2009 (12) TMI 100 - HC - Income Tax

Bad debts bad debts in respect of money landed to subsidiary company bad debts in the course of business - The subsidiary company paid back the outstanding principal amount of Rs.7,50,000/- but there was an outstanding interest of Rs.4,13,567.22. The assessee also had shares in the subsidiary company which were sold after the subsidiary company faced difficulties. The assessee also stood as a guarantor for the credit facilities granted by the bank to the subsidiary company. In view of the transfer of the shares belonging to the assessee in the subsidiary company, the said company thereafter ceased to be a subsidiary company. Inspite of the fact that the advances have been made by the assessee in favour of the subsidiary company to prop-up the sagging business, the same could not be run - Therefore under those circumstances, the assessee has written off the loans advanced to the subsidiary company in his book of accounts as bad debts for the assessment year 1989-90. The assessing officer in the assessment passed under Section 143 (3) read with Section 251 of the Income Tax Act, 1961 has disallowed the bad debts claims for a sum of Rs.25,98,579/- CIT(A) and ITAT allowed the claim the bad debts - held that - First Appellate Authority as well as the Tribunal have considered the materials on record and came to the conclusion that the transactions involved are true and genuine. They have also held that the advances have been made during the course of the business and they have become irrecoverable as bad debts and hence the assessee is entitled to the benefit under Section 36 (1) (vii) of the Income Act, 1961. The said decision being based upon the findings of fact, the same cannot be agitated before this Court. revenue appeal dismissed

Summary

Issues Involved:
1. Allowability of bad debts claimed by the assessee.
2. Whether the bad debt constituted a trading loss deductible under the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allowability of Bad Debts Claimed by the Assessee:

The core issue was whether the Income Tax Appellate Tribunal (ITAT) was correct in allowing the assessee's claim of bad debts amounting to Rs. 25,98,579/-. The assessee, engaged in the money lending business, had lent money to its subsidiary company. Initially, the subsidiary paid interest, but due to financial difficulties, it ceased to do so from 1978 onwards. Despite this, the assessee continued to advance money to support the subsidiary's business. Ultimately, the subsidiary could not repay, leading the assessee to write off the debt as bad.

The assessing officer disallowed the bad debt claim, arguing that the advances were not made in the course of business and were merely to help the subsidiary overcome financial difficulties. The Commissioner of Income Tax (Appeals) overturned this decision, stating that the transactions were genuine and made for commercial expediency. The ITAT upheld this view, leading to the Revenue's appeal.

The High Court confirmed that the transactions were genuine and made during the course of business. The court noted that the subsidiary had paid the principal amount earlier and that the advances were made to protect the assessee's interests, such as recovering earlier amounts, sustaining share value, and avoiding guarantee liabilities. The court emphasized that the advances were made out of commercial expediency and therefore, the bad debts were allowable under Section 36(1)(vii) of the Income Tax Act.

2. Whether the Bad Debt Constituted a Trading Loss Deductible Under the Income Tax Act:

The Revenue argued that since no interest was charged on the advances made after 1978, the transactions could not be considered business transactions, and therefore, the bad debts were not deductible. The assessee contended that the advances were made to protect its business interests and were genuine transactions.

The High Court referred to the Calcutta High Court's decision in *Commissioner of Income-Tax v. Gillanders Arbuthnot & Co. Ltd.*, which held that advances made to subsidiaries as part of business activities could be considered trading losses. The court agreed with this reasoning, noting that the assessee's advances were made in the course of its financing business and were necessary to prop up the subsidiary's business.

The court observed that the subsidiary's financial difficulties and the assessee's subsequent losses from selling shares and losing the subsidiary status further supported the genuineness of the transactions. It concluded that the bad debts were indeed trading losses incurred during the business and were thus deductible.

Conclusion:

The High Court dismissed the Revenue's appeal, affirming the ITAT's decision. The court held that the transactions were genuine, made during the course of business, and out of commercial expediency. The bad debts were therefore allowable under Section 36(1)(vii) of the Income Tax Act. The court also emphasized that the question of whether a debt had become bad was a factual matter, not a legal one, and thus could not be contested further.