2015 (10) TMI 806 - AT - Income Tax

Bad debts claimed by assessee as business loss - CIT(A) treating the bad debts as business loss u/s 28 - whether the block assessment has been completed by applying deeming provisions and despite agreeing that conditions laid down u/s 36(1) (vii) are not satisfied? - assessee is the Karta of the HUF - assessee before the Tribunal had challenged the order of the CIT(A) restricting the bad debts to ₹ 25,26,000/- as against the claim of ₹ 1,46,54,468/- - Held that - It is undisputed fact that both the authorities below have admitted that appellant was carrying on the money lending business. But both the authorities failed to interpret the provisions of S. 36(1)(vii) r/w S. 36(2) in its proper perspective when it comes to the money lending business. The interpretation of the provision contained in CI. (i) of sub. S. (2) of S. 36 and second part of this clause starting from or represents money lent in the ordinary course of business of banking or money lending which is carried on by the assessee leads to only conclusion that it deals with different types of activities not at all related to those with the first part of business activities. In other words the submission is that in the case of advances/ loans made by any concern doing business of banking or money lending it was not obligatory that such advances/loans or part thereof should be shown to have become irrecoverable and consequently written off in the accounts of the assessee in the previous year. The money lent as part of money lending business being stock-in-trade automatically comes into revenue account. In other words it need not be taken into account in computing the income as required in the first limb in relation to money lending business to prove that it is on revenue account. As per second limb it should be found out in relation to money lending business that debt is advanced in the ordinary course of money lending business. If this debt is not advanced in the ordinary course of business, it would not qualify for deduction as bad debt. The only condition laid down in second part of Sub. S. (2) of S. 36 of the Act is that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions are required to be satisfied which are only applicable with regard to debts qualifying as bad debts in the first part of sub. S. (2). Revenue authorities were not justified in restricting the claim of bad debts/business loss to ₹ 25,26,000/- as against claim of assessee for ₹ 1,46,54,468/-, because debt in question having been undisputedly advanced in assessee s ordinary course of money lending business, so this part of claim of bad debt of ₹ 1,46,54,468/- is allowable u/s.36(1)(vii) read with second limb of sub-section 2 of section 36 of the Act. The Assessing Officer is directed accordingly - Decided in favour of assessee.

Issues Involved:
1. Justification of CIT(A) in granting relief for bad debts claimed by the assessee.
2. Treatment of bad debts as business loss under Section 28.
3. Allowability of further claim of depreciation by the assessee on assets purchased out of undisclosed income.
4. Reduction of unexplained investment computed by the Assessing Officer.
5. Timeliness and validity of the Revenue's appeal.

Issue-Wise Detailed Analysis:

1. Justification of CIT(A) in Granting Relief for Bad Debts Claimed by the Assessee:
The Revenue contested the CIT(A)'s decision to grant relief of Rs. 25,26,000 out of the Rs. 37,17,000 disallowed by the Assessing Officer (AO) as bad debts. The AO had disallowed the claim on the grounds that the reasons provided for non-recovery were vague and no details regarding the assets owned by the debtors were furnished. The CIT(A) allowed the relief based on the evidence that the business of money lending was carried on and the loans were not recoverable due to various reasons such as the death of debtors, financial incapacity, absconding debtors, and criminal cases against them. The Tribunal upheld the CIT(A)'s decision, noting that the bad debts were advanced in the ordinary course of the assessee's money lending business and thus allowable under Section 36(1)(vii).

2. Treatment of Bad Debts as Business Loss under Section 28:
The AO computed the undisclosed income on an asset basis, rejecting the books of account maintained for money lending. The CIT(A) argued that the loans given were part of the regular business of money lending and should be treated as business loss under Section 28. The Tribunal agreed, stating that the loans not recovered should be allowed as business loss since they are part of the stock in trade or working capital in the money lending business.

3. Allowability of Further Claim of Depreciation by the Assessee on Assets Purchased Out of Undisclosed Income:
The Revenue contended that the CIT(A) was not justified in allowing further claims of depreciation on assets purchased out of undisclosed income. The Tribunal did not specifically address this issue in the provided text, focusing instead on the treatment of bad debts and business losses.

4. Reduction of Unexplained Investment Computed by the Assessing Officer:
The AO computed the unexplained investment in loans at Rs. 1,39,29,108. The CIT(A) reduced this amount by considering bad debts and other factors. The Tribunal upheld the CIT(A)'s decision, agreeing that the loans given in the ordinary course of business should be accounted for as business losses, thus reducing the unexplained investment.

5. Timeliness and Validity of the Revenue's Appeal:
The assessee argued that the Revenue's appeal was not filed within a reasonable time as directed by the Tribunal in its previous order. The Tribunal dismissed the cross objections filed by the assessee on account of limitation, noting that no application explaining the reasons for the delay was filed.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue and upheld the CIT(A)'s decision to grant relief for bad debts claimed by the assessee. The Tribunal also dismissed the cross objections filed by the assessee due to the delay in filing. The Tribunal's decision was based on the recognition that the assessee's money lending business was legitimate and the bad debts were incurred in the ordinary course of business, thus allowable under the relevant sections of the Income Tax Act.

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