2022 (1) TMI 1380 - HC - Income Tax

Disallowance of bad debts as conditions laid down in Section 36(1)(vii) r.w.s. 36(2) not satisfied - debts have been taken over from the sister concerns - Tribunal allowed the claim - HELD THAT - Substantial question of law involved in this appeal has already been considered and decided in favour of the assessee by judgment 2021 (12) TMI 1446 - MADRAS HIGH COURT as held tribunal has taken note of the position that the Memorandum and Articles of Association permitted the assessee to carry on the business of money lending and the transactions in question have been held to be in the realm of business activity. Decided in favour of assessee.

Summary

Issues:
Challenge to order passed by Income Tax Appellate Tribunal regarding bad debts deduction under Section 36(1)(vii) and Section 36(2) for assessment year 2004-05.

Analysis:
The tax case appeal was filed by the Revenue challenging the order passed by the Income Tax Appellate Tribunal regarding the deduction of bad debts for the assessment year 2004-05. The substantial question of law raised was whether the ITAT was correct in allowing the bad debts claimed by the assessee when the conditions under Section 36(1)(vii) and Section 36(2) were not satisfied.

The facts of the case revealed that the assessee had agreements with M/s.Elgi Finance Ltd. for the takeover and assignment of certain book debts. The assessee wrote off debts from certain parties as bad debts amounting to Rs. 8,44,46,006/- for the relevant period. The Assessing Officer initially disallowed the deduction claim, leading the assessee to appeal to the CIT(A). The CIT(A) decided in favor of the assessee based on previous orders and decisions. Subsequently, the Revenue appealed to the ITAT, which upheld the CIT(A)'s decision, prompting the Revenue to file the current Tax Case Appeal.

During the consideration of the case, both the counsel for the appellant/Revenue and the respondent/assessee jointly submitted that a previous judgment had already decided the substantial question of law in favor of the assessee. The judgment highlighted that the debts taken over by the assessee were part of business activities permitted under the Memorandum and Articles of Association. The Tribunal had considered these transactions as part of legitimate business operations, leading to the allowance of the bad debts claimed by the assessee.

Based on the previous judgment and the factual position of the case, the substantial question of law was answered in favor of the assessee and against the Revenue. Consequently, the appeal of the Revenue was dismissed, and no costs were awarded. The decision reinforced the principle that bad debts claimed by the assessee were allowable under the provisions of the Income Tax Act, given the business nature of the transactions involved.