2016 (9) TMI 590 - AT - Income Tax

Disallowances of bad-debts and other expenses - application of explanation 1 to section 37 (1) - assessee is a NRI, citizen of USA and claimed to have carried on money lending as business activity in India - Held that - We find merit in the contentions of the ld. DR. As observed that - (1) The assessee himself offered the interest from private loans under the head income from other sources . The assessee having filed the return and not filed the revised returns, the Assessing Officer while accepting his income has acted perfectly in accordance with law; (2) The assessee s contention that it was into illegal money lending business apart from being unbelievable is highly deplorable as a US citizen cannot be supposed to violate Indian Laws, i.e., Gujarat Money-Lenders Act and FEMA regulations. The Assessing Officer has been more than reasonable in not intimating these facts to concerned authorities; otherwise, the assessee would have been in deep trouble. (3) Assuming the assessee was into illegal money lending business then also in view of the Explanation 1 to Section 37, the assessee s business being an offence and prohibited by law, the expenditure cannot be allowed. In view of the above, I have no hesitation to uphold the orders of the authorities below. - Decided against assessee.

Summary

Issues:
1. Disallowance of bad debts and other expenses made by the Assessing Officer.
2. Disallowance of expenses incurred if interest income is assessed under 'income from other sources'.
3. Justification for comprehensive scrutiny assessment under section 143(3) despite CBDT instructions.

Issue 1: Disallowance of Bad Debts and Other Expenses:
The appellant challenged the disallowance of bad debts amounting to ?8,00,000 and other expenses of ?3,61,489 by the Assessing Officer. The appellant contended that the expenses were incurred for legitimate purposes to run the business and should be allowed as either bad debts written off under section 36(1)(vii) or as trading loss. The Assessing Officer held that since the interest earned was chargeable under 'income from other sources', the expenses could not be considered as business expenditure. Even if the appellant was engaged in illegal money lending business, no expenditure could be allowed for such activities. Consequently, the claimed business losses were disallowed, and the income from other sources was assessed at ?14,90,974.

Issue 2: Disallowance of Expenses with Interest Income under 'Income from Other Sources':
The appellant contested the disallowance of expenses amounting to ?3,61,489 if the interest income of ?14,90,974 was assessed under 'income from other sources'. The Assessing Officer found that the appellant had shown interest income under this head in the return of income but also claimed business expenditure resulting in a business loss. The appellant argued that the expenses, including bad debts, were allowable as business expenditure even if the money lending business was illegal. However, the Assessing Officer held that the expenditure could not be considered as business expenses, leading to the disallowance.

Issue 3: Comprehensive Scrutiny Assessment and CBDT Instructions:
The appellant raised an additional ground challenging the comprehensive scrutiny assessment under section 143(3) despite CBDT instructions limiting the scope of scrutiny. The appellant argued that the assessment should have adhered to the CBDT's instruction No.7/2014, which was communicated to the Assessing Officer before the assessment order was passed. However, the Tribunal rejected the additional ground, stating that the appellant failed to show reasonable cause for not raising the issue before the lower authorities. The Tribunal held that the Assessing Officer acted lawfully in conducting the assessment, dismissing the appellant's appeal.

The Tribunal upheld the orders of the authorities below, dismissing the appellant's appeal. The Tribunal found that the appellant's business activities, including the claimed expenses, were not allowable under the Income Tax Act. The appellant's contentions regarding the legality of money lending activities and corresponding expenditures were refuted, leading to the dismissal of the appeal.