2016 (8) TMI 215 - HC - Income Tax

Claim for bad debt disallowed - business carried on by the assessee in respect of which the debts were written off had been discontinued - Held that - So far as the business activities carried on by the assessee, namely, pharmaceutical and commission agency, are concerned, since there was common management, common fund, common staff administration, consolidated accounts, balance sheet, complete unity of control in the management and administration of both business activities, we find that both the activities constitute same business. We are, therefore, in complete agreement with the view taken by the Tribunal. - Decided in favour of the assessee Disallowance of interest on account of interest free advance given to Sardar Patel Foundation - Held that - As the assessee was having surplus amount to give interest free advance to Sardar Patel Foundation. The Assessing Officer could not prove that there is a direct nexus between the borrowed funds and the loan given. In that view of the matter, we are of the opinion that the Tribunal has rightly deleted the disallowance. - Decided in favour of the assessee Disallowance of interest on account of interest free advance given to M/s. Madhavdas Tulsidas & Co. - Held that - Since the principal amount itself is doubtful and there was pending civil and criminal litigation, the disallowance of interest is required to be deleted. We are, therefore, of the view that the Tribunal has rightly deleted the disallowance. - Decided in favour of the assessee

Issues Involved:
1. Allowability of bad debt claim for discontinued business under Section 36(1)(vii) of the Income-tax Act, 1961.
2. Deletion of disallowance of interest on account of interest-free advance given to Sardar Patel Foundation.
3. Deletion of disallowance of interest on account of interest-free advance given to M/s. Madhavdas Tulsidas & Co.
4. Deletion of disallowance of interest paid in respect of interest-free advances out of borrowed funds.
5. Cancellation of penalty levied under Section 271(1)(c) of the Income-tax Act, 1961.

Detailed Analysis:

1. Allowability of Bad Debt Claim for Discontinued Business:
The appellant-revenue challenged the Tribunal's decision which allowed the assessee’s claim for bad debt amounting to ?1,31,84,176/-. The business related to these debts had been discontinued since June 1999. The Assessing Officer disallowed the bad debts claim on the ground that the business was not carried on in the previous year, relying on the Supreme Court’s decision in L.M. Chhabda & Sons v. Commissioner of Income-tax and State Bank of Travancore v. Commissioner of Income-tax. The Tribunal, however, found that the business activities of manufacturing and marketing of pharmaceutical products and commission agency constituted the same business due to common management, funds, staff, and administration. The High Court agreed with the Tribunal, affirming that both activities constituted the same business and allowed the bad debt claim.

2. Deletion of Disallowance of Interest on Account of Interest-Free Advance to Sardar Patel Foundation:
The Assessing Officer disallowed the interest on the grounds that the assessee could not substantiate its claim for not charging interest on the advance. The Tribunal deleted the disallowance, finding that the assessee had sufficient own funds to make the advance and there was no direct nexus between borrowed funds and the loan given. The High Court upheld the Tribunal’s decision, noting that the assessee had surplus funds and the Assessing Officer failed to prove a direct nexus between the borrowed funds and the interest-free advance.

3. Deletion of Disallowance of Interest on Account of Interest-Free Advance to M/s. Madhavdas Tulsidas & Co.:
The Assessing Officer disallowed the interest on the advance of ?1.21 crore, considering the principal amount itself doubtful due to pending civil and criminal litigation. The Tribunal deleted the disallowance, and the High Court agreed, stating that the Tribunal rightly deleted the disallowance given the doubtful nature of the principal amount.

4. Deletion of Disallowance of Interest Paid in Respect of Interest-Free Advances Out of Borrowed Funds:
This issue in Tax Appeal No. 1439 of 2007 was covered by the decision on the second issue in Tax Appeal No. 1440 of 2007. The High Court found that the assessee had sufficient own funds and no direct nexus between borrowed funds and interest-free advances. Thus, the disallowance of interest was rightly deleted by the Tribunal.

5. Cancellation of Penalty Levied Under Section 271(1)(c):
The Tribunal had confirmed the order of the CIT(A) canceling the penalty of ?61,77,043/- levied under Section 271(1)(c). Since the disallowances made by the Assessing Officer were deleted, the penalty proceedings under Section 271(1)(c) were also annulled. The High Court upheld the Tribunal’s decision, answering the issue in favor of the assessee.

Conclusion:
The High Court dismissed all the appeals, answering all the issues in favor of the assessee and against the revenue. The Tribunal's decisions were upheld, allowing the bad debt claim, deleting the disallowances of interest on account of interest-free advances, and canceling the penalty under Section 271(1)(c).

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