2022 (7) TMI 532 - AT - Income Tax

Loss sustained in respect of the amounts advanced by the appellant to 2 companies - Loss written back by the said companies and offered as income as amounts no longer payable to the appellant and the same constituted a legitimate loss incidental to business carried on by the appellant under - assessee is in his profit loss account claimed expenses in the nature of investment in companies written off - HELD THAT - The write off cannot be added in the hands of assessee. This argument of assessee is totally misconceived. We have to see how the investment has been treated in the hands of assessee not in the hands of recipient of the advances. In the hands of assessee, this advance amount has been treated as a capital investment and it is not in trading asset in nature, so as to claim the written off as business expenditure. In the hands of the present assessee, it is an investment, if the same has to be considered as a capital loss not as a trading loss or business loss so as to claim the same as business expenditure. In our opinion, the assessee has not satisfied the condition laid down in section 36(1)(vii) r.w.s. 36(2) - As per section 36(2) of the Act, deduction shall not be allowed unless such debt or part there of has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of business or banking or money lending which is carried on by the assessee. Being so, in our opinion, the assessee cannot claim the written off investment in the field of capital as bad debt or business expenditure. Accordingly, we find no merit in this argument of the assessee s counsel and the same is rejected and this ground of appeal of assessee is dismissed. Disallowance being the interest paid on borrowing, which were used to make the investment on which income was offered - HELD THAT - In the present case, the assessee earned interest income - The claim of assessee is that the assessee has incurred an expenditure in the form of interest paid - AO allowed the interest expenditure to the extent of interest income earned by the assessee - The contention of the assessee is that assessee has actually incurred an interest expenditure for which the assessee not given any details, so as to enable the lower authorities to examine the claim of the assessee even the allowability of interest expenditure to earn the same amount of income is very exorbitant. Since the department is not in appeal before us on this issue, we are not commenting anything on this. However, in our opinion, the AO is very liberal in allowing the interest expenditure to earn interest income - Hence, we do not find any merit in the claim of the assessee on this issue and the same is rejected. This ground of the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of a sum of Rs.5,55,20,973/- claimed as a business loss.
2. Disallowance of Rs.18,58,444/- being the interest paid on borrowings.

Issue-wise Detailed Analysis:

1. Disallowance of Rs.5,55,20,973/- Claimed as Business Loss:

The primary issue is whether the disallowance of Rs.5,55,20,973/- claimed by the appellant as a business loss is justified. The appellant argued that the loss was sustained due to amounts advanced to two companies, M/s. Lad Technologies Pvt. Ltd. and M/s. Connect Films Media Pvt. Ltd., which were written back by the said companies as income. The appellant contended that this constituted a legitimate loss incidental to the business carried on by the appellant.

The Assessing Officer (AO) observed that the advances made to these companies were not for carrying out any business of the assessee and were not trade advances. The AO noted that the assessee was not in the money lending business and had not charged any interest on these advances, thereby not complying with the provisions of section 36(1)(vii) read with section 36(2) of the Income Tax Act. The AO treated these advances as capital investments rather than trading advances and disallowed the claim as business loss.

The CIT(A) upheld the AO's decision, and the appellant appealed to the ITAT. The appellant's representative argued that the write-off represented a legitimate business loss, supported by board resolutions and financial statements of the companies. The appellant cited the case of Ace Designers Vs. ACIT, where a similar loss was allowed as a business loss.

However, the ITAT distinguished the present case from Ace Designers, noting that the appellant was not engaged in the same business as the companies to which the advances were made. The ITAT held that the investments were made with a view to creating capital assets in the form of holding shares, and thus, the judgment in Ace Designers supported the revenue's case rather than the appellant's.

The ITAT also referred to the case of CIT(A) Vs. United Breweries Ltd., where it was held that an amount advanced for helping a business associate does not constitute a debt and cannot be claimed as a business loss. The ITAT concluded that the appellant did not satisfy the conditions laid down in section 36(1)(vii) read with section 36(2) of the Act, and thus, the write-off could not be claimed as a business expenditure. The ground of appeal was dismissed.

2. Disallowance of Rs.18,58,444/- Being the Interest Paid on Borrowings:

The second issue is the disallowance of Rs.18,58,444/- being the interest paid on borrowings. The appellant claimed interest expenses of Rs.40,66,247/- under the head "income from other sources," while the interest income earned was Rs.22,07,803/-. The AO restricted the interest expenditure claim to Rs.22,07,803/- and added the balance amount of Rs.18,58,444/- to the income of the appellant, as the appellant failed to substantiate the claim.

The ITAT noted that the appellant did not provide details to substantiate the claim of Rs.40,66,247/- as interest expenditure. The ITAT observed that even the allowance of interest expenditure of Rs.22,07,803/- to earn the same amount of income was very liberal. Since the department did not appeal this issue, the ITAT did not comment further but found no merit in the appellant's claim. This ground of appeal was also dismissed.

Conclusion:

The ITAT dismissed the appeal filed by the assessee, upholding the disallowance of both the claimed business loss of Rs.5,55,20,973/- and the interest expenditure of Rs.18,58,444/-. The order was pronounced in the open court on 6th June 2022.