Business loss- Inter-corporate deposits written off is allowable business loss.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

Section 2(13) of I.T.Act – inclusive  and wider definition of ‘business’.

CIT  vs. ABC Bearing Limited  (2011 -TMI - 206616 - BOMBAY HIGH COURT)

Business and business loss:

In terms of section 2(13) any adventure in nature of commerce is also included in scope of  business which is widely and inclusively defined. Making  ICD involves a systematic and organized activity, even in absence of such regular activity making ICD involves an adventure in nature of commerce, therefore it is a business activity. One take an adventure by making ICD with a view to earn higher interest. When a sum of money is advanced during course of business, loss on such sum becoming unrecoverable will be a business loss as per commercial and accounting parameters. Such loss is also an allowable business loss as per theory of computing and taxing real income. Without deduction of such a loss, profit or business cannot be computed in real sense. Unless there is any specific restriction, loss incidental to business is allowable as business loss under section 28 read with section 145 of the Income-tax Act, 1961.

  Case before Bombay High Court:

In case of CIT  vs. ABC Bearing Limited  (2011 -TMI - 206616 - BOMBAY HIGH COURT) the matter involved was deduction of such loss on write off of ICD. The assessee carried  business of advancing loans and making ICD. Interest received on ICD  was  assessed as business income by the Assessing Officer in earlier years. (per author- the proper head for interest on ICD is income from business and profession, therefore there was no mistake on part of assessee and AO to assessee the same as such).

Assessee claimed inter-corporate deposits written off in the books as allowable business expenditure (it should properly be described as business loss). The AO and CIT(A) did  not accept such claim, on appeal  the Income-tax Appellate Tribunal  allowed the claim based on facts.

The revenue feeling aggrieved by the aforesaid order of the Tribunal, preferred an appeal before the Honorable Bombay High Court on the following question of law:

1. Whether, the Income Tax Appellate Tribunal was justified in allowing the claim of the assessee under the head “inter­corporate deposits” written off by the assessee?

On consideration of facts found by the Tribunal the High Court observed and  held as follows (with highlights added by author for analysis):

                 “The finding of fact recorded by the Income Tax Appellate Tribunal in para ­5 of its order is that the assessee was engaged in the business of advancing loans and interest received from the inter­ corporate deposits have been assessed as business income in the past. Since the said inter­ corporate deposits had become bad, the assessee in the assessment year in question had written off that amount. Since the interest income from the inter­ corporate deposits have been assessed as business income, in the facts of the present case allowing the claim of the assessee in writing off the inter­ corporate deposits cannot be faulted. Accordingly, the appeal is dismissed with no order as to costs.

Authors point of view:

As observed and discussed by author in this write-up, the making of loans, advances, deposits is always a business being adventure in nature of commerce. It is not a case of no risk activity as would generally been in case of deposits with banks or making investment in secured debentures etc. Therefore, the making of ICD is business activity. Even if interest be considered as business income or income from other sources, will not make difference about allowability of loss because ICD itself was made as a business- being adventure in nature of commerce.

The finding of facts and decision of Tribunal is correct. There is no challenge about facts as wrong or perverse. Therefore, the judgment of Bombay High Court is correct and it is hoped that the revenue will accept the same.

Although the judgment is silent on the point as to how the claim was made – whether as a business loss or bad –debts. However, author feels that it is allowable as business loss, without any condition. In case any part of ICD written off is recovered in future, the same shall be taxable as business income. For this reason also the revenue should not indulge into un-necessary litigation.