whether or not the Assessee was engaged in the business of money lending and/or banking. This is so as in the present facts it becomes academic. - Decided in favour of assessee.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal for Assessment Year 2004-05 regarding disallowance of bad debts written off by the assessee on account of intercorporate deposits. Interpretation of Sections 36(1)(vii) and 36(2)(i) of the Income Tax Act, 1961.

Analysis:
The Respondent-Assessee, engaged in the manufacture and sale of paper, had made an intercorporate deposit with a company. Subsequently, a settlement was reached where a portion of the amount was paid back, and the remaining sum was written off as bad debts. The Assessing Officer disallowed the bad debts claim as the conditions of Sections 36(1)(vi) and 36(2)(i) were not met, stating the assessee was not in the money lending business, and the amount was not previously taxed. The CIT(A) allowed the deduction, citing that the interest income was taxed earlier, meeting the requirements of Section 36(2)(i).

The Tribunal upheld the CIT(A)'s decision, emphasizing that the interest income was previously taxed and considering the assessee engaged in money lending. The Revenue challenged this, arguing the assessee's primary business was paper manufacturing, not money lending, thus the bad debts deduction should be disallowed under Section 36(2)(i).

The court analyzed Sections 36(1)(vii) and 36(2)(i), noting that bad debts need to be written off in the accounts and considering if the debt was previously taxed or part of money lending business. It was established that the interest income was taxed earlier, meeting the first condition of Section 36(2)(i), allowing the bad debts deduction under Section 36(1)(vii).

Referring to a relevant precedent, the court clarified that even if only a part of the debt was taxed earlier, it satisfies the requirement of Section 36(2)(i). As the conditions were met, no substantial legal question arose for consideration, and the court dismissed the appeal, refraining from opining on the money lending business aspect due to its academic nature in this context.

In conclusion, the court upheld the deduction of bad debts based on the fulfillment of Section 36(2)(i) requirements, dismissing the appeal with no costs imposed.