2021 (4) TMI 671 - AT - Income Tax

Disallowance of claim of bad debts written off - HELD THAT - We are of the view that the disallowance of bad debts claimed by the assessee in assessment year 2013-14 was justified as the assessee could not establish that there existed business compulsion to write off the loan amount given to MSL as on 31.3.2013. At the same time, it is an admitted fact that the loan given to MSL has become bad. It is also corroborated by the fact that MSL has also written off the amount payable to the assessee in A.Y. 2015-16. In view of the above, we are also of the view that the bad debts claim of the assessee should be examined only in assessment year 2015-16. Since we have given a specific finding that the above said claim is required to be examined in assessment year 2015-16, the assessee may move appropriate petition before the A.O. for making its claim for bad debts in assessment year 2015-16 before the A.O - We are of the view that it would not be appropriate to adjudicate the question as to whether the amount of ₹ 8.39 crores given to MSL by the assessee is loan or investment, which may be examined by the AO afresh while disposing the petition of the assessee.

Summary

Issues:
Challenging disallowance of bad debts written off amounting to ?8.39 crores for assessment year 2013-14.

Analysis:
The appellant, engaged in finance and investment services, challenged the disallowance of bad debts written off amounting to ?8.39 crores for the assessment year 2013-14. The appellant claimed that the bad debts were a result of loans given to a company, which faced financial distress leading to the cessation of operations in June 2013. The appellant argued that the writing off of the bad debts was allowable under section 36(1)(vii) of the Act as it was in the course of its business activities.

The Assessing Officer (AO) observed that the company to which the loans were given had tangible assets and questioned the justification for writing off the loans. Additionally, the AO noted that the appellant was not registered with RBI for money lending activities, categorizing the loan as an investment activity rather than money lending. Consequently, the AO disallowed the bad debts claim, a decision upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

During the hearing, the appellant contended that the decision to write off the bad debts was based on the cessation of operations of the company to which the loans were given. However, it was highlighted that the events leading to the write-off occurred after the balance sheet date, questioning the timing of the write-off. The appellant also acknowledged the need for uniformity in treatment of the transaction between related entities.

The Tribunal found that while the bad debts claim was justified due to the loans becoming irrecoverable, the timing of the write-off was not adequately supported by business compulsion as of the balance sheet date. The Tribunal directed the appellant to seek redress for the bad debts claim in the subsequent assessment year, emphasizing the need for a fresh examination of whether the amount given to the company constituted a loan or an investment.

Ultimately, the Tribunal partially allowed the appeal, confirming the CIT(A)'s decision with a direction to the AO to reconsider the bad debts claim in the following assessment year. The judgment was pronounced on 22nd March 2021.