2018 (1) TMI 1308 - HC - Income Tax

Disallowance of Bad Debts - treatment as business loss - Held that - The assessee had initially received an amount of ₹ 70,00,000/from M/s. Maharishi Traders, which was duly reflected in the books of account. Subsequently, in view of the verdict of the court the assessee was required to pay an amount of ₹ 70,00,000/to M/s. Maharishi Traders. Thus, the assessee was required to pay such amount to M/s. Maharishi Traders in relation to a business dispute. The assessee had regular transactions with the said party. Moreover, it is not disputed that the assessee had shown ₹ 81,49,803/as part of the gross revenue for assessment year 2004-05. The Commissioner (Appeals) was, therefore, wholly justified in holding that since the assessee was required to pay such amount in relation to a business transaction pursuant to the court order, the same was required to be treated as business loss and business expenditure and required to be allowed.

Summary

Issues:
Challenge to the disallowance of bad debts under section 36(2) of the Income Tax Act, 1961.

Analysis:
The appellant revenue challenged the order of the Income Tax Appellate Tribunal regarding the disallowance of bad debts amounting to ?70,00,000 despite only ?11,49,803 being outstanding, alleging that the conditions under section 36(2) were not satisfied for the balance amount.

The Assessing Officer disallowed the claim of bad debts based on the observation that the condition under section 36(2) was not met, as only ?11,49,803 was actual debt outstanding, pertaining to trading income on behalf of another entity. The disallowed amount was ?70,00,000 out of the total claim.

The Commissioner (Appeals) treated the ?70,00,000 paid to another entity as a business expenditure, which was upheld by the Tribunal in the subsequent appeal by the revenue.

The appellant contended that the bad debts claimed were not allowable as per section 36(2), and the Commissioner (Appeals) and Tribunal erred in treating them as business expenditure. However, the court found that the payment was related to a business dispute and was required to be treated as a business loss, as directed by the court order.

The court noted that the payment of ?70,00,000 was made in relation to a business dispute with regular business transactions, and since it was part of the gross revenue, it was justified to treat it as a business loss and expenditure. Therefore, the appeal was dismissed as no substantial question of law arose from the impugned order.

In conclusion, the court upheld the decision of the Commissioner (Appeals) and Tribunal, ruling that the payment of ?70,00,000 was a business loss incurred during the course of business activities, and thus, the disallowance of bad debts was not justified under section 36(2) of the Income Tax Act, 1961.