2016 (9) TMI 543 - AT - Income Tax

Penalty u/s 271(1)(c) - claim of bad debts - whether the claim of the appellant was patently wrong under section 36(1)(vii) read with section 36(2) of the Act? - Held that - As it is noted that in P&L account prepared for M/s Gopal Das Sonkia, assessee had claimed bad debts of ₹ 5,15,000/-. It consists of bad debt written off in books of accounts pertaining to amount advanced by way of loan to Shri Rajeev Khattar amounting to ₹ 5,00,000/- and interest thereon charged by assessee amounting to ₹ 15,000/-. In the balance sheet prepared for M/s Gopal Das Sonkia for immediately preceding financial year 2005-06 (AY 2006-07), an amount of ₹ 5,15,000 has been shown outstanding under the head loans totalling to ₹ 47,929,540. Similar is the position in the balance sheet prepared for the financial year 2004-05 (AY 2005- 06). The assessments have also been completed for both of these years u/s 143(3) where the above balance sheets were placed on record. The ld AR has further submitted a statement of account of Shri Rajeev Khattar right from year 2000 and onwards where the said amount of ₹ 515,000 has been shown as outstanding and in the year 2007, the same has been written off as bad debt and balance in the account has been reduced to Nil. The above facts shows clearly that the appellant had lent this money to Shri Rajeev Khattar and the same has been regularly been disclosed in the balance sheets right from the year the amount was lent to the year under consideration when the amount was finally written off. In light of this, it cannot be said that there is failure on the part of the appellant to disclose or conceal the true particulars of such transaction. It cannot be said that the claim of the appellant towards bad debt was patently wrong. Further, the Coordinate Bench while confirming the disallowance towards claim of bad debt has nowhere stated that the claim was patently wrong. Apparently, the Coordinate Bench was guided by the first limb of the two alternate conditions specified u/s 36(2)(i) of the Act whereas the appellant claim was largely under the second limb of 36(2)(i) of the Act. All it stated was that the appellant has failed to adduce appropriate evidence to show that such debt or part thereof has been taken into account in computing the income of the assessee of the previous year. During the course of subject proceedings, the appellant has ably demonstrated through appropriate documentation that he was engaged in the money lending business and has offered its interest income to tax. Accordingly, the claim of the appellant towards bad debts of loan transaction of ₹ 515000 cannot be held to be lacking in any bonafide. Its a different matter that in quantum proceedings, the appellant has failed to succeed however the same cannot be a basis for levy of penalty. - Decided in favour of assessee

Summary

Issues:
Penalty imposition under section 271(1)(c) of the IT Act for disallowed bad debts claim.

Analysis:
The appellant claimed bad debts amounting to ?5,15,000 in relation to a loan advanced to an individual during money lending activities. The Assessing Officer (AO) disallowed the claim and initiated penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961. The AO found that the appellant had no evidence to support efforts to recover the amount, lacked a license for money lending business, and failed to prove the debt was reflected as income in previous assessments. The appellant's claim was considered an attempt to reduce tax liability, leading to the penalty imposition.

The CIT(A) upheld the penalty, stating that the claim of bad debt was wrong as the basic prerequisite under section 36(2)(i) was not fulfilled. The appellant's argument that the loan was part of money lending business was supported by past interest income figures, indicating a consistent lending activity. The appellant's claim was considered bonafide, not false, and in line with commercial money lending practices.

The Tribunal noted that the appellant consistently reflected the loan in balance sheets, demonstrating a genuine transaction. The Coordinate Bench had found non-compliance with section 36(2)(i) due to lack of evidence regarding previous income consideration. However, the appellant's engagement in money lending business and tax assessment of interest income supported the claim's bonafide nature. The Tribunal concluded that the penalty imposition was unjustified, deleting the penalty of ?1,73,350 under section 271(1)(c) related to the disallowed bad debts claim.

In conclusion, the Tribunal allowed the appeal, emphasizing the appellant's genuine business activities and consistent financial reporting. The decision highlighted the importance of bonafide claims and factual evidence in tax penalty cases, ultimately leading to the deletion of the imposed penalty.