2018 (12) TMI 49 - HC - Income Tax

Advance of amount in the normal course of the assessee's business - business of lottery agency - claim for deduction was under Section 28 - Held that - In the instant case, we have seen that the assessee is not only in the business of lottery agency, but also in the business of financing as well. Records disclose that from the assessment year 1998-99, they have been advancing loans and receiving interest. Therefore, as a part of commercial expediency, the assessee, with a view to earn additional income, has advanced the surplus money available to their sister concern, which, on becoming irrecoverable, has been written off as a bad debt. For all the above reasons, we find that the Tribunal committed an error in reversing the order passed by the CIT (A) - decided in favour of assessee

Issues Involved: Deduction of bad debts, business of financing, commercial expediency, applicability of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deduction of Bad Debts:
The primary issue revolves around whether the appellant is entitled to a deduction of ?16,05,000/- as bad debts under Section 36(1)(vii) of the Income Tax Act, 1961. The appellant, a partnership firm engaged in the lottery agency business, advanced money to M/s. Deccan Pictures Private Limited for a Telugu movie project. The project did not materialize, and the amount was written off as bad debt. The Assessing Officer disallowed this deduction, treating it as a capital loss. However, the CIT(A) allowed the deduction, recognizing it as a business expenditure. The Tribunal reversed this decision, leading to the present appeal.

2. Business of Financing:
The appellant contended that they were not only in the lottery agency business but also engaged in financing activities. The CIT(A) accepted this, noting that the partnership deed allowed for investment in ventures like movie production. The Tribunal's reversal was based on the assumption that the appellant was solely in the lottery business. However, the High Court found sufficient evidence, including interest income and loan advances over several years, to establish that the appellant was indeed engaged in financing.

3. Commercial Expediency:
The appellant argued that the advance to M/s. Deccan Pictures was a prudent financial decision to earn interest income, which later became irrecoverable. The High Court referenced the Supreme Court's decision in S.A. Builders Ltd. v. CIT, which emphasized that commercial expediency includes expenditures incurred by a prudent businessman for business purposes, even if not legally obligated. The High Court found that the appellant's advance was within the scope of commercial expediency.

4. Applicability of Section 36(1)(vii) and Section 36(2):
Section 36(1)(vii) allows for the deduction of bad debts written off as irrecoverable, subject to Section 36(2). The High Court noted that the appellant had written off the bad debt in their accounts, fulfilling the statutory requirement. The Tribunal's reliance on the Bombay Tribunal's decision in Grindwell Norton Ltd. was deemed inapplicable as it dealt with Section 37(1), not Section 36(1)(vii). The High Court also dismissed the relevance of the decision in CIT v. R. Chidambaranatha Mudaliar, which dealt with capital gains, not bad debts.

Conclusion:
The High Court concluded that the appellant was engaged in both lottery and financing businesses. The advance to M/s. Deccan Pictures was a legitimate business expenditure written off as a bad debt, fulfilling the requirements of Section 36(1)(vii). Consequently, the Tribunal's order was set aside, and the appellant's claim for deduction was allowed. The substantial question of law was answered in favor of the appellant, and the appeal was allowed without costs.

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