2024 (2) TMI 1342 - HC - Income Tax

Bad Debts - Loans advanced to the Group Company utilized for purchase of properties and shares - whether it can be termed as proper debt for the purpose of claim as bad debt u/s. 36(1)(vii) r.w.s. 36(2)? - HELD THAT - As position before the amendment was that assessee could claim deduction in respect of the bad debt or part thereof which is established to have become bad in the previous year relevant to the assessment year in which the claim is made, whereas the position after the amendment is that assessee is entitled to deduction in respect of the amount of bad debt or part thereof which is written off as irrecoverable in the account of assessee in the previous year. In our view, it is not necessary that assessee should establish that the debt has gone bad during the previous year relevant to the assessment year in question. If assessee could show that it bona fidely believed that the debt had gone bad and the claim could be made, it is to be allowed for the year in which it is written off in the books of accounts. One of the reasons the AO has disallowed the claim of assessee is that assessee is not a money lender and hence, it could not be said that the amount advanced had become bad. We agree with the ITAT that it is not necessary that every businessman should register himself under Money Lending Act and make the claim in relation to any advance made by it only in the capacity of carrying on money lending business. As per the balance sheet of assessee, the said M/s. Ganges Soaps Pvt. Ltd. was assessee s debtor because assessee had given advance loan to it. ITAT has come to a factual finding that the money was advanced during the course of business. As relying on a judgment of Bazpur Co-op. Sugar Factory Ltd. 1988 (5) TMI 4 - SUPREME COURT the ITAT has given a finding that entries in the books of accounts were not determinative of the character of a transaction but it is the nature and the quality of receipt/transaction and not the head under which it is entered in the account books that will prove decisive. In the grounds of appeal this view taken by the ITAT has also not been disputed. Decided in favour of assessee.

Summary

Issues involved:
The appeal under Section 260A of the Income Tax Act, 1961 challenging an order passed by the Income Tax Appellate Tribunal (ITAT) regarding deductibility under Section 37(1) and bad debts under Section 36(1)(vii) read with Section 36(2) of the Act.

Deductibility under Section 37(1):
The assessee filed its return of income declaring a total loss, which was later assessed at a higher total income by the ITAT. The ITAT found that the assessee substantiated the claim of deductibility under Section 37(1) of the Act, despite the Revenue's contention that it was merely an advance to another company without evidence of services rendered. The Revenue challenged this finding, leading to the framing of a substantial question of law regarding the loans advanced and their classification as bad debt under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act.

Bad debts under Section 36(1)(vii) read with Section 36(2):
The assessee wrote off a substantial amount as trade dues from another company, claiming it as a bad debt not recoverable during the year under appeal. The Revenue argued that the amount was shown as a loan in the assessee's books and did not relate to sales or services. The court examined the conditions laid down in Section 36 of the Act and the relevant provisions regarding the deduction of bad debts. The court noted the distinction before and after an amendment to the Act, emphasizing that the assessee need not establish that the debt became bad in the previous year, but only show a bona fide belief in its irrecoverability. The court also addressed the argument that the assessee was not a money lender, affirming that registration under the Money Lending Act was not a prerequisite for claiming bad debts. Relying on factual findings and legal precedents, the court upheld the ITAT's decision and found no infirmity in the impugned order, ultimately answering the substantial question of law in favor of the assessee.

Separate Judgement:
No separate judgment was delivered by the judges in this case.