2022 (6) TMI 269 - HC - Income Tax

Claim towards bad debts - Disallowance by AO as it was not satisfied the criteria laid down u/s 36(2) after having found that money lending and banking are not the principal activities of the assessee and they made the advance of surplus funds available with it for earning interest and they could not recover the principal and hence, the same was written off as irrecoverable - HELD THAT - As noted by the assessing officer that the advances are transactions on capital account and therefore, the loss suffered by the assessee is capital loss which is neither admissible u/s 36(1)(vii) nor u/s 37(1) - The order of the assessing officer was confirmed by the CIT(A), on the premise that putting surplus money as inter corporate deposit for earning of interest cannot be said to be incidental to business or during ordinary course of business and hence, the loss of investment by way of deposits by the appellant, cannot be claimed as revenue loss. The said order of the CIT(A) was also affirmed by the Tribunal in the further appeal filed by the appellant / assessee, by observing that if the provision written back is the excess provision than the money realized, then that would 100% be brought to tax apart from the fact that whether it is a revenue loss or capital loss; the loss sustained by the assessee in respect of the loan advanced to BFL is in the nature of capital loss and is not allowable u/s 28 and there is no transfer of asset involved and hence, the loss sustained by the assessee is not liable to be carried forward, though it is a capital loss. - Decided against assessee.

Summary

Issues:
1. Entitlement to deduction in respect of irrecoverable amounts due from M/s. Bangur Finance Limited.
2. Allowability of loss incurred in the nature of capital loss under Section 28 of the Act.
3. Consideration of loss as a capital loss for shares obtained in connection with settlement of debt.

Analysis:

Issue 1: Entitlement to Deduction for Irrecoverable Amounts
The appellant, engaged in automobile manufacturing, claimed deduction for amounts due from M/s. Bangur Finance Limited. The appellant argued that the loss crystallized during the assessment year 2000-2001 and should be allowed as a deduction. However, the Assessing Officer disallowed the claim, stating the loss was on capital account and not admissible under Section 36(1)(iii) or Section 37(1) of the Act. The Tribunal upheld this decision, considering the loss as a capital loss. The appellant contended that the loss should be allowed or considered part of the cost of shares transferred, but the Tribunal rejected this argument.

Issue 2: Allowability of Capital Loss under Section 28
The assessing officer disallowed the claim for bad debts as it did not meet the criteria under Section 36(2) of the Act. The officer considered the advances as transactions on capital account, resulting in a capital loss not allowable under Section 36(1)(vii) or Section 37(1) of the Act. The CIT(A) and the Tribunal affirmed this decision, stating that the loss was capital in nature and not liable to be carried forward. The Tribunal emphasized that no transfer of asset was involved, leading to the loss not being allowed under Section 28 of the Act.

Issue 3: Capital Loss for Shares Obtained in Settlement of Debt
The appellant further argued that the loss should be considered part of the cost of shares obtained in connection with the settlement of debt. However, the Tribunal held that for a capital loss to be carried forward, there must be a transfer of an asset as per Section 45 read with Section 2(47) of the Act. The Tribunal cited the decision of the Allahabad High Court to support its position that the liability to recover the deposit did not amount to a transfer of capital assets.

In conclusion, the High Court dismissed the Tax Case Appeal, upholding the decisions of the lower authorities. The Court found no reason to interfere with the findings that the loss incurred was capital in nature and not allowable under the relevant sections of the Income Tax Act. The judgment highlighted the distinction between revenue and capital losses, emphasizing the necessity of a transfer of assets for a capital loss to be carried forward.