2008 (7) TMI 453 - AT - Income Tax

Bad debts claimed u/s. 36(1)(vii) - amount of inter-corporate deposit (ICD) placed with the various parties written off - Disallowance of depreciation - no business was conducted at vegetable oil division. Bad debts claimed u/s. 36(1)(vii) - amount of inter-corporate deposit (ICD) placed with the various parties written off - Assessee argued that the debt having become bad in the course of carrying on money lending business the same is allowable as per s. 36(1)(vii) r/w s. 36(2)(i) - AO held that the assessee s business is not that of banking or money lending - HELD THAT - It is admitted fact that the amount of bad debt claimed as deduction is written off in the accounts. It is also not in dispute that the write off is bona fide and hence the condition set out in s. 36(1)(vii) is satisfied. Sec. 36(1)(vii) is subject to the provisions of sub-s. (2) of s. 36 under which the claim of bad debt in respect of amount written off which represents money lent in the ordinary course of the business of money lending carried on by the assessee is allowable - The assessee usefully lent money realized them and redeployed the fund as per the borrowers requirement. This was carried on by way of regular business activity. Taxing the same under the head Profits and gains of business is a testimony to the fact that the interest was earned in the course of carrying on business. It is too late in the day for the Revenue to contend that interest income should be taxed under the head Income from other sources . Thus it can be said that the assessee was carrying on business of money lending in its ordinary course - In the case before us the assessee has been lending money by way of ICDs for several years and offering interest thereon which was assessed as business income. The object of lending money is part of main object of the assessee. The facts being not different but being stronger than in the case of Poysha Oxygen (P) Ltd. 2007 (12) TMI 304 - ITAT DELHI the claim of the assessee finds support in the said decision - The Hon ble Delhi High Court in the case of CIT vs. Ess Jay Enterprises (P) Ltd. 2007 (8) TMI 709 - DELHI HIGH COURT applied the decision of Hon ble Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh vs. CIT 1969 (9) TMI 2 - SUPREME COURT wherein it was held that the treatment given to a transaction in the books of account is of importance. In the present case also we find that the interest income on money lent by way of ICDs was assessed as business income and hence the loss of such ICD is to be held as allowable - Since we have found that the assessee had lent money by way of ICDs in ordinary course of its business of money lending the assessee has complied with the condition laid down in s. 36(1)(vii) and 36(2)(i) of the Act the claim of bad debt is allowable. We accordingly delete disallowance. Disallowance of depreciation - no business was conducted at vegetable oil division - CIT(A) held that building and machinery is not being used for the purpose for which it was set up nor it is going to be used in near future. There is no likelihood of undertaking similar activities action of the AO is justified - HELD THAT - Depreciation claimed in respect of assets of vegetable oil division is only building vehicles and furniture. Depreciation is not claimed on plant and machinery. It is not the case that the building or other assets are discarded. All the assets are maintained by the assessee and the employees are placed at the building at vegetable oil division. The vehicles and furniture and fixtures are used by the employees and hence depreciation thereon is allowable since the user condition is satisfied - As regards depreciation in building no separate identifiable WDV can be assigned to such building - As held by the Tribunal in the case of SRF Ltd. 2008 (2) TMI 656 - ITAT DELHI once the assets are forming part of block of assets and the business having been carried on depreciation is allowable on the WDV comprising the block of assets so long as the business has been carried on. The user condition is not applicable under the concept of allowing depreciation on block of assets. Once the assets are part of block of assets it looses its individual cost or WDV. In a way it losses its identity. Hence depreciation on them could not be disallowed. We. therefore delete the disallowance. In the result the appeal is partly allowed.

Summary

Issues Involved:
1. Disallowance of bad debts claimed on account of inter-corporate deposits (ICDs).
2. Disallowance of certain expenditures treated as capital expenditure.
3. Disallowance of depreciation in respect of assets of the vegetable oil division.

Detailed Analysis:

1. Disallowance of Bad Debts Claimed on Account of Inter-Corporate Deposits (ICDs):

The assessee claimed a deduction of Rs. 3,60,00,000 as bad debts under Section 36(1)(vii) of the Income Tax Act, 1961, for ICDs placed with various companies. The AO disallowed the claim, stating that the assessee's primary business was manufacturing and trading, not money lending. The AO noted that interest income from ICDs was a small percentage of the gross receipts, concluding that ICDs were not placed in the ordinary course of money lending business. The CIT(A) upheld the AO's decision, viewing the ICDs as capital investments rather than money lending.

The assessee argued that the ICDs were part of its business activities, as evidenced by consistent taxation of interest income as business income. The Tribunal agreed with the assessee, noting that the interest earned on ICDs was taxed as business income in previous years, thereby qualifying the ICDs as part of the money lending business. The Tribunal cited several case laws supporting the assessee's claim, including Poysha Oxygen (P) Ltd. vs. Asstt. CIT and CIT vs. Ess Jay Enterprises (P) Ltd. The Tribunal concluded that the assessee's activities constituted an organized money lending business, satisfying the conditions of Section 36(1)(vii) read with Section 36(2)(i). Thus, the claim of bad debt was allowed.

2. Disallowance of Certain Expenditures Treated as Capital Expenditure:

The assessee did not press the ground regarding the disallowance of Rs. 51,76,646 and Rs. 47,36,047 treated as capital expenditure. However, the assessee requested depreciation on the capitalized expenditure. The Tribunal directed the AO to allow the claim for depreciation on the capitalized expenditure.

3. Disallowance of Depreciation in Respect of Assets of the Vegetable Oil Division:

The AO disallowed depreciation of Rs. 35,40,295 on assets of the vegetable oil division, citing non-use of the assets for business purposes. The CIT(A) upheld the AO's decision. The assessee argued that the assets were maintained and used by employees, satisfying the user condition for depreciation. The Tribunal noted that depreciation is allowable on the block of assets concept, where individual asset usage is not required once the asset forms part of the block. Citing the Tribunal's decision in Asstt. CIT vs. SRF Ltd., the Tribunal held that the user condition is satisfied if the assets are maintained and ready for use. Therefore, the Tribunal deleted the disallowance of depreciation.

Conclusion:

The Tribunal allowed the appeal partly, granting the claim for bad debts on ICDs and depreciation on assets of the vegetable oil division, while directing the AO to allow depreciation on capitalized expenditure.